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Financial Tips for Gig Economy Workers

Financial Tips for Gig Economy Workers

Christine Benz: Hi, I'm Christine Benz for More and more workers are employed in the gig economy. Joining me to share some financial tips for gig economy workers is Tim Steffen. He is director of Advanced Planning for Baird.

Tim, thank you so much for being here.

Tim Steffen: Thanks for having me.

Benz: Tim, let's talk about some of the decisions, the financial decisions, that confront gig economy workers. One of the basic ones is sort of how to classify yourself as a person working in the gig economy as a contractor. What are the options?

Steffen: Sure. Yeah. So, keep in mind, you are a business owner here. So, you got to figure out how you're going to structure your business. Most gig economy workers are going to be what we call a sole proprietor. This is where you are your own boss; you don't have any partners. You might have an employee or two, but you own the business yourself. So, it's sole proprietors, kind of, the generic term. Other forms, you might see there's something called a partnership. There, you got to have at least another owner of the business with you. You could take the step to incorporate yourself. And then, you've got the C corporation or S corporation options. But sole proprietor is where most of these gig economy workers are going to land.

The other thing that many of them consider is something called an LLC or a limited liability company. These are kind of unique structures. They are set up by states. Individual states have their own rules in how they are structured and how you set them up. But typically, very easy to do. They provide you a lot of the same benefits of being a sole proprietor from a tax standpoint, but with an added layer of liability protection, hence the name LLC. So, sole proprietor is kind of the base one that a lot of people choose. And if you are just starting out in the business, that's probably the way to go. If you are going to be in this for the longer haul, maybe looking at the LLC is probably the next way to go.

Benz: Okay. So, you say, a key thing once you've sort of decided how you're classifying yourself, another thing to think about is record-keeping, making sure you are keeping good records. Any tips to share there?

Steffen: Yeah. Again, this is a business, so it's got to--important to operate it as a business. Be careful to separate business expenses from personal expenses. Get a separate bank account, a separate credit card. Maybe even have a dedicated workspace in your house if you're going to do that. Try not to comingle your personal and your business stuff too much. Maybe even get a separate cell phone line or something like that for the business itself. And then, really keep track of what your expenses are. I've talked to some folks who are in this kind of gig economy world and it comes tax season, they are saying, right, "I really didn't keep any records. I'll just go back and recreate it." That's really hard to do. You might have all the receipts laying around, and you might have kept some logs here and there. But to recreate it after the fact is a big challenge. So, really keep good records of as you're going through the process. Maybe invest in something like a QuickBooks or some other software. Maybe even hire a bookkeeper. Maybe a sibling or a parent who is retired who wants to help out, they could keep track of that for you. It's really important to put the time in ahead of time rather than trying to recreate afterwards.

Benz: Okay. So, another thing that you say is really important to keep track of would be any automobile expenses. It's obviously going to be top of mind for Uber and Lyft drivers. But not just them, right?

Steffen: Yeah, exactly. I mean, if you are in the rideshare world, those entities do keep pretty good track of some of your miles that you're driving, especially when you've got riders in your car. But there may be more to it than just that. You might be doing other driving around where you maybe don't have a rider but it counts as a business expense. Or maybe you are not in the rideshare world at all. You've got a home-based business where you are going out to people's homes and you're doing the parties where you're selling food or candles or toys or whatever it might be. As you're driving out to those homes, that's all business miles. So, really automobile expenses are a big one and you really need to keep good record of those. The IRS is very particular about how you do that. They want to make sure that you've got a separate log that keeps track of your dates and your distances and why you were doing it and all that. So, really keep good records of that.

From a tax standpoint, it will make your life a lot easier. You can deduct all your actual expenses for the car, but they give you this a nice flat standard mileage rate which is really handy. For 2019, it's $0.58 a mile. Every business mile you drive, you can take a deduction for $0.58. So, that can add up pretty quickly and certainly simplify your record-keeping, too. So, just make sure you keep track of those miles. There's other expenses you can deduct on top of that, but the mileage is the big one for those drivers.

Benz: Okay. Other expenses--home office, I remember when I was taking this tax course at CFP Land, our instructor practically had us repeating that this is one of the biggest ways to get yourself into trouble on your tax return. What should people know about deducting their home office expense?

