It is 2020 and the gig economy is a hot topic. People are questioning whether the freedom of not being employed full-time is an advantage to gig workers who crave work-life balance, or whether they are being taken advantage of by companies that want to avoid paying consistent wages and employee benefits.
In this article, we are going to discuss when gig-workers, aka freelancers, should worry that their status as a contractor has become financially disadvantageous.
We will also discuss how they can reverse this disadvantage and create financial security without going back to being employed by someone else.
Financial Services Freelancers and Small Businesses Need Right Now
- Gig-Workers Versus Full-Time Employees
- Creating Your Financial Strategy As A Freelancer
- 6 Financial Services for Freelancers & Small Businesses
- Shopping for Financial Services
- After Choosing Financial Services
Gig-Workers Versus Full-Time Employees
The first step in the process of determining what financial services you need is to assess your status as a worker.
Indicators to look for when determining if your freelance work is actually a full-time job and what benefits to expect from it are:
1. Earning most, if not all, your income from one source.
2. The amount of time you spend on your freelance work or gig.
For example, if you spend more than 30 hours per week on your gig, it may be wrong to consider yourself a freelancer.
3. Your personal goals.
Do you want your benefits to be provided by an employer or do you want to maintain control over them? Why or why not?
This will differ for individuals from different parts of the world, but to provide some perspective, where I’m from in the United States, lawmakers have long since created policies to prevent companies from treating full-time employees as contractors. The reason is because in many cases, companies do it to avoid employer liability including taxes.
Still, the gig economy is becoming more prevalent with businesses like Uber and GrubHub, which almost exclusively use contract labor to deliver services, taking what seems to be a fixed seat in our markets.
As a reaction, lawmakers continue to update these policies and, in many states, have even placed restrictions on what kind of work can legally be treated as freelance or contract work.
With all of this said, the information I’m sharing are intended for individuals that do not wish to be treated as employees.
If most of your income comes from contract work, you will need to put together a financial strategy for yourself. If not, you will miss out on important opportunities to save and invest your hard-earned income, as well as secure your financial future.
Creating Your Financial Strategy As A Freelancer
Before continuing, I need to share two important points with you.
First, because I am in the United States, I will be talking about financial services that are available in the United States. I’m aware that as a reader, you might be located anywhere in the world. Even if you’re located in the US as well, your needs may differ from mine depending on what state you’re in.
This is to say that everyone’s situation is different. Don’t take the information I’m sharing as inflexible, but allow it to provide you with ideas on how you can apply similar strategies to your own.
Second, I want to be pretty straight up and tell you that if most or all of your income comes from gig or freelance work, and that if you are responsible for selecting and purchasing the kinds of financial services that we’re about to discuss, you’re not really a gig-worker or a freelancer.
That’s right, the first step to getting yourself together is seeing your situation for what it is: Self-employment.
We’re not going to get into all what self-employment means or how to properly set yourself up as a small business–it’s a completely different subject that can get pretty complex and needs to be addressed separately.
The point is, if you’re having to buy these financial services, you’ll need to set your business up properly first and then you’ll be able to get your financial services in place.
Try not to feel overwhelmed by this. Yes, it’s a big deal but you don’t have to stress or rush. When you are a freelancer, it takes time to get organized properly and set yourself up for long-term success.
In my case, I had been freelancing for two years before properly setting up my business. Then another two years passed before I purchased the bulk of my financial services. As my needs continue to evolve, so does the need to continually adjust.
Basically, this is not something that can be done overnight, so be patient.
There are a few key elements that you’ll consider in your financial strategy and the services you select. These are:
- Retirement & Savings
Understanding how your income is taxed is going to be the foundation of your financial strategy. Paying taxes is an obligation that should never be neglected since unpaid taxes can accrue interest and cause you to be penalized financially or with jail time.
How you are taxed in many countries is also significantly affected by how you choose to save for retirement, save for healthcare, and pay for healthcare expenses, so again having some knowledge of tax law is necessary for your financial success.
This brings me to my list of recommended financial services that the self-employed need to look at–with the first being the support of a decent accountant, preferably a CPA (Certified Public Accountant).
6 Financial Services for Freelancers & Small Businesses
1. Accounting Services
If you can run your own business and figure out every aspect of your own accounting, you are an amazing person. I’m serious.
After freelancing for a while and then starting my sole proprietorship, the first year I found myself faced with having to file a tax return for a small business I knew I was in over my head. I promptly hired a CPA to prepare my taxes and then help me plan my tax strategy for the following year.
This service cost me about $400 USD and without exaggeration, it saved me over $5,000 USD immediately.
