Income Volatility: Giving Savings a Lyft
It goes by many names--the gig economy, the share economy, the on-demand economy--but no matter what you call it, you can't deny the trend in contract and freelance work. A recent NPR/Marist poll found that 1 in 5 jobs in America are already held by contract workers, a number that is expected to increase to half of the workforce in the next decade.
There are many benefits to this type of flexible work, but with it a few challenges. A primary concern of gig workers has been income volatility, and the difficulties it presents is paying bills and saving consistently. And in response, innovative solutions are being introduced from the financial capability field to help these workers "smooth" their income.
We know many of you are involved in these programs or support savers with volatile income, so this partner packet makes it easy for you to encourage workers from all fields to save.
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3 steps for saving in the gig economy
By America Saves
4 ways to manage fluctuating income
By Philly Saves
Are you saving enough for taxes?
By America Saves
By Madeline Daniels, America Saves
You drop off a businesswoman at work with Uber. You give a young couple visiting New York City for the first time the perfect place to stay with Airbnb. You help an elderly neighbor install a new ceiling fan with Task Rabbit. And you deliver groceries to a couple with a new baby with Instacart. Or perhaps you work 10 to 20 hours a week for a start-up or other business.
You’re one of the growing shares of Americans earning a living in the gig economy. The humans that power these services rose to 16% in 2015 from 10 percent a decade earlier.
The gig economy offers workers flexibility and access to many employment opportunities. But without a predictable paycheck or employer-sponsored savings or health coverage, self-employed workers are less likely to save. In fact, a survey found that a majority of self-employed workers say they are behind in retirement savings and that most do not have a specific savings goal.
Preparing for your future, an emergency, or a goal such as purchasing a new home doesn’t need to be difficult, but you do need to make it a priority.
Those with a savings plan are twice as likely to save successfully. So take the pledge to start saving, and use these tips to get started.
Step 1: Save automatically
The easiest and most effective way to save is automatically. An advantage to the high-tech gig economy is that as a rule, most paychecks are directly deposited into the workers’ bank accounts. Ask the company you work with if you can split your paychecks into two different accounts – checking and savings. Or have your bank or credit union automatically transfer money into your savings each month. Not only are you more likely to put money in savings this way, you’re also less likely to spend it.
Step 2: Build an emergency fund
An emergency savings fund consists of a small amount of money, usually in a savings account, that you do not have easy access to. An emergency fund is especially important for workers without a steady paycheck because it will cover unexpected and unavoidable expenses like a period of unemployment or a repair to a car that’s needed to get to work. By having an emergency fund, you’ll be able to pay these types of expenses without getting into (more) debt.
Step 3: Open a retirement account
You do not need an employer-sponsored account to save for retirement and receive tax benefits. Your can open an Individual Retirement Account (or IRAs).
If you are age 49 or younger, you can contribute $5,500 each year to an IRA. The limit increases to $6,500 if you are age 50 or older. There are two main types of IRA – traditional IRAs and Roth IRAs. In addition, those who are self-employed can put money in a SEP-IRA. Each has its own set of rules and offers different tax benefits. This article breaks down the difference and can help you figure out which is best for you.
By Philly Saves
Does your income fluctuate? Sometimes that may mean more than usual, and other times it may mean less than usual. It can be frustrating, but it does not mean that your financial plans are not manageable! Here are some tips that will help you to manage your money when your income fluctuates.
1. Track your spending to find your monthly baseline. Calculate the monthly amount for your “have to pay” bills. The baseline expenses typically include housing, utilities and groceries, among other things that are necessary each month. Knowing the bare minimum needed will help you to create a manageable budget with a fluctuating income.
2. Know your average monthly income. Start with reviewing your income from the last two years. While your income will fluctuate from month to month, knowing the average will help you to avoid overspending or making large purchases that you cannot afford. Compare your monthly average income with your monthly baseline expenses. Is there a gap between your baseline and your income? If so, what budget cuts are you able to make close the gap?
3. Create an income-flux fund for any additional or unexpected income you may receive. For example, if your income is typically $1,000 per month, but you receive an additional $500 as a bonus or for overtime pay, place the extra cash into your income-flux fund. This money should be used to cover expenses when your income takes a dip or is less than usual. Your income-flux fund should be a separate account from your emergency savings fund.
4. Make prepayments to your bills whenever possible. This is a great way to manage your budget and expenses if you receive most of your income or additional income during specific times of the year. Paying a few months of rent or car payments in advance can make a huge difference during “slow seasons” when your income will decrease.
Overall, managing a fluctuating income requires planning. You certainly have to plan for the future and predict (as best as possible) when your income will increase or decrease. For example, take note and plan for the time of year you will receive a bonus or commission. If you are a contract employee plan and save for the months after your contract will expire. Look at the trends and ask your employer as well.