Steffen: So, everybody thinks they have a home office, but for tax purposes it's pretty specific rules. You got to have a dedicated area for that business. It can't be your kitchen, because your kitchen is not your dedicated business unless you are a chef, I suppose. But it's got to be an area that's dedicated to the business. It's also got to be the primary place where you are meeting with customers and operating the business itself. You're an Uber driver, for example, you're on the road--that's maybe more your office. But you might have an office at home where you are handling records and bookkeeping, some of that other kind of stuff. It's got to be dedicated. And then, if you can do that, if you can have that home office, it opens up the world to some other deductions you can claim. You can actually allocate some of your home costs to the business. Maybe some of your mortgage interest, some of your property taxes, your home insurance, your Internet coverage at home. Any of those other things that you could allocate to the business itself. So, if you can qualify with a home office, it can really open up a great world of deductions for you.

Benz: Okay. So, let's talk about some of the other tax issues, the self-employment tax, for example.

Steffen: Yeah. Most people who--or many people--who got into the gig economy used to work somewhere as an employee at some place. When you are an employee, you are subject to something called FICA tax, which is the 6.2% tax you pay to fund Social Security; you are also subject to a Medicare tax of about 1.5% or so. Your employer is also paying that same tax. So, while you are paying it, they are paying it in themselves. You get into this gig economy where you own the business, you are now the employee and the employer. So, you have to pay both those halves. And the other thing to keep in mind there is that while you are paying that tax, you're not subject to withholding, because there's no employer to withhold from. You got to get into the habit of making estimated payments perhaps. And you got to build not just the income tax but also this FICA and Medicare, this self-employment tax as we call it. You got to build that into your tax payments as well. So, as a gig employee you got a lot more things to be aware of that can increase your tax liability, things maybe you hadn't thought about.

The flip side of that is, under the new tax reform you maybe able to take advantage of something called qualified business income, which is a new deduction that's available for owners of pass-through businesses where you can actually exclude up to 20% of your income from the business from tax. Again, not everybody is going to qualify for that. Most lower-income businesses and mostly side businesses aren't going to be real high income. They are probably going to qualify for the deduction. But it's a nice advantage that these small business owners didn't have before. So, the taxman taketh, the taxman giveth a little bit too. You just got to understand so you don't miss out on those things.

Benz: And get some advice, it sounds like.

Steffen: Absolutely.

Benz: Okay. A couple of other things. Retirement plan contributions--don't forget about those, and don't forget about liability insurance. Let's talk about those things.

Steffen: Sure. If you're an employee, your employer has probably got a plan for you of some kind, maybe a 401(k) or a 403(b) or something like that. Again, now, you are the business owner; unless you set up a plan, you don't have anything. So, you got to go set up a retirement plan. A SEP IRA, that's the most common type that we see for these types of businesses. They are easy to set up; they are inexpensive to maintain; and you can put away 20% of your income basically into that plan and get a deduction for that. So, that's a nice tool. You can also still do a traditional IRA. Maybe you do a Roth IRA as well depending on which one makes sense. So, don't forget about putting some of that money aside for retirement. It's easy to enjoy the income you are getting from the business, but you got to set some of that aside for later as well.

And on the insurance side, you are again operating a business. You are opening yourselves up to exposure to customers. You've got employees perhaps on the road doing things. Some liability insurance probably wouldn't be a bad idea. Especially these rideshare economies, the Uber and the Lyft world. Your current auto insurance may not cover you if you are using your car in a business like that. So, check with your carrier and make sure you are covered. If not, add the additional coverage on there. It will be a well worth the expense.

Benz: Okay. And should I also think about an umbrella policy with my homeowners?

Steffen: Sure. Yeah. I mean, we always recommend umbrella policies in almost all cases. But especially if you are somebody who is operating a business where you are opening yourself up to even more liability. You're not a surgeon; you're not out there operating on people. So, you're not that kind of liability. But you've still got some added liability because you've got employees perhaps and who knows what they are doing, and you are just out on the road, perhaps more--anything can happen. So, a little bit of liability coverage never hurt.

Benz: Okay, Tim. Always great to get your perspective. Thank you so much.

Steffen: Thanks again.

Benz: Thanks for watching. I'm Christine Benz for

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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