Entrepreneurship, freelance work and solo-preneurship are no longer the future of work – they’re pretty much the norm for millennials.
However, it’s not easy to gather up the courage to trade in your steady paycheck for the instability of self-employment. Which is why we had National Bank connect us with Shannon Simmons, Founder of the New School of Finance, to give us some tips on how to make the transition as smooth as possible.
After all, as Shannon points out, when you’re self-employed, your business finances are your personal finances. For instance, if you have a tax bill that you can’t pay, that will directly affect your ability to save for other things like trips, down payments or retirement.
To help keep you in the black, here are her best freelancer financial management tips.
1. Keep receipts
If you can only do one of these tips, this is the most important one. Hold onto your receipts for business expenses and keep them organized – not in a crumpled ball in a random shoebox. Even if you’re not sure whether something qualifies as a business purchase, keep the receipt just in case. You should educate yourself on what you can and cannot deduct from your income so you can keep and maintain the proper records. Apps like Shoeboxed make it super easy to stay organized – simply snap a pic of your receipt with your phone’s camera and then choose whether the expense is reimbursable or deductible.
2. Track your income
You need to track all the money you make from self-employment. Seriously, every invoice. Track this either in a simple Excel spreadsheet or with bookkeeping software like Wave or Freshbooks.
3. Put aside money for income taxes
You will owe federal and provincial tax on your self-employment income (assuming you’re not incorporated) and you’ll need to pay CPP (Canada Pension Plan) on that. Be sure to put a percentage aside for tax time. For example, every time you cash a check or e-transfer, put 20 per cent aside for taxes. This could be more or less for you depending on your income, so be sure to seek out advice that’s customized to you. Most banks have a feature where you can schedule automatic transfers to your savings account, so you don’t have to worry about any surprises come tax season.
4. Pay attention to HST/GST
Not only do you need to put aside money for income tax, you need to watch out for HST/GST. If you’re bringing in over $30,000 a year, depending on the type of business you run, you may need to register for a HST/GST account. If so, you need to charge it to your clients, collect it and then put it aside to pay to the government. Therefore, this is something you should definitely look into before you start freelancing. For more information, head to the Canada Revenue Agency’s website.
5. Remember, you’re only paying tax if you’re making money
Many self-employed people are so frustrated at tax time because it sucks to shell out a lot of money. But, keep in mind, you only pay tax if you’re making a profit. If you’re losing money, you don’t owe tax. So, if you’ve got a tax bill, you should celebrate – it means you made money!
Don’t be intimidated by the financial part of running your business. It might sound like a lot of effort, but once you get the right systems in place, you’re golden.
National Bank is inspired by the freedom to decide: Your own styles, actions, and paths. We believe in better alternatives to the norms. This could be your finances, dwellings, careers, travels, any and all undertakings. National Bank’s purpose is to help you power ideas that can change your life and change the world. Check out tips & tricks the alt way here.