Creativity is your superpower—whether you're working on the next great Alberta-filmed series, creating masterpieces for your city’s upcoming art show, or designing websites for local businesses. But let's face it: managing irregular income, taxes, and long-term financial goals is challenging for many creative and digital professionals.
As Alberta's film, arts and culture industries thrive and the gig economy expands, many creatives are choosing the freelance path. Although this offers exciting opportunities and encourages freedom, it creates distinctive financial challenges. The good news is you can build a solid financial foundation while nurturing your creative spirit.
Separating business and personal finances
Maintaining a clear division between business and personal finances is crucial for freelancers and gig workers. This separation not only simplifies accounting and tax preparation but also provides a clearer picture of the financial health of the business.
One strategy to reinforce this separation and create a sense of financial stability is to adopt a “pay yourself” mentality. By regularly paying yourself a set amount from your business earnings, similar to a traditional employee receiving a salary, you can establish a consistent income stream. This practice can help mitigate the income fluctuations often associated with freelance work and provide a more predictable budget for personal expenses.
Building a flexible budget for unpredictable income
Traditional budgeting advice often assumes a steady paycheck—but what about when your income swings as dramatically as Alberta's weather? Start by creating a "bare-bones budget" to cover essential living expenses: housing, utilities, food, insurance, and basic business costs: website and e-commerce fees, entry fees for shows and exhibitions, studio space, and subscriptions software, to name a few.
Next, calculate your average monthly income based on the past year's earnings. This will give you a baseline for planning. When the projects are flowing and your income is high, save assertively. Aim to build a buffer of 3-6 months of expenses. This isn't just emergency savings; it's a fund to smooth over leaner periods.
Digital tools like YNAB (You Need a Budget) are handy for freelancers because they focus on allocating your current money rather than projecting future income. This approach aligns perfectly with the unpredictable nature of freelance work.
Establishing financial safety nets
While building savings is essential, consider setting up a business line of credit as an extra safety net. Unlike credit cards, a line of credit usually provides lower interest rates and more flexible repayment terms, which can be invaluable for managing cash flow gaps between projects or addressing unexpected business expenses. Treating your line of credit as a tool, not a crutch, is key.
Connect with an ATB Advisor about which line of credit works best for you.
Choosing your business structure
One decision that can significantly impact your financial future is whether to operate as a sole proprietorship or incorporate your business. While a sole proprietorship is more straightforward and has lower startup costs, incorporation may offer advantages—but only as your income grows beyond what you need to cover your essential expenses.
Consult an accountant or lawyer about your situation; they can help evaluate factors such as liability protection, tax implications, and the ability to retain earnings in the corporation at a lower tax rate.
Valuing your work and managing payments
One of the biggest challenges for creatives in many industries is confidently setting and maintaining professional rates. Your rate should cover not just your time but also your expertise, taxes, equipment, items such as software subscriptions, and profit.
Consider this formula: (annual desired salary + overhead costs + tax provision) ÷ billable hours = your minimum hourly rate. Then, add a profit margin based on what is reasonable in your industry. Remember that you're offering specialized creative services, even if this number seems high. Your rate should reflect your value, not your comfort zone.
To maintain healthy cash flow, implement strong payment practices:
- Require a 50% deposit for new clients
- Set up milestone payments for longer projects
- Use professional invoicing tools like FreshBooks
Navigating taxes and deductions
As a Canadian freelancer, tax season doesn't have to be overwhelming. The key is preparation throughout the year. Set aside 25-30% of your income in a separate account for taxes. This percentage might seem high, but bear in mind you're paying personal income tax and CPP contributions.
Take advantage of all eligible tax deductions. As a creative professional, this might include:
- Home office expenses
- Equipment and software
- Professional development courses
- Travel to film sets or client meetings
- Marketing and portfolio costs
Explore additional tax deductions for content creators.
If your revenue exceeds $30,000 over four consecutive quarters, you must register for GST/HST. This isn't just a requirement—it's an opportunity to appear more professional to larger clients. In the film industry, some clients may be able to claim it as an input credit.
Investing in your future
Without an employer pension plan, retirement planning falls entirely on your shoulders. The good news? As a freelancer, you have flexibility in how you save. Consider maximizing both your RRSP and TFSA contributions. RRSPs offer immediate tax benefits and are particularly valuable during high-income years, while TFSAs provide withdrawal flexibility—perfect for freelancers with variable income.
Start small if necessary but start now. Thanks to compound interest, even contributing $100 monthly to a TFSA invested in low-cost index funds can grow significantly over time.
Building your financial support team
Consider building a financial support team:
- An accountant who understands creative industries and self-employment
- A financial advisor for long-term planning
- A business banking specialist who can help with cash flow solutions
View these professionals as investments in your creative career. They can help you identify tax savings, optimize your business, and create more time for your creative work.
Managing your finances effectively will help you create a sustainable foundation. Start small by focusing on one aspect that needs attention, such as tracking expenses, raising your rates, or opening a separate business account.
With these financial tools and strategies in your tool belt, you'll be better equipped to build a creative career that can withstand any economic uncertainty.
Connect with an ATB Advisor about long-term planning or cash flow solutions.
