Yahoo Finance 8 Expenses Every Gig Economy Worker Must Budget For
Geoff Dubiski, the executive director of people advisory services for the financial firm Ernst & Young, worked in the gig economy for about 25 years. But during his tenure, it wasn't known as the gig economy. It was simply contract work.
Nowadays, millennials are embracing the idea of working on their own schedule. Contract work has been relabeled as part of the gig economy, and Brad Smith, the CEO of Intuit, which owns TurboTax, estimates gig workers make up more than a third of the workforce. A 2016 report from the McKinsey Global Institute estimates 20 to 30 percent of the European and U.S. workforce are engaged in independent work. Members of the gig economy include Uber drivers, Shipt shoppers who deliver groceries, website developers and even attorneys and accountants.
Transitioning from a traditional 9-to-5 job to a career that lets you set your own hours and schedule can be appealing, but Dubiski warns people to watch for blind spots that can wreak havoc on their finances.
Here are eight things experts say people should work into their budget before deciding to be their own boss.
[See: 10 Offbeat Ways to Earn Extra Money.]
1. Business services. Brent Messenger, global head of community for freelance services marketplace Fiverr, says gig workers have to wear many hats. But not everyone has the time or expertise to manage invoices, taxes, marketing and technology needs. "You might be someone who is a great graphic designer, but you're not an accountant," Messenger says.
Freelance sites like Fiverr, Upwork and Freelancer.com build some business services into their platform. Other gig workers can use the Fiverr-owned And Co, which offers free business tools such as customized proposals, invoices and expense tracking. However, sometimes people may need to hire outside help, and workers should be prepared by factoring those costs into their budgets.
2. Health insurance. The Affordable Care Act requires almost all U.S. residents maintain health insurance. Without an employer providing benefits, gig workers have to find another avenue for coverage. "In some states, there is an opportunity to buy health insurance as a group through a chamber of commerce," Dubiski says.
Otherwise, workers may be eligible for government subsidies if they purchase health insurance through the federal exchange, also known as the health insurance marketplace, or a state's equivalent.
3. Other insurance. Gig workers may have additional insurance needs beyond a health policy. "Depending on your state, you might need workers' compensation insurance," says Robert Charron, partner with accounting firm Friedman LLP in New York City. "It can run $500 to $1,000 a year."
Others may need automotive coverage or other liability insurance, depending on their line of work. The silver lining is that these insurance purchases are often deductible expenses, Charron says.
4. Taxes. Dubiski says one of the biggest blind spots for gig workers is taxes.
"This is where people tend to go very, very wrong," he says. While workers may be aware of their income tax liability, they forget about self-employment taxes. In a traditional employment situation, the employer and employee split the cost of Federal Insurance Contribution Act taxes, which collect money for the Medicare and Social Security programs. However, those who are self-employed are responsible for paying the entire amount. The self-employment tax can vary but starts at 15.3 percent of a person's income.
To avoid surprises at tax time, gig workers need be sure they are saving the right amount and making quarterly payments. Online services such as Painless1099 can be used by freelancers to ensure they are withholding the right amount from their income for taxes. However it's done, Dubiski urges gig economy workers not to ignore their tax obligations. "There is an organization you don't want to mess with, and that's the IRS," he says.
[See: Answers to 7 Burning Tax Questions.]
5. Emergency savings. Gig economy work isn't always steady, and payments don't always come immediately. Anyone planning to work for themselves as a freelancer should budget for plenty of savings to level out the peaks and valleys in their income stream.
6. Retirement savings. Traditional employees may have an employer match for their 401(k), but self-employed workers don't have that possibility. That makes it even more important for those in the gig economy to budget for retirement savings.
As a benefit, money saved in retirement plans such as a simplified employee pension IRA or a traditional IRA is tax deductible. "Retirement plans are one of the best tax shelters available," Charron says.
7. Marketing. Some gig workers, such as Lyft drivers, don't have to worry about marketing themselves individually, but others need to get the word out about their services. That could entail paying dues to professional organizations for access to networking opportunities, purchasing advertisements or traveling to industry events.
In addition to planning for the cost of marketing, gig workers may also have to budget time for these tasks. "We've heard people say they spend half their time marketing," Messenger says.
8. Equipment maintenance. Gig economy workers may be thinking about how much it costs to buy the equipment needed to launch their business, but they also need to budget for maintenance. Cars need oil changes, laptops need upgrades and other equipment may break down or become obsolete.
Despite the added expenses that come with working in the gig economy, experts advise people not to be discouraged about going this route with their career. Beyond the costs, there are financial benefits, such as the potential for saving on transportation, dining and work clothing if you'll primarily be doing your job from home.
Plus, Charron notes the new tax law will allow many self-employed workers the opportunity to deduct 20 percent of their business profits, starting in the 2018 tax year. The regulations haven't been finalized for the deduction yet, but it should provide some relief to offset the self-employment tax and other expenses incurred by gig workers.
[See: 12 Best Part-Time Jobs to Pay the Bills.]
If you're looking to move into the gig economy in 2018, make sure to account for these eight expenses first. Then find your niche and join the millions of workers who are making money on their own terms.
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