Take it from me – money mistakes as a freelancer could really cost you.
You don’t need me to tell you that the workforce is now more competitive than ever. Enrollment in Canadian universities is up 150% since 1980 and education is no longer something that will set new grads out from the crowd. On top of that, more than a quarter of young people are underemployed, meaning they have degrees but end up in jobs that don’t require them.
We aren’t letting these frightening numbers stop us. Baby boomers can call us whatever they want, but we’re go-getters. We chase after our dreams and we don’t settle for less (or at least when we do, we are already thinking ahead to what’s next).
Welcome to the freelancer and side-hustle generation.
We love the extra cash and a lot of us actually need it to make ends meet. Our education isn’t going to guarantee us a job in our field, let alone one with a salary. So, we’ve discovered new, inventive ways to allow us to live the lives we want. But, if you’re not careful, that extra money could disappear in a flash.
How I learned the hard way…
I’m one of those millennials who started freelance writing and doing social media consulting for businesses early in my career. Freelancing gave me the ability to gain valuable experience while also enabling me to keep up with a very expensive life living in Toronto, one of the most expensive cities in Canada. I wasn’t making a ton, but I also wasn’t trying to given that I was a lucky one with a full-time career in my field already. However, this past year I earned more than I expected. I landed an international client who was paying me a good chunk of money to write for them. I loved it. It was easy to get lost in all the extra income I was bringing in and I completely forgot about what I was supposed to be doing financially.
That’s when I received my tax return back this past spring with the dreaded line saying I owed over $1,500 in taxes.
WHAT?! I almost fell off my chair.
It’s no secret that they don’t teach you about your taxes or financial literacy in school. I may know how to calculate the angle of a triangle but I have no idea how my taxes work even after years of math classes. I dragged my feet, paid the bill and did my research on how I could make sure this would NEVER happen again to me. In my research and talking to some money-smart people (thanks Dad!), I came across some tips that all side-hustlers out there should keep in mind so they don’t end up blindsided like me.
Budget for taxes
What I wish someone told me when I started earning more and more money from my freelance work was to actually budget for tax season. Money experts say to set aside around 25-30% of every freelance paycheque. The easiest way to do this is to set up a separate account that you can’t easily access and automatically deposit that 25-30% each time.
This straight up sucks, I know. When you have worked your butt off and finally have money, the last thing you want to do is to save it to pay off a bill. BUT this will allow you to avoid some big problems if you get a hefty bill to pay when tax time rolls around.
Note: If you make over $30,000 as a freelancer in a year, you’ll need to register for GST/HST.
Build a safety net
Build a fallback plan. This is money you set aside to help you pay for the cost of living or just that fun stuff you “can’t live without” or have grown accustomed to. This could be as simple as putting aside a certain amount you earn each month to help make your ends meet (Say, 10 percent of every paycheque for example).
With freelance clients, work can come and go. There’s no guarantee of new projects and you never know when a client will pull the plug. Even if you have built out contracts (which you should) that protect yourself to some extent, you still don’t have complete control over client demands and situations changing.
Start and contribute to your RRSP
I started a Registered Retirement Savings Plan (RRSP), not because I was thinking of retirement in my early 20s, but because my work at the time had a great program that matched my contributions. An RRSP can be a way around having to pay as much money when tax season comes along. Plus, it can feel much better contributing to an account that’s all yours versus giving away your money to the Canada Revenue Agency. Your contributions can be claimed when you do your taxes, which in turn will help lower what you owe in taxes.
Bonus: when you want to buy a house later, you can use the money you’ve put into your RRSP as a down payment through a program called The First Time Home Buyers Plan
Keep track of your expenses so you can claim them
Many people dive head first into freelancing and miss key opportunities to claim their expenses come tax time. As a freelancer, lots of things that you wouldn’t think about can actually be claimed as business expenses when you file. For example, do you work from home? Claim a portion of your rent or household expenses like your Internet, hydro, phone bill, etc. If you use your car for the work you do, look into claiming a portion of those expenses. What about if you had a business meeting and bought your client a coffee or food? Or bought a new computer so you could actually work effectively as a freelancer? Fair game.
Saving your receipts and invoices throughout the year in an organized place will help make pulling this information together an easier task when tax season hits. Plus, you are required to have receipts and invoices for any expenses you claim in case you are audited and need to provide proof/documentation.
I’ve said it once, and I’ll say it again. We are the freelancing, side-gig, side-hustle, whatever you want to call it, generation. However, we can also be the generation that jumps in head first without thinking through the repercussions. So cover your butt by keeping the above things in mind when taking on your next project.
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