Attention contractors, gig workers, interns and anyone with a side hustle! If non-regular income is a regular part of you’re working life, here’s how to plan for bills, save for the future, and be ready when tax season rolls around.
Build an Emergency Fund
Experts recommend keeping three to six months worth of living expenses in an emergency savings account—and building this fund is even more important for people on an irregular income. An emergency fund ensures that if a gig ends unexpectedly or a contract goes AWOL, your critical expenses such as rent, food and vehicle payments are covered. An emergency fund also gives you the ability to hold out for a better earning side hustle, rather than accepting a not-great gig because you need to fill your coffers fast.
Set Aside Money for Taxes
This is a big one. Many gig workers and contractors operate as an independent business, which means money isn’t taken from your paycheck for taxes. It’s your job to set aside funds—25% to 30% is a good rule of thumb—so that when tax season rolls around, you can cover what you owe. If it gets to tax season and you’re unable to afford your tax bill, it’s important to still file! Not filing comes with it’s own penalty fine. So, file your taxes then head to irs.gov to see various options, including payment plans, delayed collection or penalty relief for those who qualify.
Budget Monthly
The core tenet of budgeting is: plan out your spending based on how much money you’re earning. But what if your income is irregular and you can’t predict earnings from one month to the next? It’s a good idea for everyone to evaluate finances each month and make a monthly budget accordingly; and this is even more true for people on an irregular income. Schedule in a monthly budget meeting with your family (or just yourself!), review recent income and upcoming expenses, and plan for the next four weeks accordingly.
Start an IRA to Save for Retirement
Any American can start an Individual Retirement Account (IRA) to save for the future, and holding one of these accounts is particularly important for gig workers who might not participate in an employer-sponsored retirement scheme, such as the 401(k). An IRA allows you to set aside money every year and let it grow in a tax-advantaged account. Savers can choose between a traditional IRA which offers tax advantages on current contributions, or a Roth IRA which offers tax advantages later on. If you’re not sure which account to choose, consider when you expect your income to be highest and take the tax break at that point.
Consider a Healthcare Savings Account (HSA)
As much contractors and side-hustlers don’t have employer-sponsored health insurance, it’s a smart idea to consider how you’ll cover medical expenses if and when they arise. One option is a tax-advantaged healthcare account, known as a Health Savings Account (HSA). An HSA offers dual tax benefits: money can be added the account tax-free, and withdrawals on funds to cover qualified medical expenses are also untaxed. In addition, interest earned on money while in the HSA isn’t taxable, either. Eligible expenses typically include prescription drugs, inpatient and outpatient care, medical equipment such as crutches, dental care, glasses, contact lens solution and care related to family planning. HSAs are typically offered through your health insurer.