Today, our standard workday isn’t so standard anymore and we’re talking more about “gigs” – alternative work arrangements that often depend on the latest technology and a desire to set one’s own schedule and pay. However, the question is whether everyone plans for the reality of the work or the impact self-employment in any form can have on his or her long-term finances.
Gig workers – a broad spectrum that includes temporary help agency workers, on-call employees, contract company workers, independent contractors and freelancers – were measured as a startling and growing economic force in a March study by Harvard and Princeton researchers. According to their measurements, this diverse group of earners that made up 10.1 percent of the workforce in February 2005 has grown to nearly 16 percent as of late 2015.
Anyone thinking about going into business in place of or in addition to their day job should consider a planning period with the help of a qualified financial or tax expert. Major issues to cover include:
Consider qualified tax and financial advice. Switching to gig work – even if you find lucrative contract work in your field – can be an enormous shock to your finances. Cash flow can be irregular, disrupting budgets and long-term savings. It’s a good idea to get some qualified financial and tax advice so you understand the changes you might face and to keep major financial goals like retirement and college savings on track.
Setting up a business structure: While most gig economy participants settle on a sole proprietorship or some form of limited liability company (LLC) business structure, the choice needs to be carefully considered based on your particular business activity, overall tax situation and other financial factors unique to you. This is probably one of the most important reasons to seek out qualified tax, legal or financial expertise – the level of personal or property risk inherent in your choice might call for a structure that offers additional protection against lawsuits or insurance claims.
Think carefully about your benefits… Unless you fit a particular group from the Patient Protection and Affordable Care Act or are insured by a spouse or partner, you’ll have to invest in healthcare insurance for yourself or consider the cost of being uninsured. This is a particularly important expense to plan in advance based on your health needs and the type of affordable coverage that’s available. Get referrals on qualified health insurance agents to get a full range of choices. And most of all, make a plan to keep saving and investing your money for long-term goals. Walking away from a weekly check can make that process tougher – talk about it and plan for it.
Track your spending and planning carefully. If you don’t budget or track your expenses now, it’s time to start. Being in business entitles you to certain deductions for home office expenses, equipment and other costs related to your work. So whether you use a specific software program or a computer spreadsheet or paper and pen to track your expenses, do so regularly to avoid missing items that could eventually save you money. If you’re working with a tax professional or financial planner, coordinate this recordkeeping with the work they’re doing for you. Also keep a constant discussion going about saving for the future, including retirement.
Make sure you’re really right for this. With proper planning, the gig economy can be both enjoyable and challenging. You’ll not only learn whether you can support yourself, but also whether you’ll enjoy doing it long-term. Many of us dream of being our own boss, but reality can be very different, particularly when managing uneven earnings and cash flow common to many new companies. It’s not just about business; it’s about whether your lifestyle and personality traits make you right for operating a business in this economy – or any economy.
Bottom line: Plenty of people find themselves dealing either by choice or necessity with the brave new world of “gig” work. It’s important to approach it as a financial and lifestyle decision on par with starting a business.
Nathaniel Sillin directs Visa’s financial education programs. To follow Practical Money Skills on Twitter: www.twitter.com/PracticalMoney.
