11 financial planning tips for the self-employed worker

04 November 2018 by National Bank

Did you plan to work for yourself after settling in Canada? As a self-employed worker, your income will be more sporadic than if you have a salaried position. In addition, you won't have an employer to withhold taxes from your salary; you will have to do it yourself.

To avoid headaches and to determine the amount of provincial and federal tax you will owe, it is important to properly plan your finances.

Below are 11 tips provided by Hassan Moussa, Personal Financial Advisor at National Bank, which will help you start off on the right foot with your financial planning.

1. Make a budget. A budget is the best tool for planning income and expenses. With a budget in hand, it will be much easier to weather the feast-or-famine reality that many self-employed workers face.

2. Build an emergency fund. Ideally, you should keep a cushion that would see you through a dry spell of three to six months. If you don't have enough liquidity, apply for a bank line of credit.

3. Consult an accountant and financial planner. Don't hesitate to call on experts to help you manage your business and personal finances. They can help you calculate the amount of taxes you owe, plan for retirement, etc.

4. Pay your income tax in installments. When you receive a payment from a client, it's a gross amount. It's easy to forget that you will need to pay income tax on that amount. With the help of your accountant, calculate your provincial and federal taxes and make instalment payments every three months. This will keep you from spending money that isn't actually yours.

5. Set aside funds for sales tax payments. As with income taxes, it's important to remember that a portion of the money you earn includes sales tax that you must repay to the government. Deduct the amount owing from your payments and set the difference aside so that you are able to pay it to the government when required.

6. Build your savings. Given the ups and downs that come with working for yourself, it's easy to forget to save. Set up an automatic savings mechanism that will force you to set funds aside for unforeseen expenses and retirement.

7. Plan your retirement. Retirement planning is particularly important for self-employed workers as they cannot count on a pension plan from their employer. Consult your financial planner to ensure that your golden years are secure.

8. Maximize your RRSP and TFSA contributions. Since you don't have access to a company pension plan, it is crucial that you contribute the maximum amounts allowable to your registered retirement savings plan (RRSP) and tax-free savings account (TFSA). Doing so will help your tax situation and facilitate your retirement.

9. Don't claim unnecessary deductions. You may be tempted to deduct as many expenses as possible to reduce your taxable income and pay as little income tax as possible. However, this short-term strategy often causes problems for self-employed workers who wish to buy a home or obtain financing for a major project in the future. If you lower your income significantly by claiming numerous deductions, it may be difficult to convince financial institutions of your ability to repay loans. To prevent this from happening, don't overdo it when it comes time to deduct your expenses. For example, you may be allowed to deduct the purchase of your car, but if you don't really use it for work, it may be best to avoid doing so.

10. Separate your business finances from your personal finances. If you chose to register your business as a sole proprietorship, there is no real distinction between your personal and business finances. Nevertheless, it's best to keep them separate, as it will simplify things when it comes to managing your finances. It will also make it easier to talk to the bank about your personal financial situation and that of your business.

11. Take out sufficient insurance. Your income hinges on your ability to generate it. If you were to suffer a critical illness or disability, you could be in serious financial trouble. It is therefore crucial that you take out disability and critical illness insurance.

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