15: So You're Self-Employed
Today, we’re talking about what you need to know when you start your own business, and we’re beginning, as most good things do, with a quote from Sir Terry Pratchett:
I’m losing my touch, he said. Imagine—me, working for someone? I must have been mad. It’s the cold weather getting to me, that’s what it is. Even…wages, he said the word with a shudder, looked attractive.
D’you know, he added, in a horrified voice, he was telling me what to do? Next time I’ll have a quiet lie-down until the feeling goes away.
Like that guy (CMOT Dibbler in Sir Terry’s 25th Discworld novel The Truth to those who celebrate), I’m fundamentally unemployable. Maybe you are too. Maybe you’re tired of your labour being exploited for someone else’s profit, or how toxic your workplace is, or being evaluated for the quantity of time you spend in the office instead of the quality of the work you do.
If you’re thinking of starting what the kids these days call a side hustle, or what people at my advanced stage of life call “a business”, this episode is for you.
Why is this important?
Unless you’re operating entirely outside of the government’s watchful eye, you’ll need to track what you earn and what you spend to earn it no matter what kind of business you start.
Knowing what the government and the tax man need from you from day one is going to make the actual work you want to do so much easier. If they don’t get what they want from you, you’ll spend a huge chunk of your time on paperwork and miserable phone calls instead of crocheting custom tea cozies, pet sitting, renovating kitchens, or running self-defense workshops.
Before you start your business
Broadly, there are two different types of business: one that is both legally and financially separate from you (think a corporation or a cooperative), and one that’s not (think a partnership or a sole proprietorship). It takes some serious thinking to understand what structure works for you, but for today’s episode, we’re assuming you’re going to be a sole proprietor.
As a sole proprietor, you and your business are the same thing for the purposes of income tax. The money you keep after paying your expenses is taxed to you personally, in the year you earn it.
If you do business under your own name (as in, if your clients pay you, personally) you don’t have to do anything special. If you want your business to have its own name, you’ll need to register it with your province, and you’ll need to open a business bank account.
Even if you don’t need to open a business bank account, open a separate account that you only use for the business.
Once you spend or earn your first dollar
Track every dollar
Tracking your business income and expenses is non-negotiable, starting with the very first dollar you earn and the very first dollar you spent to earn it.
Anything you spend to earn an income is an expense that you can deduct from that income before you pay tax on it. There are some exceptions to this rule, and the best thing you can spend a bit of money on right off the bat is a consultation with a bookkeeper to get you set up for dealing with the everyday stuff and the exceptions.
Keep your receipts
If you work from home, save your property tax and utilities bills. If you travel, track your mileage.
Keep every single invoice and receipt. Find a dedicated spot to store them, and bundle them together by month. Future you is going to be pissed if you throw them all in a grocery bag or stuff them into the door of your truck, because finding a specific receipt when you need it (or when your accountant needs it) is going to be a nightmare.
Save for income tax and Canada Pension Plan contributions
Get into the habit of setting aside a reasonable percent of every dollar you earn. What’s “reasonable” is a guess when you’re starting out, and depends on how much income you’ll have for the whole year. Start with 35% and you probably won’t be sad about it. You can adjust it as you go.
On top of the money you save for tax, set aside money to make your Canada Pension Plan contributions. Remember, you’re your own boss now, so you’ve got to pay for yourself and for your business. Check out the Canada Pension Plan episode for amounts.
Once you’re in the groove
Regular reviews of your business income and expenses are a must, friend, and not just so you can count the days until you quit your day job. Even if you don’t particularly care how much you earn (and how much of it you keep), you’ll want to know when you have to start collecting sales tax (because the government won’t tell you in time), or if you should increase the amount you save for income tax.
What I want most for you is to enjoy the parts of your business that made you start it in the first place. Doing a few un-fun things at the beginning is a great way to avoid having to do a lot of really un-fun things later.
Resources
Decide on the ownership structure for your business - Ontario.ca
10: The Canada Pension Plan - Ready...Set...Money