Finances for Freelancers in the Gig Economy
For freelancers, understanding finances, taxes, etc. can be more confusing than for people who hold down a regular 9 to 5 job.
That’s a big problem. In the USA, “Gig workers are expected to comprise 40 percent of the workforce by the end of the decade,” reports the Times Free Press. “And they are not saving enough.” Canada seems to be on a similar path. For the masses of freelance graphic designers, web coders and sharing economy DIY-entrepreneurs, knowing more about how to save and invest is critical. Without this knowledge, they might just be retiring years later than their more conventionally office-rooted peers.
Barry Choi is the expert behind Money We Have. It is one of Canada’s most trusted personal finance blogs. So what should freelancers know in regard to their finances? Barry’s here to tell us.
How can a TFSA or RRSP (or both) help freelancers lower their taxes due at the end of the year?
With your TFSA, any gains on your investments are tax free. Your RRSP does give you a tax break since any contributions made can be deducted from your income. Both of these accounts are great. But as a freelancer, you may also want to focus on what kind of business expenses can be claimed. That will help you lower your taxes.
How important is meeting that tax filing deadline?
You should never miss a deadline! If you owe the CRA money, you better believe they want you to pay it on time. If you fail to meet the deadlines, you’ll be charged interested immediately. Always pay your taxes on time to avoid the CRA coming after you!
What counts as a tax deduction when it comes to entertainment, office expenses, etc?
Generally speaking, a business expense is anything you paid to earn business income. So if you had to purchase office supplies for your business or had to take a client out for lunch, those count as business expenses that can be claimed.
Keep in mind that there are different rules when it comes to how much and what you can claim as a business expense. Refer to the CRA website for clarification or use a good accountant. Don’t forget to save all your receipts for 6 years in the event you’re ever audited!
For freelancers, is there any benefit to incorporating?
With an incorporated business, you become a separate legal entity. This gives you limited liability. There are some extra tax benefits such as how you pay yourself an income. If you’re thinking about incorporating, speak to an accountant. That way, you know exactly what’s available to you. I should also note that you do not need to incorporate to be a freelancer!
What are the challenges for freelancers getting approved for borrowing?
If you’re a full-time freelancer, getting approved for finance for any reason may be difficult. The reason for this is that it’s much harder to prove consistent income. Lenders want to make sure you can repay the loan that they’re giving you.
If your income is up and down, they may not feel comfortable lending to you. One way to get around this is to get a loan with a co-signer. Co-signers should be aware that they’re fully on the hook if you default on your loan, of course.
There you have it, gig economy movers and shakers, courtesy of the blogger behind Money We Have. Thanks, Barry!
Got questions about longer-term retirement income planning or something related to that? Sign up for CI Direct Investing and you can create a long-term plan with a financial adviser.