Can you afford to work for yourself?
The upsides and downsides to stepping out of the corporate structure.
Love what you do but hate having to go to work everyday? Or maybe you sense the axe is about to fall as your employer downsizes?
Could you be your own boss? Being self-employed requires discipline, focus and confidence. It also requires having unique knowledge, skill or expertise.
Statistics Canada says 1.8 million self-employed people worked at home in 2008 (the last year figures were available), up from 1.4 million in 2000, and the trend is expected to continue.
It's not something everyone can do. Trades people, for example, are often self employed or have a side business while knowledge-based workers also develop a freelance business or dream of going out on their own.
If you're in the right kind of job there are lots of advantages to becoming self employed:
- There are distinct tax advantages because almost everything required to make a living is tax deductible such as your mobile phone, Internet connection, car and gas. You may make less annually, but you'll pay less tax to offset that.
- There's no gas to buy or bus tickets for the morning commute, no parking charges, no $10 to $15 a day in coffee, bagels, muffins, lunches and snacks. It adds up to somewhere around $400 to $500 a month, or $6,000 a year or more off the top.
- You can work in your bathrobe and save money on clothes and dry cleaning.
- You can also deduct a portion of your heating and cooling costs and other home maintenance costs equal to the size of the office in your home. So, if you have a 1,000 square foot home and 100 square feet are used as an office, you can deduct 10 per cent of your overhead costs against your income.
There are downsides, however:
- Unless your spouse has a plan, you'll have to buy health and dental coverage.
- You must be disciplined. Can you get out of bed in the morning? The fridge is just a few feet away and so is the liquor cabinet. Can you step away from the screen and spend time with the family at night?
- Some people miss the social aspect of an office and get lonely.
- You may not have any revenue for two months or more.
- There may be start up costs for computers, software and other peripherals.
- You may struggle to find clients if you didn't adequately plan.
One way of offsetting initial costs and lack of cash flow, especially if you were laid off and received a severance package, is to drop that money into your RRSP and reset your tax year-end, says Chartered General Accountant Jeff O'Rourke of Jeffery J O'Rourke Professional Corporation.
Then, withdraw as small an amount as you can each month to subsidize your start-up. You'll be paying tax at a much lower rate than when you were a full-time employee. If all goes well you can wean yourself off your RRSP withdrawals as your cash flow increases.
"You should also talk to a CGA about whether you should incorporate, how you should incorporate or if you should be a sole proprietorship," he said. "For liability reasons you might want to incorporate."
While tax write offs are attractive, he said, be careful of pushing your expenses too aggressively.
"If you take a vacation with the family to Florida and claim you were looking for work, CRA isn't going to like that," he said. "They also don't like you running a side business at a loss to lower your income taxes from your day job."
And if you do take a job consulting at the company you used to work for, be careful, he warns. Make sure you maintain your independent status and are not deemed to still be an employee in CRA's eyes and therefore unable to claim expenses. Again, a chat with a CGA or tax specialist is your best option before making a move.
If you're thinking about going it alone, ask those who are already doing it to get a firsthand primer. Check with professional associations -- you're probably already a member -- and ask to be connected with a self-employed colleague. Then, meet with your financial planner and tax specialist, map out a business plan and a budget and talk to potential clients to see if they'd hire you.
The rest is up to you. Many who have taken the leap say they've never been happier.
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