Freelancers are the way of the future. Self-employed Canadians taking money into their own hands, being paid what they’re worth, and just raking in the dough. Allegedly.
The reality is that a lot of self-employed freelance financial tips freelancers don’t have a rule book of do’s and don’ts when it comes to their business finances. When you begin as a freelancer, it may be thrilling to see 100% of the value of your invoice being put directly into your bank account. It’s crucial to recognize that the pleasure of freelance is that you are the ruler of your finances and how much you make -- but on the flip side, the pain of freelance is that you are the ruler of your finances and how much you have to pay out in tax season.
Whether you’re a sole proprietor or an incorporated independent business (or you’re not sure what you are) there are some general guidelines to keep your personal finances organized and your anxiety monster at bay. Here are some tips for self-employed individuals before tax time:
Set aside 20-30% of every invoice for taxes
This percentage can vary depending on just how much you make in a year. As you continue to scale your freelance income, you may want to consider putting aside closer towards 30% than 20%. Alternatively, if you are in more of a side hustle freelance gig than full-time self-employed income, you could put aside 15%-20% of your income. This is because the amount of taxes that you will need to pay, varies depending on where you land on the tax bracket scale. The more you make, the more you get taxed.
Generally, it’s safer to put aside a higher percentage than you may need. Aim high so that when tax season rolls around and you owe less than you thought, you now have a little gift from your previous self in the form of bonus savings. Thanks, past self!
Also, it is important to note that this 20-30% of every invoice is not inclusive of HST. If you’re in Ontario and enrolled to pay HST, you need to…
Bill for and set aside 13% of every invoice for HST
Note: not every Canadian freelancer will charge HST. If you are a self-employed Canadian and have made $30,000 cumulatively in 4 consecutive quarters, you must apply for an HST number and charge for it in every invoice you send out. If you don’t meet that criteria, you aren’t legally required to charge for HST yet.
So, that’s now 15-30% for income taxes, plus potentially an additional 13% for your HST payments to the government. While you wait for tax season to come around, it’s ideal to put all those savings into a high interest savings account and gain some interest on it while you hold on for April.
But wait, there’s more! Have you considered…
Setting aside a cushion for your health and dental needs
As a self-employed freelancer, you don’t have your employer’s benefits package to rely on. Sudden toothache? Need a prescription refill? Or sat on your glasses again? You’ll now have to pay out of pocket for those needs, which can be unexpected, large sums of money to cough up in a pinch.
While you can use the above method of setting aside a cushion for health and dental, some freelancers prefer paying a fixed cost each month so there’s no sudden expenses that aren’t accounted for.
With Livelii, self-employed Canadians can now gain easy access to competitive health and dental benefits through our group plan. With packages for only $99/month, you can sign up for Livelii online and in about 15 minutes.
Livelii comes together as a group to tackle challenges, reduce fees, remove barriers, and provide transparent pricing each calendar year. Visit https://www.livelii.io/ and discover how even freelancers can get their benefits covered.