The Freelance Series: Do Your Work. Pay Your Taxes.

Whenever I speak to someone with a full-time job and they get that wistful look on their face and say “I might try working from home”, I kind of smile.

If they notice, I’m generally asked “What’s so funny?” I’ll respond with “Do your work. Pay your taxes.” Mostly they’ll wave their hand and give me a “pfffft.”

Here are the two big problems* with working from home as opposed to being employed full-time:

1. No-one tells you to go to work. Sure you get emails or phone calls from your client and their team, but you can successfully ignore them for days on end. I know this for a fact. When you’re in a crap mood and just want to play video games, watch movies, eat ice cream out of the container, there is literally no way anybody can cause you to do otherwise. However, this doesn’t get your job done and is remarkably harmful to your career. You become the unreliable guy.

What’s the answer? Freelancing is your job. You find a location where you will work and that’s your office. Your work day needs to be just like when you go to an office. Wake up, make coffee, eat breakfast, wash up, go to work. Sit down at your desk and get your work day started. That’s what you do in an office. That’s what you do in your office. Do that all day. Stop for however many breaks you would take in an office environment. Smoker? Take your smoke break. Take a lunch break. Stand up, walk away, have lunch. But spend your work day as you would spend your work day in the presence of your coworkers. Do your job.

2. Pay your taxes. When you work for a company full-time, they do your deductions for you. You get paid and that money is yours. You never have to think “Hmmm, I need to take one third of this money and set it aside for income tax. I need to take the HST off this and set it aside for my quarterly payout.”

When you’re freelance, you look at a cheque and start immediately doing mental deductions. If you don’t, I’ll tell you what happens; You’ll do your taxes at the end of the year with your accountant, he’ll raise an eyebrow when you say, “Yeah, I didn’t pay any taxes yet.” Then he’ll (or she’ll) say “Ok, so you owe *insert amount anywhere between 15,000 and 30,000*” Now when that happened to me the first time, it was the last time. I had to work with the government and took a long time paying it off. In one of the conversations I had with a Revenue Canada employee, I asked “Can’t I set you up as a payee in online banking?” And he got quiet and said “Yes, possibly.” I was looking at my account online at the time and found Revenue Canada, added them and said “Can I just pay my income tax as it comes in?” and he replied, “I wish all self-employed individuals would.”

Now, when I get paid, I deposit the cheque and immediately transfer my income tax payment. Maybe at the end of the year, I’ll owe a little money, possibly even get some back, but I know for a fact I have been paying my taxes.

*There are plenty of problems and advantages to working from home, but these two? HUGE.

7 thoughts on “The Freelance Series: Do Your Work. Pay Your Taxes.”

  1. Since I got let go a couple weeks ago, I have had the opportunity to do a couple contracts from home. I have loved it, and wish that I could work this way almost exclusively. Your point is very valid, and having to go to work does stop you from doing things that aren’t work, but so does proper work discipline.

    Maybe it was the way I was raised, but ever since I’ve been in the work force, when I know something has to get done, I am driven to ensure it gets done – and not just ‘done’, but done to the best quality that I can deliver, because even when I’m not freelancing, I want the people I’m working with to know that when the next big project comes along, they won’t have to worry about me lollygagging through it. They know I’ll get it done, no matter whether I’m at home or in an office. And sure, maybe I’ll take a 15 minute break to surf the Web or check the news on TV every now and then, just like many people do in the office, but even though I COULD ignore some client e-mails, I generally just can’t do that.

    I am one of those people (some call them ‘idiots’) that has their work e-mails wired into their phones even though it’s not a work-supplied phone, because I want to know if anybody needs me for anything, and if so, the sooner I know the better. Maybe (hopefully) I am in the minority with this, but it’s just the way I am, and I can tell you that being this way allows me to in fact be way more productive at home than I am at work.

    It should be noted that I live in Ajax, and for about 20 years I’ve been commuting to work – about 15 years of that has involved commuting via the GO Train and TTC to get to work. So that’s roughly close to 3 hours a day spent on travel, every Monday to Friday. For the most part I have not minded it, but like any commuting, I imagine, it wears on you. As a result, sleeping in until 8:00 and starting work at 8:30 is by comparison a godsend, and something I could get used to very, very easily. So I’d be lying if I didn’t say this is a big factor in my love for working from home.

