Freelancing is becoming a reality for more workers in North America each year as the “gig economy” continues to grow. According to the Freelancing in America: 2016 survey, freelancers make up 35 percent of workers in the US. Meanwhile, Intuit says 45 percent of the Canadian workforce will be freelancers by 2020.
While setting your own hours and schedule can be attractive, going the freelance route isn’t as simple as quitting your job and letting the contracting work flow in. Here’s what you want to have nailed down before you start freelancing:
Learn basic accounting skills.
Without an accounting or human resources department, it falls on you to keep track of the numbers when freelancing. Unfortunately, many freelancers don’t have a handle on basic accounting skills. To avoid long- and short-term headaches, take the time to learn simple accounting practices before you go out on your own.
Create separate business and personal bank accounts, use dedicated credit cards for purchases to keep track of expenses, and reconcile your accounts every month to check spending. Make sure you hold on to receipts for tax purposes. Use bookkeeping software to make life easier and keep track of both your incoming and outgoing expenses.
Know the tax rules.
When you’re working as an independent contractor, taxes get a little more complicated. Not only will you likely pay a different tax rate, but you also need to pay self-employment taxes and GST when freelancing.
As a freelancer, it’s crucial to have a solid understanding of how much you need to set aside each month. Do as much research as you can, and pour over the Canada Revenue Agency’s self-employed tax information. The last thing you want is to be hit with a tax audit.
Consult with a professional.
For those who can afford it, advice from tax and bookkeeping experts is a worthwhile investment — especially if freelancing is brand new for you. They can help you navigate the financial waters of working for yourself, and set up budgets to help keep you on track. Check out some expert tax tips from Intuit here.
Luckily, there are a number of affordable tools that can help you manage a freelance business, from simple bookkeeping technology that help you avoid audits to invoicing software that streamline your billing process. Before you take the plunge into freelancing, make sure you have some of these tools in your arsenal. They make managing your finances leagues easier.
Consider signing up for employment insurance.
Now that you’re self-employed, benefits such as maternity and parental leave, sickness allowance and compassionate-care payments are not available through EI, unless you sign up to voluntarily pay premiums for at least a year. Many people choose not to pay in but it’s something to consider: experts suggest doing the math to find out whether it’s worth it for you.
*Remember, this post is for educational purposes only. Square does not accept responsibility for the accuracy of any tax, accounting or insurance information presented in this article. For specific tax, accounting or insurance advice related to your business, consult a professional advisor.