It used to be that after graduating college you’d get a job with benefits — one that had employer-paid health care and life insurance, plus retirement benefits. Oftentimes, employees considered these “extras” to be just as important as your salary. But a lot has changed.
After the financial crisis of 2008–2009, many Americans began working various contract and freelance jobs (i.e., “gigs”) to make ends meet. Today musicians, writers, photographers, and many other skilled workers make up a big portion of the gig economy, as do people who drive for rideshare services.1
Those who make “gigs” their full-time work often don’t have employer-provided benefits. But that’s not stopping them. In fact, the gig economy is growing. In 2017, 34 percent of the workforce was involved in the gig economy. In 2020, it’s expected to increase to 43 percent.1 And within the next decade it’s expected that contractors and freelancers will make up half the American workforce.2
Though gig careers typically don’t come with traditional benefits, many workers opt to work this way because of necessity or because they like the freedom and flexibility. In fact, 63 percent of gig workers chose their career path willingly.3 However, saving for retirement and managing day-to-day expenses can be a real challenge. But it can be done.
Here’s a look at some of the strategies and considerations people who work either freelance or contract jobs should consider. Afterall, it comes with the gig.
Oftentimes, it’s hard to think about saving for retirement when you’re always on to the next job. A recent study proves this to be true. It reports that just 16 percent of independent workers have a retirement savings plan (that’s compared to 52 percent of their full-time counterparts who have a plan).2
But as they say, time is money. So, the sooner you start saving for retirement, the quicker the compound interest you earn will grow. A good retirement plan should have tax benefits that include contributions that can be deducted from your income, and your retirement account savings should grow tax-deferred. Here are some retirement options to consider:
Individual Retirement Account (IRA)
Traditional and Roth IRAs are a good place to start. They allow you to contribute up to $6,000 annually (or $7,000 if you’re 50 or older) of your earned income.4
With a Roth IRA, contributions are made after tax and you can usually withdraw the money tax-free after you’re age 59.5, as long as you’ve had the account for five years or longer.5
Simplified employee pension (SEP)
For retirement, you may need to contribute more than what a regular IRA allows. Thankfully, a SEP allows you to do just that. In 2019, self-employed workers can contribute up to 25 percent of pay, making it a good option if you make over $24,000 and want to save more than $6,000.4
Self-employed 401(k) profit-sharing plan
The self-employed are allowed to make generous contributions with this retirement plan. They may contribute a fixed-dollar amount up to the employee 401(k) contribution limits of $19,000 or $25,000 (if over age 50). A self-employed worker who nets $75,000 can contribute a total of $32,940 or $38,940 (if over age 50).4
Consider working with a financial professional and/or tax professional to determine which type of account is appropriate for your situation.
Tax (1099) tips
Not only do you have to make a concerted effort to squirrel away money for your future, you also need to set aside enough money to pay your quarterly taxes (federal and state). Plan to set aside about 30 to 40 percent of your earnings — preferably in a separate bank account. Included in this percentage is the self-employment tax rate of 15.3 percent (12.4 percent for Social Security and 2.9 percent for Medicare).6 (Typically, employers send in their employees’ Social Security and Medicare taxes, of which employees pay 7.65 percent and employers pay the other 7.65 percent.) The good news is you get to claim a deduction for a portion of the percentage on your tax return.7
Speaking of deductions, make sure you take into account if you have a dedicated home office, you drive your car to work-related engagements, and more. You can deduct your home office if you use it regularly and exclusively for your business.8 Do you also use your car for business purposes? If you do, you can deduct car expenses (i.e., car repairs and tune-ups, insurance, registration fees, and more) or mileage (58 cents per mile in 2019).9
A good way to keep track of business expenses is to open a business-only bank account and credit card. That will help you to keep track of costs for much-needed office supplies, cups of coffee (or meals) for clients, and traveling to that can’t-miss business conference in Chicago. Also, save receipts and record them either the low-tech way (i.e., write the date and reason for the expense and store in files) or by using high-tech methods (use an app to digitize the receipts) — but just make sure to do it. Also, when used regularly, accounting software can help you keep track of business expenses, thus keeping the IRS at bay. Not a DIYer? Then hire a bookkeeper to do it for you.
There’s a lot to keep straight when you have your own small business. That’s why having a CPA on your side is a good thing. They can help advise you if you should incorporate your business or designate it as an LLC, among other things.
Work with a tax advisor or reference the IRS for more helpful tax tips. Read more today.
Cost of care
The cost of health care is expensive. In 2019, the average consumer was responsible for $1,820 in deductible payments, plus $4,400 in out-of-pocket costs.3 So it’s important to find the right health care that meets your needs, is affordable, and complies with the Affordable Care Act.
Go to healthcare.gov to get a good picture of plans available to you. Depending on your income, you might qualify for premium tax credits and cost-sharing reductions when buying a policy from the site. Also, be sure to contact major health care companies directly since many might have individual plans that aren’t listed on healthcare.gov.5
Health savings accounts
Have a high-deductible health plan? To help offset medical expenses, consider getting a tax-deductible health savings account (HSA), which can be used for co-pays, prescription drugs, and doctor or hospital visits. You can also invest your HSA contributions, and you have the option of not withdrawing any money until retirement (the funds roll over year to year), allowing the savings to grow tax-free for many years.
Each year, you can contribute up to $3,500 to an HSA. Those older than 55 can contribute an extra $1,000.10
Accident or illness coverage
If serious injury or sickness keeps you sidelined for a lengthy period of time, you might miss out on a large portion of income. To avoid this scenario, experts say appropriate coverage is a must for freelancers and solopreneurs.
Accident or sickness insurance can be an important addition to help plan for the unexpected.11
Have you thought about what could happen after you pass away? Are you married or perhaps a sole breadwinner? Your untimely death could leave your family with financial obligations. Life insurance can help.
Term life insurance is a simple, affordable way to protect your loved ones for a specific period. The policy pays a benefit to your beneficiaries should you pass away during the term your coverage is active. Terms can generally range from 10 to 20 or 30 years.
Regardless of where you are in life, your family may benefit from life insurance to cover medical bills, funeral costs and estate management expenses.
Take a look at the history of your income earning power, and use it to project how much you’ll make in a year. When building a budget, think of the 50-20-30 rule; basically, 50 percent to cover the basics, 20 percent to save for the future, and 30 percent (or less) to pay for your lifestyle. Finally, create an emergency fund (six months’ to a year’s worth of income) that will cover the basics such as groceries, rent, utilities, medical, transportation, and cell phone.12
One more tip: The jobs you get can fluctuate from month to month, so consider that when building a monthly budget. Try to have one steady gig (or enough regular gigs) that can pay for the basics. Then any additional gigs are gravy.
Make it sustainable
Since independent workers are on their own, thus making them feel “out of sorts” at times, it’s important they cultivate connections with routines (i.e., a schedule, to-do list, exercise, sleep), place (somewhere to retreat), purpose, and people (for reassurance and encouragement).13
Working in the gig economy requires a lot of effort. But if you manage it right, you won’t want to have it any other way.