    It should also be noted that my home PC is almost guaranteed to be 5 times better than any of the POS machines that most work environments supply their employees with – another factor that not only increases productivity, but my enjoyment of doing my job.

    I think a lot of employer concerns about working from home simply come from trust issues. Employers (in general) are designed not to fully trust their employees, and if I was running a large business, especially an ad agency, I’d probably be inclined to think the same way. But as time goes by, the more I believe this is old school thinking. We can do anything from anywhere now. Hell, I have a Photoshop app on my phone, for god’s sake. With proper discipline and the desire to truly do good work, you don’t have to be in an office. Enjoy your work, and have the desire to excel at your job, and the rest will take care of itself.

    As for point #2, you won’t get any argument from me! This is fantastic advice – advice I will take as soon as my first freelance cheques come in.

    -D

  2. Good advice! I’ve been faced with the tax issue too, at the end of the year. I didn’t hit that magic tax bracket in the first 2 years of freelance, because I wasn’t making enough (I think it was like 25k or something straight out of college). 10 years later, I agree.

    Luckily I have a bookkeeper and an accountant in the family and they keep me on my toes in regards to proper procedures (and helped once I did exceed the tax bracket in year 3+). I have different accounts, in USD/CAD/Euro. Depositing a cheque means I do some online transfers to fit the expected hole. Christmas and odd occurrences dig into that account, but I always make sure to top it back up before the end of fiscal year crap hits the fan.

    Immediate payment seems like a good idea, except I like the illusion of having more than I do and sometimes it’s just convenient to take a little extra from an account that you don’t have to fill back up for another few months rather than use the credit card.

    Freelance, wash up and go to work. That often doesn’t apply here. I’ll wake up, go straight to work and half way into the day I’ll shower and get ready only to go back to the office for the rest of the day.

    I’d like to add a little bit of my own advice: Building a routine is important as a freelancer. I try to stick to a decent time schedule and build a routine but it’s difficult when you prefer working late into the night (and wake up when it’s light and buzzing with traffic outside). Routine will keep sanity, health (exercise) and ensure you don’t fall into a depression of sorts. Get your daylight and leave your computer alone for at least an hour before going to sleep.

  3. Nice article Hugh. I’ve been consulting on my own for a long time. Freelancing/consulting is great if you are self motivated and you have a natural ability to market and sell yourself constantly and you really enjoy what you do and interacting with people. There are benefits to incorporating yourself. The amount you can write off is greater in terms of travel, hardware, software, mileage, office, etc. These days incorporation is something you can do without hiring a lawyer. You basically fill out an “Ontario incorporation package” and pay the administration fee. As a general rule, I always set aside 25% to 30% for every invoiced amount received for HST, CPP, income tax, etc. Whatever isn’t used is my “bonus”. I also at the end of every fiscal year, try to put as much as I could possibly afford towards my RRSP, this cuts down on my income tax amount significantly.

  4. Nice post Hugh. I have been running my own web development shop from home for the last five plus years and freelanced for five years before that. Proper bookkeeping is one thing way too many people overlook. They just see the money coming and think it’s all their’s when in reality only a fraction is. A few ‘money’ lessons I learned early. One, always pay the tax man first. Two, keep a little extra in the bank. Three, pay yourself less than what you bring in.

    #3 is huge. If you pay yourself everything that comes into your business you have no margin for error. What happens if a big client goes away or you can’t work for a bit? You need to build up a little cash reserve in the business for rainy days. Also, it’s better to learn to live off less and then have some left over at the end of the year. You can pay that out as a dividend and save a little on taxes, or save a lot if you pump that straight into RRSPs.

  5. A couple of other pieces of advice I can offer. Set aside some cash for the lean times. I’ve been doing consulting/freelancing for 10+ years, you are subjected to feast and famine cycles. Always plan for the famine. The other thing, I’ve got into the habit of doing after a few billing issues is “ballparking” or estimating the cost of work based on scope provided by the client. Clients are sometimes suprised at how fast an hourly billable can add up. As a result I give my clients an estimated workplan, so no one is suprised. I also have a sliding hourly billable scale depending on what the client wants me to do, whether its business analysis, strategy work, project management or six sigma process re-engineering, etc.

  6. Very valid points. Since I’m not actually incorporated, I simply sock it all away in my account. Pay yourself less than what you bring in takes me to my most strident piece of advice: LIVE ON CASH .

    Credit is a hole that is very hard to dig yourself out of.

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