Being an independent contractor has its perks; you get to choose your schedule, set your own pay rates, and complete your work however you see fit. Contract work comes with its challenges, too, particularly when it comes to managing your personal finances. Determining a fair wage, budgeting for your expenses, achieving financial goals, and preparing for tax season can all be difficult for contractors.
Thankfully, there are tools that can help! An independent contractor pay calculator can help you manage your paychecks better now and prevent serious headaches in the future. Keep reading to learn about four reasons why salary calculators are absolutely essential for independent contractors.
Determine a Fair Hourly Rate
An independent contractor pay calculator is essential when determining how to price your services. Setting your pay rate as an independent contractor is a tricky process. If you underprice yourself, you’ll struggle to make ends meet. On the other hand, if your rates are too high, it may be difficult to find clients. You’ll need to keep a few key factors in mind when calculating your hourly rate.
Rates of Your Peers
Research what other professionals in your area charge for similar work. This will give you a good idea of how you should be setting your rates. You can also use an online salary database to determine what other people in your field make based on their experience and job title.
Demand in Your Local Market
Once you know your career’s average salary, you can perform more localized research. Ask questions that can help you gauge your competition and how in-demand your services are. You may be able to charge more if you provide services in a major city, don’t have a lot of competition, or offer a unique service that makes you stand out from your competitors.
Your Personal Expenses
Determine how much money you need to make each month to cover expenses and stay afloat financially. Tally your personal bills for things like housing, utilities, transportation, healthcare, and more. Remember to include savings for large purchases, debt repairment, and retirement.
Current Operating and Future Development Expenses
Determine what it costs to run your business. These expenses include rent for your workspace, Internet access, equipment, and professional services. As a self-employed worker, you have the tax obligations of both an employee and an employer. Consider using a contractor income tax calculator to estimate your projected taxes better. You should also consider how much money you’d like to reinvest in your business for certifications and continued education, marketing your services, and acquiring new tools.
Projected Billable Hours
You’ll need to consider how many billable hours you expect to work in a year. Remember, billable hours aren’t the same as the number of hours you dedicate to your business. You can’t charge clients for things like business development or accounting.
Calculating your Rate
To manually determine your hourly rate, add your personal expenses, operating costs, and development costs, then divide the sum by the total billable hours. However, an independent contractor pay calculator is the easiest way to determine your rate. You can simply plug in your expenses and operational costs to decide what to charge your clients.
Calculate Your Expected Paycheck Amounts
It can be challenging to make ends meet, especially if you don’t know how much money you have coming in or when it will come. By using a salary calculator, you can get an accurate image of how much money you’ll have coming into your bank account every month. This information is essential for budgeting and managing your finances.
The Basics of Budgeting
Budgeting is the process of estimating expenses and revenue for a specific period. It helps you manage your money and stay on track with your financial goals. Creating a basic budget is fairly simple. Add up your monthly income using an independent contractor pay calculator, choose an easy budgeting method for tracking expenses, and regularly maintain your budget to monitor your progress.
Budgeting can be challenging if you work for yourself because you have to set aside money for taxes and other business costs along with your individual expenses. If you calculated your rate using the method above, these business expenses should be already accounted for in your income. However, you must still remember to track these expenses in your budget to ensure the money is actually going where it’s supposed to go.
Choosing a Budgeting Plan
There are a variety of different types of budgets you can try. You can use the envelope method, which involves separating your take-home pay into designated envelopes for various purposes, like rent and savings.
There’s also the 50/30/20 method, which is one of the simplest budgeting frameworks to try. With this method, your income is split into three groups; allocate 50% of your income for essentials, 30% for wants like entertainment and travel, and 20% for savings and debt repayment.
When selecting a budgeting plan, the most important thing is to find a system that works best for you. You’ll need to update and maintain it regularly, so you must find a plan that isn’t a hassle to use. Choosing a suitable method is especially vital for independent contractors who have to keep a closer eye on their income than permanent employees.
Budgeting Tips for Independent Contractors
- Set realistic goals: When planning for long-term debt repayment or large purchases, it’s better to be practical than to try to achieve your goals quickly.
- Scrutinize your expenses: Look for duplicate payments, subscriptions, or memberships you no longer use; try to cancel them or find less expensive alternatives.
- Automate everything: Consider setting up automatic payments from your checking account so you don’t have to remember to write checks or transfer funds between accounts for bills or savings.
- Budget for emergency savings: Create an emergency fund for unexpected expenses such as car repairs or medical bills.
