Want to become your own boss? Here’s a self-employment starter kit

After spending several years building your career and experience, you might be feeling the urge to finally strike it out on your own, be your own boss. Or perhaps you're hoping to take your expertise and branch out or turn your passion project into a business. Or maybe post-retirement, you want to try something new.

Whatever it is, how do you ensure the transition to self-employment is seamless? Pierre Létourneau is a business succession advisor at TD Wealth, joins me now to discuss key considerations. Lovely to have you here.

Thanks for having me.

This is a great list. I'm looking forward to talking about this list because it's a really great way to think about what you need to think about if you're going to make this move. What does it mean to be self-employed? What constitutes self-employment?

Well, like you said in your introduction, it's really working on your own and being your own boss, as opposed to working for a specific employer, being an independent contractor, working with different clients. It's essentially setting up your own business, starting your own business.

Now, that may seem simple on the surface, but the reality is that it's not always an easy determination. So there's different factors that you need to look at to determine whether you're an independent contractor or still an employee. And so it's important to really consider that.

Give me a little taste of what those might be.

So control over the work and the activities, depending on is it the worker or is it the person receiving the services. Control over the who's providing the tools and the equipment to do the work. Is the worker taking on financial risk? Does the worker have the ability to work with different clients? All those factors will come in.

And then, also, if there's a contract, what does the contract say? It's important to know that the contract isn't going to determine things. If the contract says that you're an independent contractor, but all the other factors say that you're an employee—

And you worked there for 10 years.

Yeah, exactly. So those other factors are going to supersede the contract.

Got it. And that matters for taxation, which I'm sure we'll talk about. How do you ensure that you are financially prepared to get into the world of self-employment? What are you going to think about?

Planning. You need to plan for that. And I think one of the good exercises is developing a personal financial plan, first off, doing a cash flow analysis to see what your potential revenue sources are going to be, create a budget, see what your expenses are, and see if you've got some flexibility there.

Then also you probably want to make sure you have an emergency fund.

Yeah. It takes a while to get clients sometimes.

Exactly, to set up the business, to get started. Also, you never know. There could be things that you're not anticipating, additional expenses that you'll need to incur, surprises. Right? So you want to be prepared for that.

And then I think it's also important to develop a business plan, as well. What services are you really going to be offering? What's your target market? How are you going to reach them? Again, expenses and cash flow-- figuring that out and developing that type of plan can be very useful.

What about money management? Because that's the one thing-- if you have a salary, it comes in and that's fine. You can plan. In your own business, it can be very lumpy.

It can, yes. So there's a lot of variability, and so you need to be prepared for that. And I think when it comes to money managing, you need to be a bit more cautious, mostly for that reason, because you never know when the money is going to come in. And as I mentioned earlier, there can be surprises as well, too.

One of the major factors that I'm sure we'll talk about is taxes, right? When you're an employee, you get a salary, but there's a withholding for taxes, and that's remitted to the CRA. So you don't necessarily usually get a big surprise at the end of the year. But as self-employed, you may have surprises there. So you have to plan for that and estimate what you may have to pay for taxes.

Let's stick with taxes. What other things do you have to think about? Because there's also GST, and there's just things you have to manage, not just income taxes, but sales taxes as well, too.

Yeah, definitely. One of, I think, the biggest considerations is that the source of income that you're receiving now is different. It's not employment income. And what that allows you is a bit more flexibility in terms of deductions. So eligible business expenses can be deducted. And so really knowing what you can claim as an expense is important. And so a lot of times it's worth having some help there to determine what that looks like.

Yes, GST/HST reporting is another factor.

Charging GST.

Yes, charging, reporting, and remitting that.

And then the other thing is CPP, Canada Pension Plan. So now, once you're self-employed, you have to do the full contribution to CPP, whereas as an employee you're making a contribution as an employee, but the employer is also making a contribution.

And when you're working on your own, you have both. So that's the other thing, too.

Exactly.

When you were talking the taxes, I'm trying to remember-- you said something. I'm going to have to come back to it. I was like, I want to ask that. I've lost it.

Health and dental benefits, pensions, saving for retirement. That's a whole other thing, too.

Right. Those are normally benefits that are provided by your employer. So now that falls on you. So you need to make sure that you do your work, your research there.

Pension-- well again, you need to build that retirement nest egg. And so you're not getting an RRSP matching contribution from an employer, or they're not contributing to a pension plan. So you need to build that on your own.

If you're incorporated and taking out a significant salary-- so I'm thinking $150,000 or more-- and you're over the age of 40, an IPP, so an Individual Pension Plan, may be a tool that you may want to use. So there are other tools that are available to you that wouldn't be available as an employee. So you need to factor that in and consider what makes most sense for you.

I remember what I was going to ask now. Going back to the taxes, I remember someone told me rule of thumb is generally, if you incur an expense to generate income-- and it's not always true, but it's a good guide to think about what you can use to deduct from a tax standpoint.

It is, depending also if you're making-- depends on the nature of the expense. So if it's an expense that's going to provide a benefit over the long term, then you may not fully be able to deduct that expense right away. So you also have to consider the nature of the expense, in terms of how long you're going to get that benefit on that expense.

Which leads me to my last question, which is need to talk to somebody. The best thing if you can is talk to somebody and really get clear on what you're trying to do and what your goals are.

Yeah, I think you definitely need to make sure that you speak with the right professionals. So an investment professional would be very helpful, just to manage your money and to make sure that you're building that pool for retirement and building that nest egg, but also to help you with that financial planning part of it, make sure that from a cash flow standpoint you have the flexibility to take on this new venture.

And then also a tax advisor. We talked about taxes. We talked about expenses and how you want to make sure that you're claiming everything that you're able to claim. So getting the right advice on that front could go a long way.

Yeah, and also, I think that constant struggle and having the discipline to say-- I know so many entrepreneurs who are constantly investing in the business. And sometimes you need to invest in your retirement too at the same time. And having that balance is so tricky.

It is tricky. It's not easy to do. And in some ways, the business owner is in a better position to know what their business needs, but they also can't focus too much on that, because at some point, they're going to have to retire.

Yeah, and they can be very close. Pierre, great information as always. Thanks so much.

Thanks for having me.

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