Over the past several years, there has been a significant rise in gig workers and the number of affiliated companies that utilize them. According to Statista, there are 59 million Americans who participate in the gig economy, which is roughly 36 percent of the workforce. MBO Partners had a study that projected 52% of the workforce would spend time as independent workers during their life by 2023. 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 even bigger 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 large 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 7.65%, 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 up 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.
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 little sacrifice now.