As the employment pool thins, there’s a growing section of the population filling in the gaps – freelancers.
In this article, we’ll explain what freelancers are, the tech they can utilize, how they can budget, and how they save for retirement.
Let’s dive in.
What’s the Gig Economy?
Essentially, the Gig Economy is a group or sector of individuals that work as independent contractors, and/or classify themselves as self-employed.
Typically, these workers are made up of freelancers and contractors, as I mentioned. Freelancers don’t work for an organization. They work for themselves.
They set their own rates, hours, and services/products that they offer.
Many of these individuals, take advantage of different apps, programs, or organizations that subcontract a lot of their work out. Many of these are listed below.
Apps and Programs
The two most popular apps/programs used by freelancers to find work are Upwork and Fiverr.
With these two apps, an individual can create a profile and list the services they offer, qualifications, hourly rate, service location (geographically, where they can/will work), among other things.
There are, however, several companies that utilize the services and flexibility of freelancers. They include but aren’t limited to Uber, Lyft, Grubhub, and Doordash.
There are many others currently in use, with new ones seemingly popping up every day.
All that said, because freelancers and individual contractors work for themselves, they usually don’t get benefits. Additionally, they don’t have a set schedule, so their income often varies, week to week.
How to budget
As I alluded to, income received for freelancers isn’t consistent. What’s more, they often have business expenses and taxes to think about. How you budget, will differ from your typical W-2 employee.
- First, find out how much you must bring in to meet your necessary expenses. This includes rent, transportation, food, utilities, and other bills. Bare minimum what you need to earn each month.
- Now you need to figure out what your average month looks like, in terms of business expenses. This can include travel, lodging, website, gear, etc. What is classified as a business expense can vary depending on what you do and how good your accountant is.
- Okay. We have your expenses taken care of, now we have to focus on income. We established you need enough to pay for necessary expenses, but I should’ve included the cost of doing business.
- Website (domain license, etc.)
- Another variable that can’t go unmentioned is your taxes. When you’re a freelancer or an independent contractor, your income normally isn’t taxed. That means you’ll either need to set savings aside to pay your taxes, or you’ll have to pay quarterlies.
- Last thing. As mentioned, your income will vary, so you need to plan for that. Using your budget, determine what you need to bring in each month (keep a LITTLE extra for fun) and save the rest.
- The extra savings are designated for down months, but could also be used for taxes and/or retirement.
Retirement plans available
Essentially, there are five retirement plans available for freelancers (depending on business structure, employees, income, etc.). I’ll link to an in-depth guide of all plans available for businesses, but here’s that list of five.
- Traditional IRA – Available to anyone. Income limits can constrict the tax advantages, but everyone is able to open a Traditional IRA.
- Roth IRA – This is not available to everyone. Income limits vary depending on marital status, so here’s a link to the IRS site for specific information.
- SIMPLE IRA – Tax treatment of a SIMPLE is similar to the Traditional IRA. This plan, however, is designed for small businesses.
- SEP IRA – I’ll echo my last point about tax treatment; very similar to a Traditional IRA. Contributions are made by the employer, no matter how many are employed by the company. The contribution limits for this plan are much higher, however.
- Solo 401k – Almost exactly the same as your standard 401(k), with two distinctions. One, it’s designed for one individual; two, you are allowed one employee on the plan (I know I contradicted myself)…your spouse.
Talk with experts
You can do all the research in the world, but you still need to talk to someone that does this every day.
In your contact list, you should have a financial advisor (Hi there!), an accountant that specializes in one-person businesses, and an attorney.
Your financial advisor can assist you with budgeting, saving, and selecting a retirement plan. Your account can help with tax filings and deductions. Your attorney can determine what business structure is best for you, disclaimers, and other documents to CYA.