Workers in the gig economy (meaning those who string together work from a variety of sources and typically don’t set foot in a client’s office) lack many of the financial securities enjoyed by office employees, such as a 401(k) retirement savings account, company-sponsored healthcare coverage, life insurance and even a steady pay check.
“Understanding the On-Demand Economy,” a 2017 online survey of 1,524 respondents commissioned by Prudential, found that 40% of contingent workers had health insurance and 20% had life insurance, compared to 82% of full-time employees with health insurance and 59% with life insurance.
Many of these challenges can be overcome with the right financial planning—and hard work. Here’s a look at how gig workers can protect their finances and build security in a profession that lacks it.
Diversify income streams
Working for a single client or on a single platform is risky for gig workers. When employees get laid off or downsized, they can typically collect unemployment. Unfortunately, most gig workers have no such safety net (in some cases, where they’re reclassified as employees, they might be eligible, but most are not). That’s why it’s crucial to diversify your income streams instead of earning all your money from one source.
What happens if the rideshare app you’re working for lowers its rates, or legislation forces it out of your city? Rather than scrambling to replace that income, make sure you’re signed up with multiple platforms or have several clients sending you work, in case one client changes direction or goes under. This also allows you to avoid boredom and build new skills.
Full-time workers who maintain side hustles (referred to as Gig+ workers in the Prudential study mentioned above) also reduce the potential that a layoff or a reduction in hours will derail their finances, because they’re not solely reliant on income from one source. They are also usually able to get benefits from their primary employer, and should typically receive unemployment if they experience a layoff.
Document deductible expenses
Gig workers typically don’t have a company paying the employer portion of Social Security tax and Medicare tax, or withholding money for taxes, so they need to plan ahead for tax time. However, one advantage gig workers have over traditionally employed workers is that they can deduct certain expenses from their taxes using a form called Schedule C.
For instance, if you sell handmade crafts, you might be able to deduct supplies and shipping costs. Or if you’re driving for a rideshare service, some of your car-related expenses may be tax-deductible. If you’re unsure about which expenses you can deduct, consult an accountant or tax preparer, and make sure you keep meticulous records of any expenses you plan to deduct.
You may also be able to lower your taxable income by contributing to a retirement account such as a solo 401(k) or a SEP-IRA, which are retirement options specifically designed for people who are self-employed.
Lower monthly expenses
Without a guaranteed amount of money flowing into your bank account each month, it’s important to live below your means. Pay attention to wants versus needs. You need a roof over your head and food in your fridge, but do you need a luxury apartment and nightly takeout, or would a house with roommates and a crockpot dinner work just as well?
Compare costs on necessities such as health insurance (but don’t go without it!), mobile phone and other expenses to ensure you’re not overpaying. Also look for creative ways to keep your discretionary spending in check by attending free events or hosting potluck dinners with friends.
Maintain a cash cushion
Inconsistent cash flow is a huge problem for gig workers. For instance, pet sitters might get a huge influx of cash during the summer months or December holidays when clients travel, then experience slower periods when their services are in less demand. Other gig workers might devote several months to a project and spend the following month searching for new clients. Late-paying customers can present another potential cash flow problem.
Setting aside money during more lucrative periods can help smooth out cash crunches during slower times, and keep you from relying on credit cards or loans. Having several months’ worth of living expenses saved in a liquid account you can access as needed also provides financial peace of mind to gig workers.
As workplaces evolve, the gig economy could become even more commonplace. By planning ahead and keeping an eye on their bank account balance, gig workers can avoid some of the potential pitfalls.
Susan Johnston Taylor writes about small business, entrepreneurship and personal finance. Her articles have appeared in The Atlantic, The Boston Globe, Entrepreneur, Fast Company and the money section of U.S. News & World Report online.