CPA’s charges will vary depending on the quality of their work and your income. They will advise you on the best strategies for managing your resources which will allow you to save more, invest more in yourself and your small business, and avoid getting into trouble with the Internal Revenue Service or whatever agency is responsible for collecting taxes in your country.
They take on some liability for auditing your books (but not all) and can provide additional services such as bookkeeping and payroll as well.
2. Accounting Software
Accounting software can be used in conjunction with the services of a qualified accountant or on their own if you’re able to DIY your accounting.
There are many software options to choose from that include applications to manage budgeting, bookkeeping, payroll, taxes, your P&L, invoicing, etc.
Examples for softwares that we use are mainly Excel and Paypal for invoicing and budgeting. You can find more examples for accounting softwares in this list.
3. Bookkeeping Services
For a lower cost, you may choose to outsource your accounting to an administrative professional or service that is not a CPA but is certified in certain accounting software or otherwise qualified in financial record keeping.
These services may also offer tax preparation and payroll but are usually not liable for mistakes and typically are not qualified to give out financial advice. Learn more about bookkeeping for freelancers here.
4. Payroll Services
Even though payroll services are offered by financial service providers, payroll is considered a function of HR. You can outsource your payroll to an accounting-specific firm or to an HR ASO (Administrative Services Organization).
An ASO will typically offer additional services, such as business tax statement preparation and employer and employee tax payments.
They also tend to partner with other financial service providers that you might be interested in, like health and life insurance companies or retirement plan service providers.
There are also some companies that exclusively handle payroll and provide a very basic service. Which service you ultimately choose will depend on your needs and budget.
It may sound like overkill if you are just working for yourself or have a very small team, but I promise you that even if it costs $100-$200 per month, it’s worth the time it gives back to you and allows you to focus on your actual revenue-generating business.
5. Retirement Services
These include account administrators of 401K, Roth IRA, and other long-term saving plans which allow you to save for retirement while earning compound-interest on your savings.
These programs are a must whether you work for a large organization or for yourself, and especially if you work for yourself, since the contributions you make to your plan as an individual and through your business will lower your tax liability on multiple levels.
6. Healthcare Services
These include healthcare insurance plan services and HSA’s or Healthcare Savings Plan services.
These are meant to allow you to plan your healthcare expenses as much as humanly possible, to avoid financial strain which can be caused by unexpected health events, as well as plan out preventative care and take advantage of additional tax savings.
Shopping for Financial Services
We’ve just gone over quite a bit. As mentioned before, you need to be OK with taking your time to understand these services enough to make good decisions about which ones you’ll choose.
It will take a little while to get through all of this since you have other things on your plate to handle on top of setting up your financial strategy the right way.
Shopping around for your financial products and services isn’t much different than shopping for anything else. First and foremost, referrals and internet research are your friend.
Ask people you know and trust which services they use. Read reviews of the services you’re interested in online, and research the features and benefits thoroughly so you’ll have an idea of which ones are the best fit for you.
Knowing what you want and need before you even start speaking with agents that will try to sell you on their products is important in that it will help you save time and prevent you from buying services that are not a fit for you.
Key points to consider while shopping:
1. Take note of the sales process.
If the financial services representative is more interested in selling you than finding out about your business, they probably will not provide the best service once you sign up.
I love saving money, but I have found this is not an area to be cheap in. Quality services do cost a bit more but knowing I’ve hired someone capable, that is less likely to make careless mistakes with my money, gives me a lot of peace.
You will have to make some effort in setting up your services, but it should not be much beyond providing documents and information. If getting set up is clunky and your financial service provider can’t provide enough support or advice to make it easy, you need to look elsewhere.
After Choosing Financial Services
The final word from me on this subject is that getting set up right financially by purchasing the services we’ve discussed will cut into your cashflow quite a bit.
Sharing more of my own story, this is one of the reasons (besides the rest of the process that I’ve described above) that caused me to wait as long as I could before getting started.
During the beginning period of being setup properly, I constantly felt like I did not have as much as money as I had before. Sometimes I felt like I no longer had enough which was disappointing.
But when I looked at my finances about six months in, I saw my savings building, and knowing my taxes, unemployment insurance, social security, etc. were all being taken care of, I knew I was doing the right thing.
Also, not having as much cash has made me want to step up my game. I’m now doing a better job at budgeting, even planning meals, and I’ve stopped wasting so much money on a lot of frivolous nonsense. I have come up with ways to earn more money. And you know what? It feels good.
Choosing the right financial services has improved my situation all around and I’m starting to feel that I’m no longer “just a freelancer”–I’m becoming truly self-sufficient. Beyond getting the right gigs, it’s made what I do feel so much more rewarding.
How about you? Are you using these services for your finances, too? Are there other important financial services that I haven’t mentioned? Let me know in the comments.
Author: Rachel Marcelle