Money milestones: joining the gig economy

Brian Acton


Brian Acton

Brian Acton

Contributing Reporter

Brian Acton is a contributing reporter at Policygenius, where he covers personal finance and insurance news. His work has also appeared in The Wall Street Journal, TIME, USA Today, MarketWatch, Inc. Magazine, and HuffPost. 

Published|6 min read

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As the coronavirus pandemic continues to hammer markets around the world, gig workers have not gone unscathed.

There were as many as 75 million gig workers nationwide in 2019 making a living on childcare or rideshare apps and food delivery services. That number has spiked since COVID-19 hit. Upwork, a website connecting freelancers with job opportunities, has seen a 50% increase in new worker sign ups since the pandemic began. Meaning several workers are vying for the same gig, causing organizations who employ gig workers to pay less.

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However, gig workers have some advantages: Several freelance jobs can be done from home. And jobs like in-home childcare could see a surge in demand.

If you’re thinking about joining the gig economy, you’ll need to get your money right. Here’s how to prepare financially to join the gig economy.

Calculate startup costs

Some jobs require more upfront costs than others. Online and creative work may require a computer, website and other tech supplies. Some gigs have apps or websites that connect workers with jobs, which might let you avoid high startup costs in exchange for a cut of your income. For example, if you’re planning to walk dogs, you may want to invest in business cards, leashes and dog toys.

No matter what your angle is, you should calculate startup costs and figure out how to pay them. Look for ways to keep costs down initially — you probably don’t need the most top-of-the-line equipment at first, and you can always upgrade if your gig takes off.

“Do your research to figure out if the job that you want to do is feasible with the funds that you have available,” said Drew Feutz, certified financial planner at Market Street Wealth Management Advisors. Jumping into a gig that burns through your cash or savings up front might not be the best move.

Here are eight side hustles that cost nothing to start.

Create a personal budget

You should create a budget to determine how much income you need to cover your expenses. Remember that getting gigs will take time — you could be swamped with work one month and chasing down leads the next. For this reason, you need a good handle on your personal finances.

You can use bookkeeping software or a simple spreadsheet to track your expenses. Make sure to plug in rent, bills, food, business utilities and other necessities. Because of the unpredictable nature of gig work, prioritizing an emergency savings fund is a good idea.

If you have large upfront startup costs, you want to revisit your personal budget and cut any discretionary expenses. “Get lean as you free up cash flow to use for your business and allow your gig income to grow. As your income increases and becomes reliable you can start adding back in expenses,” said Feutz.

Track business income and expenses

From day one, it’s important to record business income and expenses down to the penny. This will help you understand business finances and keep track of costs that you can write off on your taxes.

For simple gig work, like dog walking or babysitting, a spreadsheet that tracks income and business expenses might be enough. But there are affordable accounting solutions that also handle invoicing, expense reporting and forecasting all in one place.

If you’re getting gigs from a third-party service like Uber or Instacart, they may automatically track your income for you. But it’s still a good idea to keep your own records, especially so you can compare your incoming cash flow against your business expenses.

Here’s how to score high-paying gigs

Plan ahead for tax season

According to the IRS, anyone who earns $400 from self-employed work must file an income tax return. To successfully file your taxes, you need to keep good records and make sure you have all the documents you need:

  • Form 1099-MISC: If a client pays you $600 or more in a calendar year, they must send you a 1099 form declaring that income by January 31 of the following year so you can accurately report your income on your tax return.

  • Financial statements: Business statements can help you track income and expenses for the year, and report that activity to the IRS.

  • Receipts: Save every receipt for business expenses you incur. They prove the item or service you paid for, the vendor and the cost. Receipts can help the IRS verify that a claimed business expense is legitimate.

  • Home office documentation: If you perform your work from home, you may be able to deduct a portion of your living costs (including mortgage or rent and utility bills), based on the proportional area of your home that is used as a home office. Make sure to keep track of your home costs and know the square footage of both your home office and your entire home.

  • Mileage log: If you use your vehicle to pick up fares or meet clients, you can deduct car expenses and mileage. Keep track of car maintenance costs and business mileage throughout the year — these costs must be separated from personal use of your vehicle.

