Freelancers and contractors form an integral part of the gig economy that is rapidly growing, backed by digital platforms, which connect service providers and customers quickly. Photographers, tutors, consultants, and others are a few examples of gig workers. This format doesn’t include full-time employment; most engagements can be short-time. In 2021, a reputable research body revealed that nearly 16% of Americans made money through online platforms. The percentage increased to 30%, with people aged 18 to 29 taking advantage of this.
You can classify gig workers into two types – contingent workers and independent workers. Freelancers are typically independent workers who charge bills for their services. The other category includes those who work for a company with flexible work opportunities. But they don’t enjoy the same benefit as W-2 employees. No matter where you belong, consider a few things while navigating the gig economy.
Retirement savings
Employer-backed retirement and health insurance plans can be inaccessible to gig workers. Those who can access such retirement plans include on-call workers (30%), temporary agency workers (7%), and contractors (38%). On the other hand, traditional employees form about 46% who benefit from workplace retirement plans. Still, you needn’t worry, as options like Traditional IRA and Roth IRA are open. If you own a business or are self-employed without any employees, you can consider a Solo 401(k). The rules and eligibility criteria can be the same as any regular 401(k) plan. The good thing is that this plan’s contribution limits for 2023 have increased to USD $22,500 for those under age 50 and USD $30,000 for those aged 50 and over. Besides this, Savings Incentive Match Plan for Employees (SIMPLE) IRA and Simplified Employee Pension (SEP) plans are also available.
You can pick one based on your retirement savings goals and current situation. Consult a finance expert for guidance. Even if you cannot open an account right now, save a minimum of 15% income every month.
Financial instability
You may not have income security as an independent worker and depend on the next opportunity. Due to this, your earnings can be unpredictable, making your financial situation unstable. You can help yourself by creating a budget that is also relevant for even salaried employees. Follow a bucket method that involves creating different categories for different expenses and prioritizing them based on urgency and necessity. Considering this, taxes and rent can be the topmost concerns. The next thing can be emergency savings to cover your living expenses for at least three months. After this, retirement, home purchase, and vacations follow. When setting up your budget, you should be realistic about what you can earn that year.
Taxes
Gig workers are not part of the company’s payroll systems. Hence, you get pre-tax money. But you have to pay your tax. If you believe you must pay over USD $1000 to the IRS, estimate your quarterly tax payments to avoid underpaying the amount. Else, there will be a penalty. Those earning over USD $400 annually from their gig job also have to pay Medicare and Social Security taxes. Luckily, you can claim tax deductions, unlike full-time employees. So, learn about everything to save as much as you can.
The changed lifestyle choices bring many added responsibilities with them. You can adapt well by paying heed to essential things in life.
