4 questions to ask yourself before becoming self-employed
Are you thinking about becoming your own boss and joining the ranks of the self-employed? Ask yourself a few questions first before making this decision.
Are you interested in self-employment, but not sure if it's right for you? An increasing number of Quebecers, especially those aged 18 to 34, are self-employed or thinking of becoming self-employed. In 2019, according to Statistics Canada, 3.7 million of the province's 4.3 million workers were salaried employees and 567,900 were self-employed (about 13 percent). That number has risen steadily in recent years.
Being self-employed is very different than being a salaried worker. While the self-employed lifestyle has many advantages, it's best to know what to expect before taking the plunge.
01Is full autonomy really for you?
Self-employment means being your own boss. As a result, you need to organize your schedule according to your needs and be flexible enough to balance your work and personal life. On the plus side, you have control over your own work environment. Instead of having to go to the office, you can work from home, in a shared workspace, or even at the local coffee shop. You also get to manage your own holidays and vacations.
However, be aware that this freedom comes at a price. Any time off is at your own expense since you don't benefit from paid vacation days. That means you need to plan ahead. For example, you could schedule your vacations during slower work periods.
02Do you know how to make a budget—and stick to it?
When you're self-employed, your income can fluctuate from month to month depending on the contracts and fees you've negotiated. Work-related expenses can also increase suddenly—you may need to go on a business trip, for example, or buy a new computer.
To cope with this unpredictability, it's recommended to build up a financial cushion. Reserve funds will help you get through more difficult periods if work dries up or unexpected costs arise. It's also a good idea to set aside a certain percentage of your income each month—to be determined with an accountant or tax specialist—so that you can pay your balance owing when you file your income tax return. Salaried employees pay tax through payroll deductions, while self-employed workers pay tax only once a year when they report their income. To avoid unpleasant surprises, it's best to save up throughout the year. You should also set aside money if you're making instalment payments. These are partial payments you can make every quarter to cover your income tax for the year. This allows you to spread out your payments and pay your government contributions throughout the year.
Employee benefits and retirement savings
Unlike salaried employees, who enjoy certain benefits, self-employed workers have only themselves to rely on. That's why it's important to have strong budgetary discipline and foresight when you're your own boss.
Self-employed workers also need to plan ahead for their retirement. When you're chasing down contracts and accumulating debt to start a business, saving for your golden years often falls to the bottom of the priority list. But even if you're only setting aside small amounts, it's important to start early to benefit from the potential return on your long-term investments and the compound interest, which helps your wealth grow faster. RRSPs and TFSAs are two investment vehicles that can offer you tax benefits, depending on your situation.
Opting for automatic savings
Could automatic savings be the right saving method for you? By including an RRSP contribution in your monthly expenses (or as often as you like), you can save more easily without even realizing it. It's a strategy based on the well-known concept of paying yourself first! Simply determine an appropriate contribution amount and set up automatic bank withdrawals. You can make adjustments during the year depending on your needs.
If you set aside $96 per week, for example, you'll save almost $5,000 in a year.
Unless they have personal insurance, self-employed individuals have to pay for all health-related expenses, such as dental care, eye care, and physiotherapy. Salaried employees, on the other hand, can often count on group insurance coverage. This may include health insurance, life insurance, dental insurance, and disability insurance, depending on the employer. Many employees also get paid leave and a number of other benefits, such as employment insurance, a pension plan, the reimbursement of transportation costs, and so on.
You should also know that in addition to taxes, self-employed workers must pay their QPP contribution in full. Comparatively, employees pay only 50 percent of the contribution, and the rest is paid by their employer. In total, you must contribute 11.4 percent of your income. Self-employed workers must pay the entire amount themselves if they want to participate in the QPP and benefit from it once they retire.
03Are you aware of the tax differences?
If you're self-employed, your tax obligations differ depending on your legal form. For example, you can set up as a sole proprietor or start your own business corporation. Both have advantages and disadvantages, so it's best to consult a tax specialist or accountant to choose the most appropriate legal form for you. Becoming incorporated involves legal costs, but it can also reduce your tax rate if your income is high and mitigate personal risk in case of financial difficulties.
Furthermore, if your annual income exceeds $30,000, you must register for the GST and QST and file the associated returns. The good news? From this point on, you'll be able to claim eligible expenses on your income tax return.
For tax advice, speak with a finance expert. Many accountants specialize in self-employment and can help you optimize your financial situation and make the right choices.
Tailor-made tax deductions
Given that they have a different tax status and business-related expenses, self-employed workers are entitled to special deductions granted by Revenu Québec and the Canada Revenue Agency. For example, if you're self-employed, you may be able to deduct part of your home office expenses, equipment or supply costs, work-related travel costs, telecommunication costs, annual membership fees for a professional order, training costs, and more. Even accounts uncollectible are deductible. Make sure you don't forget any eligible expenses!
04Are you ready to track down work and foster client relationships?
As an entrepreneur, you need to be able to meet deadlines, multitask, and keep a positive outlook, not to mention have strong self-esteem and good interpersonal skills. All of that can be quite the challenge, but self-employment is also very exciting. Besides, being a salaried employee has its share of downsides, too.
If you decide to work for yourself, you need to ensure that you have sufficient contract turnover to generate income. In addition to your daily activities, business development is a must.
You have to be prepared to take on a variety of responsibilities: contract negotiation, customer relations, billing, marketing, and more.
Now that you've considered all the implications, you're well equipped to determine whether self-employment is the best choice for you, based on your career aspirations and needs.