How to Organize Your Finances When you are Self-Employed
Being your own boss is an option that attracts more and more people. It is a situation that has certain advantages, but also comes with challenges regarding your financial security, savings, and retirement planning.
Here are six steps to take to strengthen your finances and prepare for the unexpected.
1. Create an emergency fund
An emergency fund is your starting point! Build up a safety cushion so you can support your needs for a few months. You will have greater peace of mind. The safety cushion will help you get through slow periods, such as when you have fewer contracts or lose clients. Remember: you will not have employment insurance to help you.
2. Plan for tax instalments
Tax instalments are payments that you must make four times a year to pay your taxes in advance. To prepare for these payments, you could save by making deposits into a high-interest savings account, for example, while taking into account variations in your income over the weeks and months. You can then easily withdraw your money while generating a little interest. For more information, consult the
Acomptes provisionnels : astuces et conseils pour éviter les surprises fiscales 
(Tax instalments: tips and advice to avoid unpleasant tax surprises; French only) on the Institute of Financial Planning's website.
3. Contribute to the Québec Pension Plan
As soon as your income exceeds $3500 during a fiscal year, you must contribute to the Québec Pension Plan (QPP). Your contributions vary based on two brackets of income, which change every year. You contribute
12.6% for the first bracket and 8% for the second one. You can find more information for the current year on the
Contributions to the Québec Pension Plan web page. You contribute at a rate of
12.6% on income between $3500 and $74 600 and you contribute at a rate of 8% on income between $74 600 and $85 000.
You could also decide to only pay yourself dividends instead of a salary to avoid contributing to the Québec Pension Plan. However, it would be in your best interest to contribute because, if you have done so, you will receive a pension guaranteed for life and adjusted annually to the cost of living when you retire. It is basic income, but it provides good security against stock market fluctuations and complements your personal investments.
Good to know
For a self-employed worker who works via an incorporated company, paying himself or herself a dividend means that the person decides to withdraw part of the profits from his or her business in the form of dividends rather than a salary. A dividend is therefore a portion of the profits that a corporation distributes to its shareholders.
The pension under the
QPP is calculated based on the contributions you made to the Plan and the age at which you begin receiving it. For this reason, consider contributing the maximum amount possible to the
QPP before deciding to pay yourself a salary in dividends. It is worth considering for your long-term financial security.
4. Take out an insurance
When you are self-employed, you have no protection from an employer. It is therefore important to take out a disability insurance (or salary insurance) to protect yourself. If an accident or illness prevents you from working for a while, you will still have to continue living and paying your bills. Based on the structure of your business, you could even have coverage for which the premium is tax deductible. If you contribute to the Québec Pension Plan, it offers
basic protection in the event of severe and permanent disability. It is basic protection because it does not replace all your salary and it does not cover short-term disabilities, which are more common.
You could receive certain employment insurance benefits if you need to take care of yourself, your children or other members of your family. However, these benefits will only compensate for a portion of your income, and you must have made contributions to be entitled. For more information, consult the
Benefits for self-employed people web page on the Government of Canada's website.
Regarding your medications, can you become a member of your spouse's private insurance plan? If not, you will need to take out coverage under the Public Prescription Drug Insurance Plan offered by the Régie de l'assurance maladie du Québec (RAMQ) by paying an annual premium on your income tax returns. The premium is determined based on your family income. Another option is to take out your own private insurance plan, for which the premium may be tax deductible.
5. Save for your retirement
Since you are self-employed, you cannot count on a workplace pension plan. It is therefore important to start saving early and to plan your savings in your finances. We talk about it in more details on the
How to plan your retirement when you are self-employed web page.
6. Set aside money for vacations
Vacations are important for recharging your batteries. To enjoy them to the fullest, add the necessary savings to your budget to cover your needs during this period without income. Separate these savings from those set aside for your retirement. That way, you can relax without compromising your future!
Other useful information
Revenu Québec:
Self-employed workers