Have you noticed that some of your clients are foregoing full-time jobs with a traditional employer and are opting for a less structured, sometimes temporary work environment?
Freelancers and subcontractors are common examples of gig workers, and the types of work they perform can range from rideshare or delivery drivers to highly educated software engineers or graphic designers. Their office might be in a car, at the kitchen table, or both if they have multiple gigs. And they rely heavily on online platforms and apps for their income.
While those who work in the gig economy have the benefit of flexibility and calling their own shots, they need to weigh the trade-offs in comparison to a traditional career.
Here are some valuable conversation topics you can discuss with clients who are considering transitioning to gig work to help ensure it’s a wise decision, both professionally and financially.
Some in the gig economy may bring home more income than a comparable job with an employer, and since they typically have multiple clients, they may have multiple income streams. On the other hand, those streams of income may not be consistent, and certainly not guaranteed. Discussing a budgeting strategy in the absence of a steady paycheck is prudent.
While a little less formal, gig workers basically need to run their own business and to account for expenses such as upgraded technology and marketing their services. They’ll also need to set aside money to tide them over in the event work slows or an unplanned expense pops up, so discuss establishing an emergency fund. A major and potentially sensitive topic to explore is whether the individual is disciplined enough to create a strategic plan and then “show up” for work every day to follow through on that plan.
One of the most highly sought-after benefits of a traditional job is being able to participate in group health plans. Employer-sponsored health insurance might offer significant savings over funding one’s own health insurance. If a client’s health history warrants higher-than-normal premiums, it could present an even greater disparity.
If a client is considering quitting their job in favor of freelancing, encourage them to visit the healthcare.gov website which can show them available plans and estimated prices by simply answering a few questions. If they’re considering becoming a contract worker for a freelance agency, they should ask whether the company has contracted with an insurer to offer discounted rates.
Meticulous recordkeeping of income and expenses for tax purposes could make a freelancer feel like they need to be an accountant in addition to their chosen profession. Researching which types of expenses may be tax deductible is an important move, so encourage your client to do so and to meet with a tax professional to ensure they’re claiming all the deductions they’re entitled to.
Most gig workers are considered self-employed, meaning they need to file an annual income tax return with the IRS and make estimated quarterly payments on their own.1 Some online platforms that sell products may report income to the IRS as well.
One of the biggest benefits a gig worker might miss out on is participation in an employer-sponsored 401(k). The convenience and consistency of having a fixed percentage of their paycheck deposited into a retirement account every pay period will no longer be there. Likewise, any employer match of funds will be gone, too.
Advisors can offer value by recommending personal retirement strategies for self-employed clients. A solo 401(k) does have an advantage over an employer-sponsored plan in that the individual is both the employee and the employer. As the employee, a person can defer up to 100% of their earned income up to the annual contribution limit of $19,500 in 2021, or up to $26,000 if the employee is age 50 or over. As the employer, the same individual could contribute another 25% of compensation. What might that look like? With the addition of a catch-up contribution of $6,500 for those age 50 and over, someone who earns $50,000 could contribute up to $38,500 into the plan.2
Those in the gig economy likely need more guidance to develop and pursue their retirement goals. With the absence of a guaranteed stream of income or the ability to consistently fund a retirement plan, a discussion surrounding annuities might be appropriate. Income annuities, in particular, may help your clients build their own pensions and supplement their Social Security income in retirement.
The gig economy could complicate retirement planning for some individuals. To help them navigate the uncertainties, check out our Elevate Advanced Planning Resources.