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How Do I Save as a Freelancer in the Gig Economy?

The gig economy includes various types of employment ranging from independent contractors, contract firm workers, on-call workers, and temporary workers.  According to Gallup, 36% of all workers in the United States work in the gig economy, and many of those workers within the gig economy still maintain traditional 9 to 5 jobs.  The increase in technology and sharing platforms have allowed workers to seek flexible income opportunities, whether full time, temporary or as a side hustle. The gig economy has taken off since our last recession in 2008. As pundits continue to discuss the next recession around the corner, it is even more important to know the important financial decisions going into self-employment.

Budgeting

Income as a gig economy worker is not consistent, and fluctuates per project or ride completed.  Workers in the gig economy need to be ahead of the curve when it comes to managing money.  It’s no longer just your household cash flow that you need to monitor, it’s also your business!  Since income is not consistent, gig economy workers need to understand and project what income is coming in and what expenses are expected to occur.  Budgeting is crucial so that income is not immediately spent and can be allocated for items such as retirement savings, estimated taxes, future business expenditures, and paying yourself (to name a few).

Retirement Planning

For employees in the traditional workplace, employers provide a retirement savings plan such as a 401(k) or 403(b).  As a worker in the gig economy, you must save for your own retirement.  Avoiding this step can leave to an unprepared retirement, and minimize tax saving strategies for you and your business.  The difficulty for independent contractors is that you are responsible for selecting the right retirement plan for your needs (as if you didn’t have enough to do).  Below is a preview of some popular plan options to choose from.

Solo 401(k)

A Solo 401(k) plan allows a self-employed individual to make both employee and employer contributions.  In 2019, the elective deferral to a 401(k) is up to 100% of compensation with an annual limit of $19,000 and $25,000 if age 50 or over.  The employer portion of the contribution is up to 25% of compensation defined by the plan.  The total maximum contribution between these two components can be no greater than $56,000. 

IRA

A worker can contribute $6,000 to an IRA in 2019 or $7,000 if age 50 or older and is under 70 ½.  Contributions to an IRA may be fully or partially deductible depending on your situation.

SEP IRA

Workers can establish a SEP IRA allowing for annual contributions up to 20% of net earnings or $56,000.  This may sound similar to the solo 401(k) option, but there are reasons for and against establishing one over the other.

Roth IRA

A worker can contribute $6,000 to a Roth IRA in 2019 or $7,000 if age 50 or older regardless if he or she has a 401(k) or SEP IRA.  Unlike the Traditional IRA, the Roth IRA has income limits tied to how much you can contribute.  For example, if you file as married filing jointly, the ‘phase out’ for contribution begins when your modified adjusted gross income is $193,000 for 2019.  If your income is above $203,000 in this example, you can no longer contribute to a Roth IRA.

Now that you know some of the various types of retirement plans that are available, it is important to figure out which one works best for your needs.  We recommend consulting with a financial professional in order to guide you to the right plan.

Tax Planning

Gig economy workers satisfy tax obligation by paying estimated taxes throughout the year.  Estimated tax payments are made four times per year based on a quarterly schedule (January, April, June, September).  Businesses must maintain appropriate cash reserves in order to meet the estimated tax liability per quarter.

There are many surprises as one transitions from a W2 employee to self-employed.  As a W2 employee you are only responsible for the employee portion of FICA (Social Security 6.2% and Medicare 1.45%).  The employer pays the other half, but as a self-employed individual you are responsible for both. This means that you are liable for paying in total 15.3%.  Most self-employed individuals establish their business structure as an LLC (limited liability company).  If structured as an LLC, then you must pay both portions of FICA.  There are ways to minimize FICA taxes paid such as establishing yourself as an S-Corporation.

As a gig economy worker you may be entitled to other specific tax breaks such as a home office deduction or a qualified business income deduction.  We recommend consulting with your tax accountant to explore what’s best for you.

Financial Wellness

Larger employers have been offering financial wellness as an employee benefit.  The reason for this is because employees are increasingly burdened by financial stress ultimately leading to a  decrease in productivity in the workplace.  The financial stress and decrease in productivity can escalate for those working full time AND on their business.  As more and more employers provide a financial wellness benefit, it is important to capitalize on this if you are also working in the gig economy, where you are in charge of taking care of yourself and your business.  Financial stress can lead to problems within your business and it can also carry forward into your personal life.  We always recommend working with a team of professionals in order to help delegate business operations and minimize stress.  Areas of delegation include legal, accounting, financial management and consulting.

Household Support

The life of an entrepreneur can be very rewarding.  If you are able to monetize and make a career out of your passion, then it only makes sense to pursue it.  There is one small caveat that we recommend, receive spousal consent.  We tend to only picture success when first starting a business.  This is not the reality.  It may take months to years in order to make a profit.  Financial hardships arise in households when partners are not in alignment with their visions.  Having an honest conversation about your household’s financial future such as the thought of losing income for months or years is a key factor of finding happiness as an entrepreneur.  Knowing your life partner is on board and will be with you side by side through the tough times provides added hope, aspiration, and the motivation to become successful.

Conclusion

The gig labor force will continue to take up a greater portion of the labor market especially as social platforms continue to evolve.  As this sector of the economy continues to grow, workers should be aware of financial decisions to take into consideration.  

- Dan

Disclaimer:  This article is for informational purposes only and is not a recommendation of Fyooz Financial Planning, Natalie Slagle CFP®, or Daniel Slagle CFP®. Past performance may not be indicative of future results and may have been impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be assumed that future performance of any specific security, investment product or investment strategy referenced in the article, either directly or indirectly, will be profitable or equal to the corresponding indicated performance level(s). No portion of the article shall be construed as a solicitation to buy or sell any specific security or investment product or to engage in any particular investment or financial planning strategy. Any reference to a market index is included for illustrative purposes only, as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.

Dan Slagle
Founder, Fyooz Financial
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