Just how many of us are part of the gig economy now? Turns out, it’s kind of hard to pin down. Despite the long-held belief that it's eclipsing traditional 9-to-5 work, new Bureau of Labor Statistics data suggests the number of alternative workers—those who earn their living outside of a traditional full-time job—make up just over 10 percent of total employment.
That doesn’t paint the full picture, though. The BLS numbers don’t include people who side hustle in addition to traditional employment. Nearly a third of U.S. workers fall into this camp, according to CareerBuilder. (And Upwork and the Freelancers Union’s latest report predicts that, within a decade, the majority of U.S. workers will be freelancing in some capacity.)
While freelancing can be great sources of income, it can also create some unique financial challenges. Here’s how to prep for them.
1. Adjust your budget for inconsistent income.
Irregular income is par for the course when you're freelancing full time or side hustling. This makes budgeting a little tricky, but certainly not impossible—a lesson I've learned since I began freelancing full time almost five years ago.
Your best protection is getting clear on your expenses. What's the absolute minimum you have to bring in each month to cover them? I put any surplus toward our bigger financial goals. I also have a mini emergency fund, containing one month’s take-home pay, in an online savings account. In the rare event that I fall short of my monthly income goal, I pull from there to see me through.
2. Know how it affects your taxes.
Traditional employers have state and federal taxes, Social Security and Medicare taken out of their paychecks on the front end, but side giggers are stuck doing it themselves—then making estimated quarterly tax payments to the IRS.
How much you pay depends on factors like your income and any deductions or credits you’re eligible for, but Certified Public Accountant Jonathan Medows, founder of CPA for Freelancers, recommends setting aside 30 percent. Underpay, and you could get hit with a hefty tax bill and up-to-10-percent penalty.
3. Save some for retirement, too.
Saving for the future is vital, regardless of how you earn a living. Unlike traditional workers, who may have access to employer-sponsored plans like 401(k)s, side giggers are on their own here, too. Enter: the Individual Retirement Account (IRA).
A Roth IRA is especially appealing because your money grows and can be withdrawn tax-free. You can contribute up to $5,500 this year ($6,500 if you’re 50+), so long as you earn less than $120,000 or $189,000 if you're married and filing your taxes jointly. With a traditional IRA, you may be able to deduct your contributions today, but you’ll pay income taxes when you tap it in retirement. On the upside, there's no income limit.
Finally, a SEP IRA is just for self-employed workers. In 2018, you can contribute $55,000 or 25 percent of your compensation, whichever is less. You can deduct most or all of your contributions, and you won’t pay taxes until you withdraw the money in retirement.