3 Powerful financial tips for gig economy workers

Tip 1: Figure out the best structure

Before you begin freelancing, you should decide how you’ll structure your business. Speak to your accountant about the options so they can explain the differences between operating as a sole proprietor, a limited liability company (LLC), or a corporation.

There are legal distinctions surrounding the protection afforded by each structure as well as tax implications. Discuss your intentions for the business so you can be given appropriate guidance.

Tip 2: Get well-versed in tax talk

Taxes aren’t simple, which is no surprise. But as a freelancer, you’ll need to understand the rules and your responsibilities to avoid expensive mistakes. Depending on the company structure you choose, you may be required to file estimated quarterly taxes to avoid financial penalties for underpayment. How you take income from your work could also result in payroll or self-employment taxes. The laws change frequently, so choose a professional who proactively helps you understand tax withholding so you can stay compliant and tax-conscious.

Most importantly, keep good records. Checks, invoices, receipts, payments: all of it should be kept together for easy reference and entry into an accounting system. As a freelancer, you may be eligible for write-offs full-time employees don’t enjoy such as your home office, insurance premiums, subscriptions, postage, meals, office supplies, and other customary business expenses. Keep track and stay current with your data entry to be sure you make the most of every write-off allowed since they can decrease your taxable income.

Tip 3: Don’t forget about retirement

Without an employer’s qualified retirement plan, health plan, or other employee benefits, you need to remain vigilant. From the start of your self-employment, it would be wise to contribute to a retirement account for your future. Compound interest is your friend. The longer you can keep money working hard in the market, the more of a chance it will have to grow. 

Besides traditional and Roth IRAs, self-employed individuals have a few other vehicles available to them to help save for retirement:

• SEP IRA: A Simplified Employee Pension Individual Retirement Account helps small business owners save for retirement, but only the business can contribute up to an annual maximum of 25% of eligible employee (you) compensation.

• Solo 401(k): A self-employed 401(k) is designed for business owners without employees other than a spouse. Both you and your company can contribute. Personally, you can contribute the same amount an employee is allowed to contribute to a 401(k) plan ($22,500). Plus, your business can contribute up to 25% of your earned income up to a maximum combined total of $66,000 (or, if you’re over 50, $73,500).

• Health Savings Accounts (HSA): Since gig workers may need to purchase their own health insurance, a high-deductible policy might be appealing. If so, you may consider pairing it with an HSA to allow you to save pre-tax dollars for health-related expenses. Unlike a flexible spending account where if you don’t use it you lose it at the end of the year, funds in an HSA can be saved for future health or medical expenses.