Taking the Leap Towards Self-Employment

Taking the Leap Towards Self-Employment

Are you ready to strike out on your own?

Being self-employed is the dream of countless Canadians. They fantasize about the freedom that comes with being the master of their own destiny…

But of course there’s another side to being self-employed. The rewards of being self-employed can be huge, but so are the risks and strains. Yes, you’re your own boss, but that means all of the responsibilities and risks are yours as well. If you want to be an entrepreneur, you need to provide your own motivation, pushing yourself every day towards success.

To be clear, we are not trying to talk you out of starting your own business! However, it’s important to have a clear understanding of what’s involved. With that in mind, here are some of the things you need to consider before making the leap to being self-employed.

What Do Your Current Finances Look Like?

Whether you’re considering going freelance or you’ve decided to start your own business, you cannot count on your endeavour becoming profitable right away. In fact, for the first year or so, you might be losing money.

Jumping from a reliable paycheque to invoicing clients and hoping they pay on time can be nerve-wracking—not to mention finding those clients and getting through the start up expenses. You must have detailed knowledge of your finances and your risk resilience before you make the full leap to being self-employed.

Not sure where to start when it comes to your numbers? Luckily, this is an area where The Number Works can help. We can walk you through all of your current financial data, showing you exactly where your profits and expenses are and what you can do to shape things up before you go into business for yourself.

Do Your Research

Before starting your own business, you should probably ask yourself the tough question, “Do I have any idea how to start my own business?”

There can be a real “look-before-you-leap” mentality when it comes to becoming self-employed. It isn’t just about the state of your finances; it’s also about learning the ins and outs of creating your own business and managing it effectively.

The first thing you might want to do is talk to some of your entrepreneurial friends. Getting a first-hand account of what it’s like to be self-employed can be invaluable, enabling you to bypass some of the mistakes they made in the early days of creating their businesses.

You’ll probably also want to read some books about entrepreneurship. While countless books have been written on the subject, you should be selective about which you pick up. There are significant differences between the Canadian and U.S. markets, so be sure your book is focusing on Canadians laws and guidelines. You also need to make sure it was written (or at least updated) within the last four to five years. Technology moves so fast that anything before 2015 will be borderline useless, omitting vast chunks of what it means to be self-employed today.

Ongoing management of finances can be another big hurdle for those who want to jump into the self-employed arena. If you’ve never had to manage anything larger than a personal budget, you might need a hand getting started. That’s another thing we can help you with at The Number Works. Right from the first minute of your business, we can be there to support your financial position and ensure you’re optimized and running things as smoothly as possible.

Start Slowly

Have you ever heard of a “side hustle?” It’s essentially part-time self-employment. A side hustle could be as simple as setting yourself up with an an Etsy store to sell things that you’ve created in your spare time, or taking on a single freelance client to get your feet wet in your desired industry.

Having a side hustle can be a great way to get a small business started. If you’re feeling nervous about jumping into self-employment with both feet, this can be an excellent starting point, building muscles that will come in handy when you decide to quit and go into business for yourself full-time.

Keep in mind that it can require building some serious discipline to force yourself to work even after you get home from your job, but the result can be more than worth it. And you’ll need all that discipline when you’re a full-time entrepreneur who has to continuously self-motivated.

Do Not Forget About Your Taxes

One of the biggest shocks that a self-employed person can go through is their first tax season.

When you’re working for a company, taxes are automatically taken off your paycheques. Now that you’re self-employed, you’re collecting the entire amount you’ve earned… until tax time that is. When tax season rolls around and you need to calculate your taxes, you might be in for a shock! Yes, you knew that your tax bill would be higher than usual because you’re now self-employed but… Surely there must be some kind of mistake, right? Don’t be one of those people who realizes they owe thousands of dollars to the government that they’ve already spent!

While, yes, there is a chance that you made a mistake, it’s much more likely that your numbers are correct and you need to give the government a sum of money that you hadn’t planned for. It’s shocking, but there are several ways you can mitigate this situation.

One thing you should definitely have is an accountant experienced in working with self-employed entrepreneurs in your province. At The Number Works, we know all of the deductions and legal tricks for Ontario that could save you big bucks, especially come tax time. With our help, we might be able to get your taxes down to a slightly less jaw-dropping amount. And we’ll certainly help you prepare so that you aren’t caught off guard when you see the amount you’ll owe.

We also recommend that, rather than just dump every paycheque you have into your Chequing account, you take off about 25% off and put it into a separate savings account that you use for taxes. That way, you’ll have a reserve of money ready for you come tax time, reducing any sense of “sticker shock” when you figure out precisely what you owe.

Take Care of Yourself

For new entrepreneurs and freelancers, self-care can become an afterthought in the pursuit of making your business a success. This is a massive mistake!

If you’ve been putting off going to the gym, heading to yoga, buying healthy groceries, or spending quality time with family or friends, be sure to start scheduling it in your calendar like you would a business meeting or other important event. Same with making sure that you take appropriate breaks for lunch and for stretching if you’re sitting down for long hours. If you don’t take care of yourself physically, you’re going to start getting worn down by the job. Manageable things could start to feel overwhelmingly stressful, all because you aren’t caring for your personal needs.

