Freelancing, Independent Working, the Gig Economy in general is often known for its perks such as instant pay, flexible hours, work/life balance among other things. However, working in the Gig Economy also brings with it some unique challenges. How to deal with financing, taxes, and insurance needs are a few examples.
Let’s start at the beginning with a simple question. What is a gig worker?
You are a gig worker if you are working as a driver with Lyft, a host with Airbnb, or walking dogs with Rover. This means that you are not employed by the company you work with and you are considered an independent contractor/freelancer. In doing so you need to be aware of the tax and financial obligations that you will need to take care of on your own.
Especially if you have worked as a full-time employee in the past, receiving your paycheck every month, not having to take care of taxes, health care coverage, and retirement funds, you should get informed and make sure to avoid any surprises.
Here is a Quick Guide to Help you go through the Basics.
1. Do you have Health Insurance?
When working as a gig worker you should take care of your health insurance on your own. You can take a look at the Health Insurance Marketplace or look at getting coverage through your trade groups or business associations. Remember that health insurance premiums are fully deductible from gross income. The other option you have is to be covered through a spouse’s health plan, if that is a possibility.
2. Do you have Disability Insurance?
If you were to get hurt or injured and were not be able to work it could cause a severe financial impact when you are a gig worker. You should, therefore, make sure you have disability insurance, which can give you a portion of your lost income due to long-term disability.
3. Have you Set Up a Plan for Retirement Savings?
You should choose the best retirement plan for you and fund it annually. You can opt for solo plans, simplified employee pensions (SEP) or individual retirement accounts (IRA). Though the money to put into your retirement may be hard to find sometimes, keep in mind that it is tax deductible!
4. Do you know what taxes you need to pay?
When working independently it is your own responsibility to report your income and pay your taxes, which, include both income taxes and self-employment taxes. There is also the Medicare tax, which is low but not deductible. A good strategy to follow, so as to always be prompt with your tax payments, is to use the Electronic Federal Tax Payment System to schedule your estimated payments that will be withdrawn automatically from your bank account 4 times per year. Alternatively, you can save 10% or 20% of your income in a separate bank account and perform payments when needed.
5. Have you explored your possible tax breaks?
As a gig worker, you may be eligible for tax breaks, like Home Office deduction, if you use your home as your business base or Qualified Business income deduction if your taxable income is below $207,500. Explore your possibilities and take advantage of them – it may be very beneficial for your finances!
Do you keep track of your income and expenses? This is very important when working as a gig worker! There are lots of apps and tools to help make this task easy – especially if you are not that good at doing the numbers. Try the Sharing Economy Tax Center by IRS, for example.
As you can understand, working as a gig worker entails a lot of financial planning and you should be proactive and not spend all of your income. You should save up not only for the days that you might have less work and income but also for your financial obligations.