October 5, 2018.
The gig economy is much praised for perks like flexible work and instant pay, among many other benefits. Still, it also brings some challenges to the table. For example, how to deal with finance topics such as insurance and taxes as a gig worker?
Wait. What is a gig worker?
If you are working as a driver with Lyft, a host with Airbnb, or a babysitter with Sittercity, you are a gig worker. This means that you are not employed by the company you work with. Rather, you are considered an independent contractor/freelancer. Therefore, you should be aware of the tax and financial obligations you 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. In this checklist, you will find specific information for US residents, but keep in mind that the topics are also relevant if you live anywhere in the world.
1. Do you have health coverage?
When working as a gig worker you should take care of your health insurance on your own. You can turn to the government marketplace or buy coverage via trade groups or business associations. Remember that health insurance premiums are fully deductible from gross income. You can also opt to be covered through a spouse’s health plan, if possible.
2. Do you have disability coverage?
Getting injured or not being able to work when being a gig worker can be a financial blow impossible to handle. You should, therefore, make sure you have disability insurance, which can give you a portion of your lost income due to long-term disability. Proactiveness is everything!
3. Have you taken care of your 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!
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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, take a note, 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! You can use various tools that make this task easy – you don’t even have to be good with 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. So make sure you don’t spend all of your money and create a savings account to feel safe at all times!
When first starting as a gig worker, all of this may seem a bit overwhelming, but knowledge is power and AppJobs is your best friend in the gig economy. Make sure to follow our Blog, Facebook, and YouTube to get all the useful information and support to guide you through this new territory and help you conquer it like a pro.