Have you lost or given up your job and decided to become self-employed? This status has several advantages, but also requires sound tax and financial planning.
Being your own boss can be a dream for many employees because of the freedom it brings, but also the tax advantages. In fact, you may be entitled to deductions and tax credits that employees do not have access to, such as office expenses, travel, telecommunications, etc. But this status also brings with it duties and responsibilities that you must prepare for. Here are the things you should keep in mind.
Plan your retirement
As a self-employed person, you cannot benefit from a group RRSP plan or an employer-offered retirement plan. It is therefore up to you to plan your retirement. “If we don’t do this, we will only have public pensions, that is, the Quebec Pension Plan (QPP), the old-age pension and, where applicable, the guaranteed income supplement, which may not be enough.” It is therefore up to us to make contributions to RRSPs and TFSAs and plan our retirement well,” recommends Jean-Michel Samuel, tax lawyer and financial planner at Mouvement Desjardins.
Pay social security contributions
Jean-Michel Samuel estimates the amount that self-employed people have to pay for various contributions and social security contributions at around 13% of income. These include in particular the QPP, the Quebec Parental Insurance Plan and the Health Services Fund. Additionally, with rare exceptions, a self-employed person does not have access to paid vacation. So the vacation is at his expense. Since you no longer have access to your employer’s group insurance, you may need to take out health insurance, life insurance, etc.
“When determining your rates or the cost of your product, do not forget that as a self-employed person you will incur additional costs and lose social benefits,” recommends the tax lawyer.
Be financially prudent
A self-employed person must keep an eye on their tax obligations as they can quickly accumulate costly debts to the tax office.
“From the first year of your activity as a self-employed person, you must be aware that you will probably have to write a check to the tax office, since there will no longer be withholding tax on your paycheck, as is the case with an employee », argues Jean Michel Samuel. In the second year there may be installment payments. If you miss payments, it will cost you a lot of money in interest and penalties.
Another element not to be overlooked: Once you earn self-employment income of more than $30,000 over a 12-month period, you must charge your clients GST and QST and then repay all or part of it to the government.
Don’t hesitate to consult an accountant who can help you predict and better plan your tax obligations.
Additionally, remember to keep records and receipts that support the deductions and credits you claim on your annual tax return. They are needed when the tax authorities conduct audits.
Compensate for fluctuations in income
If you work for yourself, your income may or may not vary greatly depending on the contracts you sign. To cope with lean times, it’s important to build an emergency fund as quickly as possible that covers three to six months of expenses, recommends Jean-Michel Samuel.
“If we have to pay our suppliers or even the GST/QST to the government while our customers have not yet paid their debts, it creates a lot of financial stress. We must prepare for this by maintaining liquidity, which represents working capital,” he specifies. In this regard, he emphasizes that a strict billing and collection system is the key to not ending up in a difficult financial situation.
ADVICE
- Make sure you have self-employed tax status. In particular, this means that you have autonomy where tasks are carried out, how you manage your tasks and your schedules.
- You have to be careful because certain situations and agreements with a customer can be confusing. If necessary, contact an accountant or tax advisor.
- If it turns out that you are actually an employee and not a self-employed person, the tax office will make corrections and retroactively demand the contributions from you and your employer.