There’s a lot more to a freelance writing business than the actual writing itself. One of the questions to ask before you freelance is whether you are prepared to wear all the different hats involved in running a successful freelance writing business. By and large, you will also act as your sales representative, customer service professional, accountant, marketing associate… and this is all on top of the freelance writing and editing that pays the bills.
One area that you will need to consider is how you will structure your freelance writing business. This applies also to freelance graphic artists, web designers, and so on.
Level 1: Self-Employment
Realistically, you will not find a one-size-fits-all solution for a freelance writing business, so it will depend on a myriad of factors. If you already have a full-time position elsewhere and these freelance writing jobs are just a part-time affair, it may be simplest if you just declare your freelance writing income as self-employment income. The exact process will vary from country to country, province to province, state to state, but if you make a fairly small amount of money from freelance writing, it may not be worth your while to complicate things. Self-employment income as a freelance writer is declared in much the same way as money you would make selling handicrafts on eBay or babysitting your neighbour’s children.
Level 2: Sole Proprietorship
While a sole proprietorship is fundamentally the same as the self-employment described above, you can step up your business presence and further legitimize your freelance writing career through a few simple steps. For example, if your Canadian receipts (assuming you are Canadian and operate in Canada) exceed $30,000 a year, the government requires that you register for a business number and GST registration number. This gets you to charge GST for your services — all of those killer reviews I write for John are taxed — but you also get to “save” the GST you pay on business-related expenses. You can deduct the GST paid on pens, computers, and the like from the amount you collected from customers. There is also something called the Quick Method of Accounting that you may want to consider.
A registered business number can give potential customers a little more assurance that you are for real and it also helps you respect yourself as a freelance writer. You are operating a real business; this isn’t just a hobby or something you’re doing until you get a “real” job.
Level 3: Incorporation
This is where I find myself today. After talking to John Chow and reading some of his recent posts on the subject, I’m considering the possibility of restructuring my freelance writing business as a corporation. This would be similar to what John has done with TTZ Media and what Stephen Fung has done with Futurelooks Media. One of the primary motivations why someone would consider transforming their home-based business into a full-fledged corporation is for the income tax savings. At the higher end of the spectrum, Canadian personal income tax can exceed 40%. By contrast, the tax rate for a Canadian controlled private corporation (CCPC) is only 15.5% for the first $400,000 earned. Needless to say, I’m not at $400,000 yet, but there are still tax savings to be enjoyed.
There are other advantages as well, like being to write off mileage on your car ($0.50 per kilometre) and paying yourself in the form of after-tax dividends (thus not paying CPP on those amounts).
I’m far from being an expert in this area, but as a so-called pro blogger, I am intrigued by the prospect. Maybe it’s time I see an income tax and/or financial advisor.
In America, the structure of your business is largely determined by your liability and taxes you want to pay (or not)… So, an accountant more often than not is part of the decision process.
The wearing of many hats doesn’t bother me so much until we come to the area of finance. There I feel out of my league, so yes, an accountant is going to be a serious consideration for me down the line.
Thanks for a great post.