As a gig economy worker, you enjoy the freedom to choose your projects, your schedule, and even your work location. You may love the independence of working for yourself and the greater control over your work-life balance. However, freelancing and contract work require that you take the responsibility of planning your finances seriously. You not only need to budget for your regular living expenses, but you also need to save for your retirement, purchase health insurance independently, put aside money for taxes, and have a plan in place if you suddenly lose one or more sources of income. Managing your income and benefits may seem daunting at first, but there are steps you can take to build long-term financial security while enjoying the flexibility of being a gig worker.
Budget for an Irregular Income
The unpredictable nature of freelance work means that you need to budget carefully. Calculate the minimum amount you need to earn each month to cover your expenses. Include essentials like health insurance, retirement, estimated taxes, and savings. You can expect your income to fluctuate from month to month, so make sure you put aside extra earnings to help you get through the leaner months.
As a gig worker, you may work as an independent contractor for one or more companies, earn money as a freelancer, or some combination of the two. Since the nature of gig work often involves short-term contracts instead of a permanent positive with one organization, accurate record-keeping is a must, especially if you juggle several jobs at a time. Record every payment you receive, along with business-related expenses. Some of these may count as tax deductions when it’s time to file.
A budgeting app makes it easy to help you track your spending and give you a clearer picture of your income and how it changes over time. Another great tool is a digital payment platform like Stripe, Square, or PayPal to help you issue invoices and manage payments.
Save for an Emergency
Building a buffer to ensure you have consistent cash flow each month is not enough. You also need to save up in case an accident, illness, or other emergency prevents you from working. Common financial advice calls for traditional employees to save three to six months’ worth of expenses. However, with the unpredictable nature of gig work, saving six to twelve months of expenses will give you greater security.
Purchase Essential Insurance
In the absence of employer-sponsored benefits like health insurance, you must purchase coverage for yourself and your family if needed. Check out the Health Insurance Marketplace to compare plans. If you opt for a high-deductible plan, you can open a Health Savings Account (HSA). Also consider liability insurance for protection against accidents and disability insurance in the event a serious accident keeps you from working for a long time.
Set Up Your Retirement Account
Along with insurance, you must start a retirement account for yourself. Options include a solo 401(k), traditional IRA, Roth IRA, or SEP IRA. The best retirement setup depends on your financial situation and goals. Consider setting up an automatic transfer to ensure you make consistent contributions. If you have the capital available, you may want to diversify your portfolio with other investments.
Fulfill Your Tax Obligations
As a gig worker, you are responsible for paying your own taxes. This includes a self-employment tax for Medicare and Social Security on top of your income tax. The self-employment tax is higher than what traditional employees pay since you don’t have an employer to contribute half the amount owed. You also need to pay your state and local taxes.
Self-employed individuals owe tax payments by the 15th of the next month after the end of each quarter. You can pay online, by phone, or mail your payment. Avoid surprises by transferring part of each payment into a separate account that you can use to pay your tax obligations each quarter. This includes income from 1099 forms you receive from businesses you work for, and cash payments. Use an online calculator tool to estimate your quarterly taxes. Keep in mind that if you underpay, or fail to pay your quarterly tax obligations, you will have to pay a penalty in addition to the taxes owed. Using an accounting software to help you accurately track your income, expenses, and taxes due is a smart idea. Some even assist with filing your tax forms.
Take advantage of any tax deductions for which you qualify when it comes time to file your annual tax return. As a self-employed individual, you can deduct expenses like home office costs, training, and vehicle deductions if you work as a rideshare driver.
Look for New Opportunities
Continue to explore opportunities for higher paying work and long-term contracts. The connections you make through your gig work can open many doors. You may even discover you have a particular talent or idea to start a business of your own.
With some careful planning, you can fully embrace the gig economy and enjoy high earning potential by pursuing lucrative contracts and multiple income streams at once, all while working from the comfort of your chosen space. Although gig work has several challenges, once you understand the necessity of a good financial planning strategy to manage your money, you can thrive in your chosen work.
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