2023-10-16 23:30:00
Have you lost or left your job and decided to become self-employed? This status has several advantages, but also requires solid tax and financial planning.
Being your own boss can be a dream for many employees, because of the freedom it gives, but also the tax advantages. Indeed, you may be entitled to deductions and tax credits to which employees do not have access, for example on office expenses, travel, telecommunications, etc. But this status also entails obligations and responsibilities for which you must prepare. Here are the things you should keep in mind.
Planning your retirement
As a self-employed worker, you will not be able to benefit from a group RRSP plan or a pension fund offered by the employer. It will therefore be up to you to build your retirement. “If we do not do this, we will only have government pensions, that is to say the Quebec Pension Plan (QPP), the Old Age Security Pension and, where applicable, the Guaranteed Income Supplement. which risks being insufficient. It is therefore up to us to contribute to RRSPs and TFSAs and to plan our retirement well,” recommends Jean-Michel Samuel, tax lawyer and financial planner at Desjardins Group.
Pay social charges
Jean-Michel Samuel estimates the amount that self-employed workers must pay for various contributions and social charges at around 13% of income. Among these, we find in particular the QPP, the Quebec Parental Insurance Plan and the Health Services Fund. In addition, a self-employed worker does not have access to paid leave, except with rare exceptions. The vacation will therefore be at his expense. Since you will no longer have access to the employer’s group insurance plan, you will eventually have to take out health insurance, life insurance, etc.
“When you establish your rates or the cost of your product, do not forget to consider the fact that as a self-employed worker, you have additional expenses and lose social benefits,” recommends the tax lawyer.
Be fiscally prudent
A self-employed person must keep an eye on their tax obligations, as they can quickly accumulate costly debts with the tax authorities.
“From the first year of your activities as a self-employed worker, be aware that you will probably have to write a check to the tax authorities, because you will no longer have withholding taxes on your paycheck, as is the case for an employee », argues Jean-Michel Samuel. In the second year, you may be subject to installment payments. If you skip payments, it will cost you a lot of money in interest and penalties.
Another element not to be overlooked: as soon as you exceed self-employment income of $30,000 over 12 months, you will have to invoice your clients for GST and QST, then repay it in whole or in part to the government.
Do not hesitate to consult an accountant who can help you predict and better plan your tax obligations.
Also, remember to keep proof and receipts to support the deductions and credits you claim on your annual tax return. They will be needed if the tax authorities carry out audits.
Compensate for income variations
When you work for yourself, income can vary greatly depending on the contracts you land… or not. To be able to cope with lean times, it is essential to build up as soon as possible an emergency fund representing three to six months of expenses, recommends Jean-Michel Samuel.
“When we have to pay our suppliers or even the GST/QST to the government while our customers have not yet paid what they owe us, it creates a lot of financial stress. We must prepare for this by retaining liquidity which will constitute working capital,” he specifies. In this regard, he emphasizes that a rigorous billing and bill collection system is the key to avoiding finding yourself in a difficult financial situation.
ADVICE
Make sure that you have the tax status of self-employed worker. This implies in particular that you have autonomy in the place of execution of the tasks, in the management of your tasks and that of your schedules. You have to be careful, because certain situations and agreements with a client can be confusing. Consult an accountant or tax professional if necessary. If it turns out that in fact you are an employee and not a self-employed worker, the tax authorities will make corrections and claim contributions retroactively, from you and your employer.
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