The first question anyone who is thinking of leaving their full-time job asks themselves is usually "How will I earn a living?" While taking part in the gig economy by working a series of short-term jobs or tasks can provide some workers with a higher salary than previously earned through full-time work, it's not a reliable income replacement for everyone.
Going into a gig with unrealistic expectations of your time investment or earning potential can lead to disappointing results. Read on to learn more about some of the personal financial opportunities the gig economy presents, as well as a few potential pitfalls you'll want to keep an eye out for.
What financial opportunities does the gig economy present?
Short-term or independent contractor positions can allow workers the flexibility to work on multiple jobs or projects at once. Many full-time employers require their employees to sign exclusivity or non-compete agreements, restricting their ability to seek outside employment, and those who put 40 hours a week or more into one job are unlikely to want to take on many other outside responsibilities in their limited free time.
In contrast, those working in the gig economy can put in as many hours as they need to achieve their financial goals–no more and no less. For some, this can mean taking on extra jobs to save for a specific purpose, like putting money into a vacation fund or paying for holiday gifts. For others, working a limited number of gigs may be a way to stay active in their career field without seeking out a 40-hour-per-week obligation.
What are some potential financial drawbacks of participating in the gig economy?
While this flexibility presents nearly boundless opportunities, there are some other financial considerations you'll need to take into account, often related to services that were quietly performed by your prior employers.
Tax issues
The U.S. Tax Code is complicated, and even those who regularly prepare and file their own taxes may find certain parts confusing. Unfortunately, those who transition from W2 to 1099 employment often find themselves struggling with tax issues.
A recent survey conducted by the National Association of the Self-Employed reported that a staggering 33 percent of respondents didn't realize they needed to file quarterly estimated tax payments on their self-employment income, while 40 percent of respondents confessed that they weren't setting aside money to pay this tax bill.
This lackadaisical approach to tax planning can have dire consequences. Failure to pay estimated taxes throughout the year can result in an underpayment penalty, and for those who aren't setting aside tax money, being hit with a giant tax bill on April 15 can be a quick path into high-interest debt. It's important to delve deeper into your required tax payment and recordkeeping requirements to ensure you don't end up in hot water with the IRS.
Budgeting Considerations
Most states have wage and hour laws that dictate the frequency with which employees must be paid, mandating weekly, biweekly, or bimonthly paychecks. However, these rules don't always apply to the self-employed, and you could find yourself being paid on an irregular or infrequent schedule.
Because of this, keeping a handle on your budget is crucial. Depending on your pay schedule, you may opt to pay all your monthly bills on the same day with the prior month's income or instead stagger your due dates to give yourself some breathing room.
