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Money Management Tools for Freelancers and Gig Workers

Workers in the gig economy need the right kinds of insurance and investments to take care of themselves now and in the future.

If You’re Part of the Gig Economy, Here’s What You Should Know

If you’re a worker who’s part of the growing gig economy, you may love the freedom and flexibility that it gives you to balance life and work. But there’s a financial downside if you don’t have some protections in place — such as the right kinds of insurance and investment potentials. Let’s look at a few of the money management tools available to gig workers.

Cash Flow

Gig workers have only two levels of work — too much and not enough. That fluctuating income makes planning and budgeting difficult. To avoid feeling too much financial stress, start with building a cash cushion — your emergency fund. Experts advise stashing enough cash to cover six months of your living expenses, but saving enough for even two weeks of expenses can give you some financial breathing room.

You’ll want to keep your emergency fund in a savings or money market account that can pay you a small bit of interest, and keep that separate from a checking account or debit card account. When you need to dip into savings, you may need to wait two or three business days to transfer the money from an online savings account, so keep that in mind. This way, you won’t be likely to withdraw money from savings for an impulse purchase.

In planning your spending, aim to keep your living expenses at a level that you can afford to cover when business is slow. Then, when your income picks up, put half of the increase into savings you can tap when things slow down.

Retirement

You typically won’t have a 401(k) savings plan or similar workplace account, so you’ll be on your own when it comes to saving for retirement. You can set up an Individual Retirement Account, called an IRA, or a Roth IRA. For 2019, you can contribute up to $6,000 a year in any combination of IRAs, or $7,000 if you’re at least 50 years old.

Both accounts have tax advantages. The difference between the two accounts is that money you put into a traditional IRA won’t be taxed as income until you start withdrawals. If you contribute $3,000 to an IRA, you’ll be able to deduct that amount on your income tax now. You will be taxed, however, when you start withdrawing money.

With the Roth IRA, you contribute only after-tax dollars, so you won’t typically be taxed on withdrawals. Younger workers and others with low incomes (up to $38,750 for single filers in 2019, $77,400 for joint filers) who face tax rates of 10 percent or 12 percent may be better off with a Roth, since their tax bite is lower now than when they retire.

With both types of IRAs, you could face a stiff 10-percent penalty if you try to take money out before you hit 59-1/2 years old. But there’s an exception with the Roth IRA — you can withdraw your contributions after five years with no penalty (but check with your advisor before making any withdrawals). You’ll still have to wait until 59-1/2, however, before you can touch your gains. This feature of the Roth allows you to use it as a second source of cash in an emergency, although dipping into it will endanger your retirement savings.

Insurance

Workers with permanent staff jobs often get benefits that include health, life and disability insurance. The life insurance typically covers one year of your salary if you die, while disability pays 50 percent or 60 percent of your wages if you’re injured. Disability coverage can be short- term (up to 52 weeks) or long-term.

The advantage of purchasing your own life insurance is that you can take the policy with you no matter what kind of job you have. In addition, anyone who has a spouse or family depending on them may need more than one year of income to help protect their loved ones financially. Lower-cost term life policies, which expire at a set age or after a number of years, are usually inexpensive when you’re young and can be extended until age 70 or even 100. With disability income insurance, having your own policy means that you won’t be taxed on your benefits, which happens with employer-paid disability policies.

For health care, younger workers in good health may not want to bear the expense of enrolling in policies offered on the Affordable Care Act exchanges and paying monthly premiums for what can be high-deductible plans. One option is to boost your emergency savings while helping protect yourself against catastrophic illness or accident with a critical illness policy, which helps provide protection from a variety of covered conditions. Another form of protection comes from policies that help cover specific illnesses, such as cancer, heart attack and stroke. Be sure to check the details to know if the policies meet your needs and expectations.

Even when a job or a spouse’s workplace offers some health care insurance coverage, that may not cover dental or vision care — or not do so at an affordable price. A supplemental policy with dental and/or vision benefits can be a better deal and can cover you no matter where you end up working.

Taxes

If you’re a gig worker, you’re probably self-employed, which means you don’t have an employer withholding money to cover federal, state and local income taxes. Instead, you may have to pay quarterly estimated taxes that must cover a reasonable amount of your expected tax bill. Failing to pay estimated taxes can result in penalties and interest charges. The IRS offers a withholding calculator at IRS.gov. In addition, you can find state and local tax calculators at several online sources.

With some federal taxes, such as Social Security and Medicare, freelance and gig workers must pay both the employer and employee portions of the tax. For Social Security, the rate is 12.4 percent of what you earn up to $128,400 for 2019. On Medicare, you’ll pay 2.9 percent on everything you make. High earners can also face some additional Social Security and Medicare taxes as well.

On the bright side, gig workers can get a tax deduction for their self-employment taxes, in addition to writing off business expenses and getting up to a 20-percent tax deduction if they qualify as a sole proprietor or other type of small business.

Handling these financial responsibilities is simple and doesn’t take much time. You can set up automatic savings and retirement contributions, check your taxes quarterly, and shop for insurance once and be done. And, like everything else when you’re self-employed, the good news is that you’ll be the one in control.

Written by Brian O’Connor for Mutual of Omaha. Brian O’Connor is an award-winning business and finance columnist, founding managing editor of Bankrate.com, executive ghostwriter, custom content consultant and author of “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese,” which was named Best Money Management Book of the Year by The Institute for Financial Literacy. Twitter: @BrianOCTweet


This article is provided for informational purposes only. It is not intended to constitute legal or tax advice. You should consult your professional, legal or tax advisors with specific questions about your individual situation. Mutual of Omaha Advisors is a division of Mutual of Omaha Insurance Company. Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

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