Getting a regular paycheck is great, but the flexibility of self-employment is appealing: you get to set your hours, make your own decisions about processes and products, spend more time doing what you love, and determine for yourself the actual value of your work. If you’re thinking about leaping, there are a few things you’ll need to consider. The most important of these is how you’ll provide for yourself and your dependents. Having sufficient income is part of the equation, but you also need to line up the right insurance and prepare for the tax implications of your new work model.
You won’t have the insurance benefits your employer provided to you when you’re self-employed. You may not think about these often, but it’s good to have that protection in place when you need them. The proceeds from your policy can cover your funeral costs, mortgage payments, and any debts you leave behind, including debts related to your business, such as loans and outstanding bills. Life insurance also provides a crucial safety net for people with dependents that gives your family a financial buffer and helps keep them safe and secure in the event of a tragedy.
Critical illness insurance can also help ensure you and your family are covered if you become ill and need to take time away from your work. This type of insurance is designed to allow you to get treatment and recover without worrying about your family’s finances in the interim.
Consider replacing your employer’s health, vision, and dental insurance with private insurance for an added layer of protection from unexpected large expenditures.
Employment insurance (EI) is available to self-employed people through a Government of Canada program, but you must register for the program and pay EI premiums. Benefits are paid out for maternity and parental leave, personal illness, caring for an ill or injured family member or providing end-of-life care for a loved one. The program works slightly different in Quebec; details are listed on the government website in the references below.
Before you undertake the tax responsibilities of a self-employed person, you need to determine if you’re self-employed for tax purposes. This distinction is essential for deciding which party must collect and remit Canada Pension Plan contributions, EI premiums, and personal income tax: the payer or the payee (worker). The difference is determined by elements of the working relationship between the payer and the worker. These elements include how much control the payer has over the worker, who provides the tools and equipment for the work, how much risk the worker undertakes, and whether the worker participates in the profits of the working relationship. Consult your tax advisor for to find out what applies to your unique situation.
Filing taxes is more complex if you’re self-employed. You must maintain careful, accurate records of your income, expenses, and the amount you collect in provincial and federal goods and services taxes. If you’re transferring personal assets such as equipment or supplies into the business, these also need to be accounted for when you start your business.
Sales and services taxes (GST/HST) vary by province regarding the amount to charge and what to charge; check your provincial government’s website for details.
There is good tax news for self-employed people: you have until June 15 of every year to file your tax return, although any amounts owing still must be paid by April 30. Also, you can generally deduct expenses related to your business from your income. This can include equipment, tools, and materials for your business and your home office expenses, including a portion of your utilities and mortgage/rent. Again, it is always recommended to consult your tax advisor for to find out what tax rules or laws apply to your unique situation.
In summary, there are several things you need to consider when you’re preparing for a shift to self-employment, but many people have done it successfully; with the right tools and guidance, you can make a go of it too. Remember that you may be able to start with a ‘side-hustle’ where you work for an employer and create your own business after hours. As you begin to earn income from self-employment, you’ll gain confidence, and then you can decide if you’ll make your side hustle your main hustle.
Insurance Considerations Continued
Above, we recommended that self-employed individuals secure life insurance and critical illness insurance for themselves in lieu of employer benefits. Canada Protection Plan, a Foresters Financial company, offers both competitively priced and comprehensive Life Insurance (Whole-Life and Term) and Critical Illness Insurance Learn more and talk with an insurance professional about what options are best for you. Visit cpp.ca.
This article is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant, or other professional advisor when tax planning.
- Employment insurance (EI) for self-employed people:
- Are you an employee, or are you self-employed?
- When to register for and start charging GST/HST:
- Income tax for small businesses and self-employed persons:
- Reporting business income and expenses: