I an what you would call quasi-self-employed; I work for a foreign company under contract. As such I get a consistent wire transfer every month, I get vacation days, and I go to staff meetings. Because the company has no Canadian presence, I am not an employee in the traditional sense, and can be considered self-employed in a lot of respects.

This can provide the best of both worlds a lot of the time, but come tax season it becomes a mixed bag. On the one hand, I have to pay full Employment Insurance and Canada Pension Plan premiums, because there is no employer chipping in half. On the other hand, I get to make a fair amount of tax deductions no regular employee would get to make.

The one area where it gets complicated in payment of income tax. Last year I was a bit silly, and instead of setting aside my income tax money I put it towards debt. My logic? The government would have a much lower interest rate than the creditors I paid off. Of course, the nasty side effect is that I now have to take the government a $1500 check each month for the next 4 months, then set aside $1500 a month for the remainder of the year to be ready for next year’s taxes.

On the bright side that pool of money will sit in a nice ING savings account generating interest until the government calls for it. Oh, and it would seem that in future years they may ask for quarterly installments against future taxes, so it may not sit in the account that long.

Lesson learned? If you become self-employed, take your tax money off first and put it in a separate account. You should talk to your accountant about how much you should set aside, but for me 25% is looking like a safe number. If you over-save you have a nice bonus left over after you pay your taxes. Also remember to keep receipts for anything that is even remotely related to your business.

This entry was posted on Wednesday, May 18th, 2005 and is filed under Financial Management, Financial Planning. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.