The gig economy continues to outpace traditional company job growth. And although independent work and the autonomy it brings is not without appeal, it doesn’t come with financial security, health benefits, paid vacations and a systematic way to fund your eventual retirement.
Freelancers ― a broad category that can include lawyers, writers, IT workers, designers and just about anyone else who works on a per diem or per assignment basis ― may love the freedom that comes from cobbling together a series of jobs and setting their own hours and work pace, but as a group, they don’t actually do such a great job of staying on top of their budgets. In fact, according to a poll conducted for QuickBooks by Pollfish in March 2018, 36 percent paid no taxes last year ― some because they didn’t earn enough to owe any, and others because they said they didn’t know how much they made. Uh, that’s not good in either case.
While we’re talking about managing finances as a freelancer, let’s throw in contract workers, too. One in five American jobs is held by a worker under contract, according to a Marist/NPR poll conducted earlier this year. Contractors are not employees and are generally paid no benefits. So for all those who work for themselves and need a bit of help getting bills paid on time and maybe saving a bit for down the road, here are some ideas:
Get organized with an app built for freelancers.
As a freelancer, you are not only doing the work that people are paying you to do, you are also running a business ― you. So you need to have a business infrastructure in place. You need an organized way to keep track of assignments, invoice clients for your work and make sure payments are received and recorded.
You also need to know what your business expenses are, including whether you need any special licensing, insurance, supplies, space, equipment, etc. And you, of course, must keep track of it all: when bills are due, what you spent in the course of doing business, etc.
Hubstaff listed what it calls the best 29 apps for freelancers, and more than a few are purposed on just keeping you focused.
Don’t forget about taxes — all of them.
If you are a freelancer, you are considered to be self-employed, and as such, you are required to file an annual income tax return and pay your estimated tax quarterly.
If you have net income — the amount you earned minus your expenses — of at least $400, that amount is subject to the 15.3 percent self-employment tax. This “extra” tax is composed of a 12.4 percent Social Security tax that applies to all your net income up to a ceiling of $128,400 in 2018, plus a 2.9 percent tax for Medicare. One big difference in freelancing is that wage earners get help paying their share of Social Security and Medicare from their employers ― who contribute half of it! The Medicare tax for the self-employed has no income cap, but after $200,000 adds another 0.9 percent.
Don’t think this tax doesn’t apply just because you are retired and now collect Social Security and are on Medicare. The self-employment tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare. The IRS’ Self-Employed Tax Center can help you understand your obligations.
And to all who believe that keeping records is for the birds and the IRS will never waste its time with such small potatoes like yourself: Know that small businesses draw their fair share of audits too. You are not immune. This guide could come in handy if you get a letter from the IRS.
Plan for the income ebbs and flows.
Whether you work on movie sets as a production aide or you’re a seasonal tax accountant, you must plan for the dry spells. Almost 50 percent of contract workers have income that varies from month to month or seasonally.
The trick to keeping things in balance is to determine what your annual expenses are, and then divide that number by 12. That’s the target amount you should be earning each month. In a “good” month, you may surpass that target, but you understand that a “not-so-good” month is likely just around the corner — so you set aside money from the “good” month.
Don’t forget to add in a little something extra for emergencies and future purchases. Will you be needing a new car soon? Hope to buy a house one day? Want to go to your cousin’s wedding in London in the fall? Financial planners suggest having one month of income tucked away for an emergency fund, plus an additional three to four months’ worth of average income in reserve to handle the dips that come with freelancing.
Budgeting with income that fluctuates is harder to do than you think. Financial experts advise that entrepreneurs make it a goal to live on 50 percent of their income.
Freelancing requires discipline. What you make in any given month is not all for immediate consumption.
Don’t forget to budget for health care.
The individual mandate that everyone must carry Affordable Care Act-level health insurance or face a fine was repealed, but is still in effect through 2019.
Freelance work, in and of itself, does not provide access to health insurance. The way for the self-employed to obtain health coverage at the moment is either through marriage to or a domestic partnership with someone whose plan will cover them, or by purchasing it through a state health exchange.
Remember that even freelancers must retire.
Many freelancers created jobs for themselves when they couldn’t find a spot working for a company. For them, freelancing is a way to help pay the bills and may open new doors. In other words, not every freelancer is a starving artist; more than a few are freelancing as a stop-gap measure.
But even those people need to be thinking about their retirement before they fall behind in retirement savings. Consider opening an IRA. Like a 401(k), an IRA provides tax-deferred growth on your investments, meaning the money in an IRA will not be taxed until it is withdrawn. A traditional IRA may also offer tax-deductible contributions for people who don’t participate in an employer-sponsored plan.
According to a Harvard study, the percentage of people engaged in “alternative work arrangements” (freelancers, contractors, on-call workers and temp agency workers) grew from 10.1 percent in 2005 to 15.8 percent in 2015. Economists Alan Krueger and Lawrence Katz found that 94 percent of net jobs created from 2005 to 2015 were these sorts of impermanent jobs.
Delaying retirement savings makes little sense for most people, and even less for people in this increasingly likely income track.
CORRECTION: An earlier version of this story incorrectly reported the Medicare tax for the self-employed has no income cap, but after $200,000 drops to 0.9 percent. In fact, it adds an additional 0.9 percent.