There is also a mental self-care component of being self-employed. Some people start feeling like every minute they aren’t working is a minute they’re losing money; an unhealthy mindset that can lead to self-esteem issues and self-abusive thoughts of “laziness”.

Even though you’re self-employed and can technically get up at any time of day (including well after 9am), try setting “business hours” where you do your work throughout the day. Working 9 to 5, even if you’re doing so from home, can help you maintain a healthy work-life balance. If you prefer unorthodox hours, that’s ok too but make sure that you schedule your on- vs. off-time. It can keep you from feeling guilty that you aren’t working at 9pm on a Saturday rather than spending time with friends.

It takes a great deal of bravery to be self-employed, either by starting a new business or by going freelance. No matter which path you choose, you can bet that at The Number Works we’ll do whatever we can to help. We work with freelancers and entrepreneurs every single day, helping them balance their finances and making sure they’re fully prepared come tax season. If you want to simplify your financial life while moving towards self-employment, get in touch with us today. We’d love to help your entrepreneurial dreams come to life!

All About Tax-Free Savings Accounts

All About Tax-Free Savings Accounts

Did you know that a Tax-Free Savings Account (TFSA) isn’t really a savings account? Instead, a Tax-Free Savings Account is more like a basket that holds many financial options. In your TFSA, you can choose to include exchange-traded funds (ETFs), guaranteed investment certificates (GICs), stocks, bonds, and of course, actual savings. The best part is that any money you make from the investments in your TFSA is tax-free!

In 2009, the Canadian government introduced TFSAs to encourage people to save money for retirement. Since you pay tax on the money you put into your TFSA, you won’t have to pay anything when you take that money out.

TFSAs are great tools for growing your finances and setting up a cushion for retirement, but they do come with specific rules and limitations. So here’s everything you need to know about TFSAs:

What is the Contribution Limit?

You’re only allowed to open a TFSA or contribute to one when you turn 18 (in some provinces and territories you cannot contribute to a TFSA until you’re 19). Once you turn 18, you’re allowed to contribute $6,000 per year (as of 2019). However, if you don’t contribute the full $6,000 per year, you can carry forward the unused contribution amount and add it to the TFSA contribution limit for the following year. In 2018, the contribution limit was $5,500, so if you didn’t put any money into your TFSA in 2018 or 2019, then in 2020, you can contribute $11,500.

What’s more, if you withdraw money from your TFSA in one calendar year, it’ll create additional contribution room for the following year. For example, if you put in $6,000 in 2019, but then you withdraw $1,000 in 2019, you can contribute $7,000 in 2020.

What If I Exceed the Contribution Limit?

If you overcontribute to your TFSA, then the Canada Revenue Agency (CRA) imposes a tax of 1% per month for each month or partial month that the excess amount stays in your TFSA.

The 1% tax applies until:

  • You withdraw the entire excess amount; or
  • For those who are eligible, the entire excess amount is absorbed by additions to their unused TFSA contribution room in the following years.

For more information, you can visit the CRA website.

What Are the Benefits of a TFSA?

The main benefit of a TFSA is right in its name: you don’t have to pay any taxes on the money you make on it. For instance, if you invest $5,000 in your TFSA, and it grows to be $15,000 by the time you retire, the extra $10,000 of income is 100% tax-free.

Another advantage to using a TFSA is that unlike your Registered Retirement Savings Plan (RRSP), you can quickly and easily withdraw money at any time. There is no penalty when you take money out of your TFSA. Plus, withdrawing cash allows you to contribute more the following year, as mentioned above.

Lastly, since the TFSA was designed to help build income for retirees, once you retire, you can withdraw your money from your TFSA, and it won’t affect your retirement benefits such as Old Age Security, which decreases when you have a higher income.

How Can I Open a TFSA?

If you’d like to open a TFSA, you must be a resident of Canada with a valid social insurance number (SIN) and be at least 18 years of age. There are four types of TFSAs available:

  • A deposit
  • An annuity contract
  • An arrangement in trust
  • A self-directed TFSA

You can have more than one TFSA at a time, but the total amount you contribute to all your TFSAs can’t exceed your available TFSA contribution room for that year.

To open a TFSA, get in touch with your bank, credit union, or insurance company (issuer) and present the issuer with your SIN and your date of birth. This way the issuer can register your qualifying arrangement as a TFSA.

Can TFSAs Benefit Business Owners?

As a business owner, you might opt to leave extra funds in your corporation for investing. However, according to a report by CIBC, if you decide to take those additional funds out of your corporation and invest them in a TFSA, you’ll generally end up with more after-tax cash, especially if you have a long time horizon for the investment.

How Can the Number Works Help?

It’s a good idea to discuss the above with a professional accountant. So if you’re looking for an affordable virtual accounting firm, look no further than The Number Works! We partner with small businesses and creative entrepreneurs who are looking to grow their businesses and profits.

We offer a wide range of services such as cloud-based bookkeeping, full cycle accounting, financial statement analysis, strategic planning, and tax planning. So if you have a question about TFSAs and how they can work for your business, don’t hesitate to get in touch with us today. We love helping you tell your financial story.