Plan Better for Long-Term Financial Goals
As an independent contractor, you may not have access to the same benefits and programs that full-time employees enjoy. But that doesn’t mean you can’t plan for retirement or grow your business. A payroll calculator can help you budget, save, and achieve your long-term financial goals.
Budgeting is essential for money management and achieving long-term goals. But it’s impossible to budget correctly without an accurate annual salary estimate. With a salary calculator, determining your take-home is simple– no matter how many clients you work with.
How to Set Realistic Financial Goals
It’s essential to set realistic financial goals. If you want to save $1 million, but you only make $30,000 a year, it’s not going to happen. When we talk about setting realistic goals, we mean they’re achievable — you may have to work hard, but reaching them is possible.
Your objectives should also be specific. A goal like “saving more money” is too vague and undefined; it doesn’t provide any direction on how much you need or when you need it. It could be anything from paying off your student loan debt to just starting an emergency fund. No matter what you want to achieve, it’s vital to know exactly what you’re working towards.
Lastly, your goals should be time-bound; if you don’t have a timeline in mind for accomplishing something, it will probably never happen. Think about how long it will take to reach each milestone, and then set realistic goals based on those numbers. Consider how much you can afford to set aside every month to determine how long it will take to save. If your objective seems too far off, break it down into smaller milestones with reasonable expectations.
Saving Tips for Independent Contractors
Here are some tips for independent contractors in Canada to reach financial goals like saving for retirement or growing their business:
- Start saving early: If you’re just starting as an independent contractor, it’s never too early to start saving for retirement.
- Optimize your tax deductions: Track your business expenses so you can take advantage of all the independent contractor tax deductions in Canada available to self-employed workers.
- Look for ways to cut down your business expenses: When shopping for new equipment and software, keep your budget in mind and consider affordable or second-hand supplies.
- Consider opening a TFSA: This type of account allows you to save up to $5,000 per year without paying tax on any income earned within the account. You can also use this as a buffer if things don’t go according to plan with your business or freelance work.
Estimate How Much to Set Aside for Taxes
For permanent employees, employers automatically deduct income taxes from their paychecks. But if you’re an independent contractor, you’ll need to set aside taxes yourself. Using a payroll calculator can help independent contractors in Canada estimate their income tax liability, plan out their independent contractor tax deductions in Canada, and determine how much they need to save for annual tax payments.
How much do you need to save?
The amount of money that you’ll need to save will depend on your business type and the province where you live. There are three classifications for self-employed workers: independent contractor, sole proprietor, and partnership. You can use a contractor income tax calculator to estimate how much your income tax will be. With this information, you can determine how much money to save from each paycheck.
As a general rule, experts suggest setting aside 25% to 30% of your income to pay taxes. This amount covers federal income tax, provincial income tax, Canada Pension Plan, and GST/HST (if registered). However, this amount can change based on your income and tax rates. You can view the official tax rates here on the CRA website.
Canadian Pension Plan Considerations
There are unique tax considerations to keep in mind when it comes to the Canada Pension Plan (CPP). All Canadians between the ages of 18 and 70 who have a net pensionable employment income of more than $3,500 must contribute to the CPP. Permanent employees contribute a percentage of their wages up to an annual maximum, and their employers match the contribution.
On the other hand, independent contractors don’t have CPP contributions automatically deducted from their paychecks, nor do they have employers who contribute an equal amount. Instead, self-employed workers are responsible for both their portion and what their employer would have contributed. Click here to view the contribution rates and maximum contributions for self-employed workers.
Tax Deductions for Self-Employed Workers
Perhaps the most significant tax advantage for independent contractors is the ability to deduct certain business expenses. Taking advantage of these deductions can lower your overall tax payable. Here are a few of the most common independent contractor tax deductions in Canada:
- Office supplies
- Inventory costs
- Advertising
- Internet and cell phone
- Business-use-of-home expenses (if you work from home, you can deduct a portion of your household bills)
- Bank fees
- Vehicle expenses, if you use your car for work
- Travel expenses, including public transportation, hotels, and conferences
- Fees for legal, accounting, and other professional business services
Managing finances can be complicated for independent contractors. While it’s great to be able to set your own pay rates, budgeting and paying taxes can be a challenge– especially when you’re not sure how much your next paycheck will be.
By using a salary calculator, you can ensure your rates are high enough to support your financial needs, estimate your monthly income, and manage your finances better. You’ll also be able to assess your tax liability throughout the year, so you can set aside money as you go and avoid any late payments during tax season. Contact us at Paycheck Guru to learn about estimating your income, preparing self-employment taxes, and more!