  • Form 1040-ES: these forms are used to pay your estimated taxes throughout the year, on a quarterly basis. This helps you keep up with your tax obligations and avoid steep tax bills and penalties when you file your tax return. Make sure to set aside a portion of any income you earn to make these payments.

“When starting a gig job it’s important to keep personal and ‘business’ expenses separate. Doing so will be extremely helpful come tax time and will allow you to much more easily determine what expenses you can write off on taxes and decrease your tax liability,” said Feutz.

Here are some tax tips for rideshare drivers

Establish a business entity (if it makes sense)

In many cases, you can continue to work as a freelancer or gig worker without establishing a business entity. But creating a limited liability company can help protect your personal finances and assets.

Essentially, operating as a gig worker with no business structure in place means that your business is an extension of you. If you get into any legal or financial trouble (such as getting sued by a client), your personal property is at risk, including your car, home, investments and more. For example, if you run up too many business debts and you get in financial hot water, debt collectors could come after your personal assets.

LLCs offer a layer of protection between your personal assets and your business, and they are fairly simple and inexpensive to set up and maintain. If you’re concerned about personal liability, you should consider setting one up.

Get insurance

Health insurance should be a priority for anyone joining the gig economy, as an uncovered medical expense is a huge financial burden. If you’re still employed somewhere that offers health coverage, then you can stay on that insurance plan. But gig workers without a full-time employer can get health coverage in other ways:

  • Federal programs: Gig workers over 65 can get Medicare. You may be able to receive Medicaid or insurance through if you qualify using your income and other factors.

  • Parents or spouse: If you are under 26, you can stay on a parent’s plan. If you are married, you can get on your spouse’s insurance plan as a dependent.

  • Private high deductible plans: You can get affordable coverage if you are a healthy adult with a private plan. If you go this route, you may also want to open a health savings account which helps cover out-of-pocket expenses.

Gig workers need life insurance coverage to protect their dependents in the case of their death. Even if your gig work is a side hustle, a life insurance plan can cover the loss of that income if something happens to you. Here are some tips for getting life insurance coverage as a gig worker.

Plan for the future

Saving for future goals can be difficult when you’re just starting out. But if you can, you should include future financial goals like establishing an emergency fund and saving for retirement as line items in your budget. Emergency funds can help you survive lean times, and retirement planning is crucial for your future financial independence.

There are advantages and drawbacks for every retirement plan, but here are some of the best options.

  • Roth individual retirement accounts allow you to contribute $6,000 a year after taxes (or $7,000 if you’re over 50). Eligible withdrawals and earnings are tax free in retirement.

  • Traditional IRAs allow you to contribute $6,000 a year (or $7,000 if you’re over 50). You will have to pay taxes on your earnings when you withdraw them, but your contributions are fully tax deductible if you aren’t covered by an employer retirement plan.

  • SIMPLE IRAs allow self-employed individuals to save for retirement provided they don’t participate in any other retirement savings plans. You can contribute up to $13,500 (or $16,500 if you’re over 50).

  • SEP IRAs allow you to contribute up to $57,000 per year, and your contributions are tax deductible. If you hire other employees, however, you’d be required to match their contributions to the plan.

  • Self-employed individuals can even open a solo 401(k) and contribute up to $19,500 (or $26,000 if you’re over 50), but contribution limits are a bit more complicated if you also have a traditional employer 401(k) - check out the IRS guidelines here.

“Depending on the type of business and your goals you could set up a self-employed retirement account like an Individual 401(k) or a SIMPLE IRA. Contributing to one of these accounts could help you save on taxes as well as help you save for retirement,” said Feutz. It’s also important to save for short-term goals like growing your business, a down payment on a home or a car purchase as well, he said. A high yield savings account can help with short term goal planning.

Recommended reading

Here’s how freelancers can budget for unpredictable cash flow issues.

Gig workers have to file tax returns just like everyone else. Here’s a deeper dive on the documents you need.

Gig workers have plenty of options for health insurance, and we explain them all in depth here.

Here’s how to create your own benefits package, including retirement and insurance.

Image: 10'000 Hours (Getty)