Five things you need to know as a newly self-employed professional

Before you charge headfirst into self-employment, let’s talk about something they probably didn’t cover in training or onboarding: Money.

Imagine setting out on this new chapter of your career with a clear roadmap for your financial well-being. By equipping yourself with the proper knowledge and advisors, you can set yourself up for success.

With the right planning and support, you can optimize your tax strategy, make the most of your income, and learn how to increase your cash flow.

Understand your employment status

First, it’s important to understand what it means to be self-employed.

Joining a firm or practice as a self-employed professional offers a unique blend of independence and collaboration. However, instead of receiving a fixed salary, your income is tied directly to your productivity. This model encourages a proactive approach to building your practice, allowing you to grow your income and grow as a professional.

But it also comes with challenges. You’ll be responsible for managing your finances, planning for and paying your tax bill, and determining your unique work-life balance.

Here are some things to consider as you establish yourself as a self-employed individual.

Plan for tax season

As a self-employed professional, the onus to save for taxes falls on you. And the last thing you need is to be hit with an unexpected tax bill.

To mitigate this, you’ll want to come up with an estimate of your income. You can figure this out by talking to your colleagues or by engaging an accountant. This rough idea of income will help you plan for the upcoming tax season.

One critical aspect to understand is the wide range of expenses that can be deducted to reduce your taxable income. This can include professional membership dues, travel expenses, conference fees, insurance costs, and some home office expenses.

And don’t forget about accounts like a Registered Retirement Savings Plan (RRSP) or First Home Savings Account (FHSA). By contributing to these accounts, you reduce your taxable income. This, in turn, means a lower tax bill for you.

Take the stress out of tax season by developing a basic understanding of how the tax system works. An accountant can be helpful, as they can forecast any upcoming tax requirements, eliminate surprises, determine any possible tax credits and deductions, and help you strategize for the coming year.

Money management 101

Budgeting and saving may sound boring, but they are your best friends when it comes to achieving financial stability.

Proactive planning helps you take control of your finances. And tracking your income and expenses is the first step to achieving this. Keep a tally — using pen and paper, spreadsheets, or an app — of the money coming in, as well as what’s going out.  

When it comes to budgeting your new income, the best practice is to keep it simple. Divide your paycheque into buckets — like debt repayment, retirement, taxes, as well as keeping some for day-to-day living. As you build up your income, pay down debt, and set some financial goals, you may want to start contributing to different buckets.

An accountant can help streamline the management of your income. By engaging a professional at the start of your career, you can set strategic financial goals, manage any debt repayment, and avoid being blindsided by a hefty bill come tax season. Essentially, they can help you establish and maintain your financial well-being.

To incorporate or not

Incorporating your practice can offer some advantages — but only if you truly need it. It’s not a one-size-fits-all solution.

There are many factors to consider, like how much money you earn and how much money you need to live. If you’re making significantly more money than you need, consider speaking to an advisor about incorporation.

Keep in mind, each profession and each province have their own nuances when it comes to incorporation. Understanding these subtleties can help you make an informed decision.