- The freelance workforce is growing.
- Freelancing provides workers with freedom and challenges.
- Gig workers may need help in handling financial matters.
The traditional career path of holding one full-time job for a long period is changing. You may find you have clients who are instead choosing to participate in what is now known as the “gig economy,” opting for more flexible freelance jobs, or “gigs,” and building their own client base through online platforms. Currently 57 million — or 36% of the current U.S. workforce — are in the gig economy.1
How many of your clients have made the move to earn part or all of their income from freelancing? Let’s look at some of the advantages and challenges your clients may face in becoming their own boss, human resources department, payroll, and benefits provider.
Most freelancers depend on more than one type of work, therefore their skill set may be diverse. For example, a freelance photographer may drive for Lyft between photo contracts. Independence from a single, full-time job can mean having several different income streams and work days that are varied. As a financial professional, you may want to encourage your clients to have their paychecks come from multiple sources to cover the loss of income from a client and keep their income consistent.
A freelancer’s time is their own. For many, this works well if they want to be able to care for families, work in different environments or from home, and set a schedule for times when they’re most productive (for example, night owls vs. morning people). However, if a client isn’t good at motivating themselves or disciplined enough to set their own schedule, freelancing may prove difficult. You may want to help clients keep this in mind as they consider the most appropriate gigs as well as their long-term career and financial goals.
Another upside to freelancing can be time dedicated to continuing education and building more skills. For example, a videographer may take courses in both filmmaking and editing so they can be a one-stop-shop for a client. Freelancers who build their skills have more options for more work and can even follow personal passions to do unrelated types of work. You might want to encourage clients to invest in training on topics that could further their earning potential. This training may even be tax deductible.2
One of the biggest challenges in the gig economy can be self-managing taxes. Even if your clients are just freelancing on the side and not earning a lot, it’s still important they keep records of income and expenses for the IRS. Making extra income is great for your client – and the IRS too – because it’s considered taxable income.3 Some platforms, like Etsy, will report income to the IRS, so your clients should report as well. Transamerica is not affiliated with Etsy.
With most freelancer platforms, users are considered self-employed. So, the IRS will require that they report earnings and file quarterly estimated income taxes. Taxpayers involved in the gig economy who are also employed at a full-time job can often avoid making estimated tax payments by having more tax withheld from their paychecks.2 If your clients want to learn even more, they can talk to a tax professional and head to the IRS Sharing Economy Tax Center.
Not every freelancer will have a steady stream of work. The gig economy lifestyle usually requires a lot of hustling for the next paycheck and self-marketing to build a solid client base. Of course, urging your clients to diversify their offerings may help bridge these inconsistencies. But the truth is, they may need to set aside some money to tide them over during “unplanned vacations” when no work comes in. Having an intentional tide-me-over fund is better than clients borrowing from their retirement investments, which can lead to potential tax penalties, and missed growth opportunities.
If clients are considering leaving positions with employer-sponsored health insurance, you may need to remind them that they will need to find and fund their own. A good place to start researching is the self-employed section of the Affordable Healthcare Act website. Some freelance platforms like Uber have collaborated with insurance marketplaces4 to sell their contract workers health insurance. Other freelance agencies may offer similar arrangements. Help your clients factor the cost of health insurance premiums into what they need to be earning in their freelance careers.
Encourage clients thinking about leaving full-time employment to do additional research or talk with others who are freelancing or involved with a platform they intend to use before joining it. They may also want to start slowly and ramp up as they feel more comfortable and find their unique gig personality — some enjoy juggling multiple jobs and roles while others may just want to do it part-time in addition to the security of a full-time job. For those who decide they’re ready to go it alone, you can help them pursue their professional goals and stay on track with their financial goals.
Things to Consider:
- Freelancers may want to have a “rainy day” fund to tide them over if work gets slow.
- They may need your help in putting aside money for taxes and retirement on their own.
- Empower them to find the best health insurance options and help them plan for the cost.
1 “57 Million U.S. Workers Are Part of The Gig Economy,” Forbes, August 2018
2 “Work-Related Education Expenses,” IRS, July 2019
3 “Self-Employed Individuals Tax Center,” IRS, July 2019
4 “Health Insurance Marketplace for Driving Rewards,” Uber, 2019