If you’re ready to strike out on your own as a freelancer, you’ve probably got your equipment and a plan to find clients ready to go, but aside from those important elements, you may also want to consider life insurance, retirement savings, and accounting. These are perks and services usually provided by your employer, but as you become your own boss, you need to provide these items for yourself.
The law doesn’t require employers to provide life insurance, but many employers in competitive industries offer this benefit. If you have life insurance at your current job or if you want to ensure financial security, you may want to look into buying your own life insurance plan. There are two main types of life insurance: whole and term. Whole life insurance covers you until the date of your death or until the expiration of the policy. In most cases, the premiums don’t change as you age, and you can borrow from the policy based on the premiums you’ve paid. This type of insurance tends to be more expensive than term coverage. With a term policy, you lock in a monthly rate for a certain period of time, and the policy expires at the end. Let’s say you want to ensure your family has enough money to cover your income if you die young, but you’re not worried financially about dying after retirement age. In this case, if you’re 40, you might buy a 30-year policy so you’re guaranteed a payout if you die before age 70. You can’t borrow from term policies, but they’re a relatively inexpensive way to give yourself peace of mind. If you’re alive at the end of the term, you can say it’s the best money you’ve ever “wasted.”To break it down simply, both term and whole life insurance provide a payout if you die while insured. Whole policies accumulate cash value over time and as a result, tend to be more expensive. Term policies don’t build up value, but the premiums are lower. As a general rule of thumb, if you’re buying life insurance to protect your family, you should aim for a policy that covers 10 to 12 years of income. In other cases, you may want to get a policy that covers key expenses such as paying off the house or putting the kids through college. You may also want to insure your spouse. Even if your spouse is a stay-at-home parent, you need to think about the financial aspect of the loss; you either need to be able to work less or pay someone to do what your spouse does, not to mention funeral expenses and time off from work for grieving.
Retirement Savings Account
As a self-employed individual, you have to make Canada Pension Plan contributions to the government. This makes you eligible for CPP payments upon your retirement, but in most cases, you need to make additional arrangements if you want a financially comfortable retirement. If you contribute to a Registered Retirement Savings Account, all of the contributions are tax-free. As of 2017, you can contribute 18% of income or up to $26,010. Let’s say your taxable income is $45,000, and you contribute $5,000 to an RRSP; that lowers your taxable income to $40,000. In other cases, you may want to invest in a tax-free savings account. The deposits you make are not tax-free, but any money you earn from your investments is tax-free. In other cases, freelancers get creative with their retirement planning and they invest in real estate or explore other options.
The other essential many freelancers overlook is the need to handle their own accounting. When you have an employer, it takes care of a lot of that for you. It takes income tax, CPP contributions, and employment insurance from your cheque and remits all of it to the CRA. You just have to file a tax return at the end of the year. As a self-employed individual, all of that responsibility falls into your lap. You have to calculate and remit CPP contributions, and you even have to cover the amount your employer normally pays. If you want EI coverage, you have to go through a special process to sign up, and then make the payments on your own. On top of all that, you may have to deal with goods and services, payroll, and export taxes as well as other obligations. You also have to track income and expenses for your business, including capital expenditures. To keep all these balls in the air, you need a solid accounting plan. With a small freelance operation, you may be fine with some basic expense tracking software and self-employed accounting software or even just a spreadsheet. As your business gets more complicated or if you’re dealing with inventory, you may need more comprehensive accounting software or help from a professional. In addition to these three elements, you may also want to figure out how to budget for vacation pay and identify any other perks that your current boss or your dream boss would offer. As a freelancer, you have to do a lot of work, but you also get to set your own terms, and that should include budgeting for and figuring out how to give yourself the perks you deserve.