Question. I’ve been a software developer with an engineering firm for many years. Although I enjoy software development, I feel I’ve outgrown my role, as there is no room to advance at my firm. I have several potential contract opportunities, but I’m nervous about leaving my employer. I have a great benefits and pension plan, and despite the opportunity for a significantly higher income, I’m concerned about making the transition to an independent, self-employed contractor. Do you have any advice for me that could help me with this difficult decision?
Answer. That’s a great question, and actually quite common these days. According to a recent study by Statistics Canada, over 1.5 million Canadians are currently self-employed, with over a half million making the move to self-employment every year. For some, the decision is a no brainer. However, for many others, the decision to become self-employed can be both challenging and unnerving.
There are legal and tax consequences from this decision. It is also very personal and unique to your own individual circumstances – there is no one-size-fits-all recommendation. Rather, there are advantages and disadvantages to being either an employee or being self-employed, and so it’s important to consider the relevant trade-offs. Let’s take a look at some key considerations that can help you make an informed decision on what’s best for you.
When asked what they like most about self-employment, most entrepreneurs cite freedom as their top benefit. And depending on how you structure yourself, that freedom can come in many different forms – you may be able to pick and choose what work to do, what hours to keep, what clothes you wear, and when to take vacations and holidays – all without asking for anyone else’s permission or approval. That’s great! Those who enjoy that level of freedom would rarely trade it for anything. But of course, many who are self-employed may still have to conform, at least on some level, to specific hours of availability, requirements to be physically present at a workplace from time to time, etc.
The flipside to all that freedom and flexibility is uncertainty, which can often be accompanied by a fear of the financial consequences. Where will your next contract come from? When will you get paid? Etc. While established and reliable sources of work can greatly reduce those fears and unknowns, self-employment can still be somewhat nerve-racking for some.
Pension and Benefits
Having access to an employer pension plan and a group benefits plan can be a great advantage of employment over self-employment. However, outside of government circles, Defined Benefit pensions are largely a thing of the past, and therefore not often a significant factor for many. But Defined Contribution plans can be very significant. If you become self-employed, you will be solely responsible for your pension savings.
Employee group benefit plans, however, are much more common than pension plans, and can be a valuable component of an employee’s overall compensation package.
Yet, group benefits shouldn’t be an impediment to pursuing the goal of self-employment for the simple fact that group insurance can be replaced with individual insurance – you can simply purchase your own insurance policies to replace your group benefits plan if you leave your employer. Furthermore, many group benefits plans offer inadequate coverage, often leaving employees under-insured. On the other hand, private insurance plans can be far more comprehensive, can provide significantly enhanced levels of coverage, and can be tailored to meet the specific needs of you and your family.
Another great advantage to self-employment is the potential for tax deductions. While this can vary considerably depending on the nature of your employment, those who work from a home office typically enjoy considerable tax advantages. Keep in mind that the amount that can be deducted is proportional to the amount of space in the home that is designated as a home office for self-employment purposes. For example, if you have a 2,000 sq. ft. home, and your home office is 500 sq. ft., then you can deduct 25% of your home expenses as business expenses.
Some of the most common self-employed expenses include:
- Home maintenance (i.e. fuel, electricity, minor repairs, etc.)
- Home insurance
- Property taxes
- Mortgage interest – note that only the interest portion of the mortgage payment is eligible for deduction as a business expense, and the principal portion is not.
- CCA – capital cost allowance
- Rent – if you rent rather than own your property.
For more information about tax deductions for self-employed individuals, please visit the Government of Canada’s website. Furthermore, we always recommend you speak with a qualified accountant or other tax specialist for specific tax advice regarding your own unique personal situation. You’re much more likely to have your tax return reviewed so make sure you can back up all of your deductions and know what’s deductible and what isn’t!
How can you decide which is the right choice for you? Deciding whether or not to leave your employer and pursue self-employment is an important decision with many factors to consider. Indeed, for critical decisions involving multiple complex variables, it can often help to seek input from other professionals, and from those who have made a similar move and can share a first-hand account of their own personal experiences.
Are you faced with a decision regarding your employment? If you want to speak with a professional advisor, or if you have any other questions about pensions, benefits, insurance, or any of our services at ModernAdvisor, just contact us.