Over the past several
years, there has been a significant rise in gig workers and the number of
affiliated companies that utilize them. In fact, in 2017, the Bureau of Labor
Statistics reported that 55 million people, or about 34 percent of the
workforce, were 'gig workers. Being classified as a gig worker does not
necessarily mean gigging was a person's primary income source. Still, it could
be substantial enough to report earnings.
The gig economy
workforce includes freelancers, self-employed consultants, contractors,
on-call, temporary workers, and others in similar employment situations.
Self-employment is an attractive career path for many individuals. Still,
unfortunately, it does not come with a built-in retirement plan.
What
Are My Options?
When you are a member of
the gig economy, it is imperative you are proactive and set up your own
retirement fund. As a gig worker, you typically have no other third-party or
employer to rely on to set one up for you. However, taking control of your own
retirement savings need not be frustrating or overwhelming.
Here are a few options:
- Solo 401(k). A Solo 401(k) is an option for people who are in
business for themselves without employees other than maybe their spouse in
their business entity. Individuals who go with a Solo 401(k) can
contribute as both employee and employer, meaning more considerable
savings toward eventual retirement.
- Self-Directed IRA & Roths. Self-Directed IRAs and Roth IRAs are another choice for
retirement for sole proprietors and freelancers. You can fund an IRA as
long as you have some earned income for the year. But the annual
contribution limits are similar to other available IRA options.
- SEP IRA. Now, the Solo 401(k) provides many advantages over a SEP-IRA and is typically ideal for businesses with just a sole proprietor and spouse. But, once you begin hiring full-time employees, you can no longer use a Solo 401(k). The Simplified Employee Pension (SEP-IRA) is the ideal option at the time when your business begins growing. It is easy to administer and cost-effective to set up.
Dealing
with Taxes
When you were a
full-time employee, you were used to getting a W-2 form from your employer each
year. Now, because you are a gig worker, freelancer, or sole-proprietor, you
will receive a 1099-MISC form (most likely) unless you have made under $600.
Depending on the type of freelancing you are doing, you might receive both a
1099 and W-2.
You will also have to
pay your estimated taxes each quarter too, or you could face late fees and a hefty
bill at the end of the year when you file your tax return. You may be able to
qualify for some type of monthly payment plan if you wind up owing more than
you pay when tax season hits.
You pay your taxes
directly to the IRS as an independent contractor. Therefore, you might be
surprised by extra individual taxes. When you are employed, your employer
covers half of your Medicare and Social Security taxes, or 7.15%, combined.
However, when you are self-employed, you are responsible for paying the full
15.3% of Medicare and Social Security taxes.
What
Insurance Do I Need?
If you do not have
health insurance, this should be your first priority in the self-employment
world. If you do not have health insurance, a severe medical condition or
injury could require you to dip into your retirement savings. High medical
bills also often lead to personal bankruptcy.
If you cannot be on a
spouse or parent's plan or extend your COBRA coverage from a previous job, you
will have to obtain your own health insurance. To do this, you can visit
HealthCare.gov and choose from various plans in your area. You might also find
a cost-effective health plan group via freelancers' unions or professional
organizations. Shop around to find the most affordable plan that will fit your
needs.
You could also open a Health
Savings Account (HSA). This will offer you a
tax-advantaged way of saving for your health care costs. However, many
individuals don't realize HSA money can also be used for non-health-care
expenses once you have hit the age of 65. And there would not be any withdrawal
penalties on it either. However, for you to open an HSA, you will need a
high-deductible health plan.
Takeaway
It can take some advance
planning and creativity for a gig economy worker to reach retirement goals.
Begin saving today to build your own nest egg using your tax refund. You can
significantly impact your future with a bit of sacrifice now.
