The essentials to note before you take the leap.
If you’re considering quitting your 9-to-5 job for a freelance career, or have just been laid off and are frankly assessing your work options, it can be helpful to know what you’re getting into before taking the leap into self-employment. Because the freelance life, whether you’re a travel writer or an interior decorator, is not only about getting to work in your pyjamas and having the flexibility to make your own hours, although those perks are well-advertised and pretty universally appealing. Instead, at least at the beginning, expect to spend hours mastering not-as-glamourous tasks like Harmonized Sales Tax registration and creating invoices using the FreshBooks accounting software.
Especially if you’ve never had a side hustle, and are venturing into the freelance or contract work force for the first time fresh out of school or from an early career spent going from one full-time gig to another, there’s a lot of nitty gritty logistics to know and factors to consider while you’re building up your business and client list. Being aware of these resources and rules early on could save you from big headaches later on, and help you make the right decisions for your circumstances.
Crunch the numbers
When you’re a salaried employee who hasn’t received a cost-of-living wage increase in years, hearing about freelance friends’ lofty day rates and work-from-the-beach scenarios can incite major jealousy and inspire daydreams about becoming your own boss, too. But, it’s important to research your industry and ask your friends a few probing questions to see how realistic your expectations are before jumping to conclusions. Maybe those sweet day rates are balanced out by unpaid hours spent drumming up business, or you’re forgetting to factor in some of the non-salary perks your full-time job might offer, such as dental care and a defined contribution pension plan.
Plus, you’ll want to keep in mind that, unless you have potential clients already lined up, it might take months for you to build up your freelance business, even if you’ve been working in the industry for years. And, since invoices are normally paid in terms like Net 30 or Net 60—indicating the number of days the client can take to pay you—it will take time for the checks to start rolling in, even after you’ve completed a number of paid projects. So if you don’t have enough savings put aside to cover all your life expenses, like rent and utilities, for a few months, it might be prudent to stay at that day job a little while longer before striking out on your own.
Before you get busy working and invoicing, take a day to research the different business structures available to entrepreneurial Canadians. For example, if you want to form a partnership with a friend instead of running a sole proprietorship or incorporating your fledgling business, there’s different legal paperwork and forms involved. A corporation, for example, might offer the tax rates on your income, but involve spending thousands of dollars more upfront for services like bookkeeping and accounting because the paperwork needed can be more complex.
And, keep in mind that once your personal or business annual income hits the $30,000 threshold, you’ll be required to register for an GST/HST number, and start charging tax—which you’ll have to collect and then pass on to the government—on your services. This means lots of extra spreadsheets and receipts, because you’ll have to keep track of tax collected as well as any taxes you’ve spent on business-related spending.
Find an accountant (before tax season!)
Often, first-time freelancers only realize how much more complicated their taxes have become to prepare and file once they try to tackle Canada Revenue Agency forms like T2125 themselves. Save yourself the stress by finding and meeting with an accountant or tax preparer that you like way before tax season; many offer low-cost initial consultations or host seminars that will help you become a pro about everything from common freelancer deductions to allowable business expenses.
Knowing in advance what you can confidently deduct, and the kind of red flags to avoid that could get you audited, will help you prioritize your spending throughout the year, and might even inspire good record keeping. For example, you may able to deduct expenses such as office supplies and meals with clients, but an experienced accountant would be able to give you more specific parameters about which types and amounts of expenses are common and popular in your field.
Keep your overhead low
Even though co-working spaces and shared offices like WeWork are extremely trendy right now, membership definitely does not make good financial sense for every freelancer. Unless you’re regularly meeting with clients at your office, for example, at the early stages of freelancing it’s hard to justify the additional expense when one can easily work from a local coffeeshop or the neighbourhood library. Plus, holding off on optional costs like rent and cabs makes sense when you haven’t yet established the income patterns or a steady cash flow for the business.
That having been said, be aware that you might need to invest some money upfront for things like equipment, software, and specialized tools or training in order to properly launch and pursue your freelance work. After all, you won’t have access to employer-provided staples like computers, printers and office supplies.
Plan (far) ahead
As a freelancer, you’ll have learn quickly not to spend the entirety of each check you receive. Instead of having an employer take care of things like automatic payroll taxes and deductions, you’ll be the one responsible for making sure that enough money is put aside for not-so-fun expenses like income tax, Canadian Pension Plan payments and voluntary RRSP contributions. Otherwise, you might suddenly find yourself owing a few thousand dollars to the government at tax time, instead of getting a big refund like when you were a salaried worker.
And if you’re considering having a baby soon and want to go on parental leave, keep in mind that the eligibility rules are much more complex for self-employed individuals in Canada (note that the rules differ slightly in Quebec). Basically, in order to receive maternity or parental leave benefits as a freelancer in most provinces, you’ll have to start paying EI premiums at least 12 months before you go on leave—which basically means you’d have to register for the benefit long before you, or your partner, would even be pregnant. Because of these requirements, many freelancers simply opt to forgo the extended parental leave and just cut down on their workload post-baby.
The conclusion? Embracing the freelance life can mean greater freedom and lead to real quality of life gains; however, it may not be the right choice for everyone, at all stages in their career. There’s a lot of logistics that you’ll have to handle and worry about as a self-employed individual that your employer would normally deal with, like taxes and cash flow. Still, taking the time to research your industry and build your business carefully will pay off in dividends down the road. And a year from now, you could be finding yourself working, in your pyjamas, on a tropical beach somewhere!