Written with AFP Associate, Erik Attias, in LA.
Freelancer, gig worker, temp…three different terms for essentially the same thing and these days it is becoming “the new black”. More and more people are finding themselves in these types of jobs. The financial challenge is that your income is inconsistent, which is why it is important to figure out how to navigate the financial realities of gig work.
There are a lot of positives in the world of gig work. The biggest one being autonomy. You have some control over when and where you work. But, you may never be sure when you’ll be working or how much you’ll be making. With all the uncertainty that comes with being a gig worker, there are few critical financial things to get right:
- Have separate accounts for your business and your household
- Pay yourself a “salary” each month
- Pay your taxes on time and make sure its enough to avoid surprises
Have separate accounts: always keep your gross/pretax money separate from your net funds for your household. Never let pretax funds hit your household accounts. Generally, money gets consumed in the vortex of your household checking account and you never remember or you don’t have enough to set aside for item #3 on our list. Having separate accounts will help you make sure you only send money to your household AFTER you've set aside some for taxes.
Pay yourself a “salary” each month: Figure out what your business can CONSISTENTLY net each month after deductible expenses, retirement savings and estimated taxes. Try to do this for the year or month by month, whichever is easier with your line of gig work. If you consistently net over $4000/month, then make your “salary” $4k/month and leave at least $500/month of "cushion" to accumulate in your business account for months where work is slow or you’re on vacation. That way, you can still pay yourself $4k in slow months, because you have enough cushion to supplement your slow month earnings.
Pay your taxes on time: this can be a viscous cycle if you do not start paying your taxes on time from the beginning. You get more and more in the hole to Uncle Sam and you can’t see your way out. It just keeps compounding. Remember, your tax funds are NOT YOURS. They are the government's. Try to see taxes as an expense like your car payment or cable bill. It’s not negotiable, it’s not yours and it can’t wait. You can even ask the IRS to take funds out of your account monthly to make sure you stay on top of it.
If you can live by the three rules I’ve listed above, you should be able to weather the ups and downs of gig work and maybe even enjoy the autonomy and variety it affords you.