Your goal is to plan for the immediate future while working on a long-term savings goal. While it takes time and practice to find the best strategies and tools to manage your fluctuating income just know that it is POSSIBLE!
By Darlene Aderoju, America Saves
If you work as a contractor or freelancer, you’re a part of the gig economy, and you may be required to pay the IRS the self-employment tax.
Are you saving enough for taxes? Here are five things you should know about taxes and the gig economy:
1. You could be considered self-employed even if you don’t own a business
If you’re a business owner, then you are self-employed. But did you know that freelance and contract work is also considered self-employment? Even though you’re providing a service to someone else or a company, when you work as a freelancer or independent contractor you’re considered a self-employed worker by the Internal Revenue Service. This means during tax time, you’re held accountable for paying the taxes that your employee would usually pay on your behalf. >> Learn more about being self-employed
2. You might have a unique set of tax obligations
As a self-employed worker, you may be required to file an annual tax return and pay estimated tax quarterly. You may also be required to pay the self-employment (SE) tax. The SE tax pays for Social Security and Medicare. When you work for a traditional employer, your Social Security and Medicare taxes are automatically withheld from your paycheck. When you’re self-employed those taxes are not taken out of your initial pay, so you’re responsible to pay the IRS later.
3. You can calculate your self-employment taxes with IRS Schedule SE (Form-1040)
IRS Schedule SE (Form-1040) allows you to calculate the taxes owed on your net self-employment pay. When you complete the form, the Social Security Administration will use the information to determine your benefits through the social security program.
Once you determine the amount you owe the IRS in taxes, you can make quarterly payments called Estimated Tax, to avoid a large bill at the end of the year. Estimated Tax payments for the remainder of 2018 are due on June 15, September 15 and January 15, 2019. >> Access IRS Schedule SE (Form-1040)
4. You should save about 30 percent of your income for taxes
If you decide not to make estimated tax payments, it’s best to save about 25 to 30 percent of your self-employment income each time you get paid. This is to ensure that you if you get with a large tax bill at the end of the year, you’ll have enough money set aside to pay it off right away. Saving 25 to 30 percent of your taxes may seem overwhelming, but you’re lucky and you don’t owe taxes at the end of the year, you’ll have a stash of savings that you can put towards your savings goal.
5. You can take a 10-minute test to see if you’re subject to the self-employment tax
You can take a test provided by the IRS to see if your income is subject to self-employment tax. The information you’ll need is the type of self-employment income you’ve received and your net profit or loss from your self-employment income. The test has an estimated completion time of 10 minutes. >> Take the IRS self-employment test.
Share the following messages with your followers.
Are you a gig worker? Here are 5 key tax questions to ask if you’re self-employed >> http://bit.ly/2M5zdim #BetterMoneyHabits #SavingsTipTuesday
Gig worker? Ask your contracting employer if they can “split deposit” your pay into two separate accounts—savings and checking—so you can save instantly when you’re paid >> http://bit.ly/2ebD4Nz v/ @AmericaSaves #SavingsTipTuesday
DYK that you can set up "rules" to your automatic savings deposits for when your income fluctuates and you bring in less? Learn more >> http://bit.ly/2M6Rb43 v/ @thepennyhoarder #SavingsTipTuesday
No employer-sponsored retirement account? No problem! See the FAQs of IRAs (individual retirement accounts) here >> http://bit.ly/2ebD4Nz v/ AmericaSaves #SavingsFactFriday
Savers with a plan are over twice as likely to save successfully. It's that simple. Get started on your plan right now with @AmericaSaves >> http://bit.ly/2dFhJf9
Trying to decide between a Roth or traditional IRA? Start here >> http://bit.ly/2ebD4Nz v/ @AmericaSaves #gigeconomy #retirement
Here are 4 ways to save money each month, even if your income fluctuates >> http://bit.ly/2M6Rb43 v/ @thepennyhoarder
Don’t have a workplace savings account! Get your retirement fund started by saving up to $5,500 this year in an IRA (individual retirement account) >> http://bit.ly/2ebD4Nz
Self-employed? Check out these tax tips courtesy of the @IRS >> http://bit.ly/2I2ycoO #gigeconomyhttp://bit.ly/2I2ycoO
Income volatility goes beyond the #gigeconomy. Learn more v/ @MarketWatch >> https://on.mktw.net/2M5YIQu
From America Saves
- Save for Emergencies
- Save for Retirement
- Saving at Tax Time
- 3 steps for saving in the gig economy
- 4 Ways to Save Money With a Fluctuating Income
- 5 tips for turning your passion into a side gig
- How to Save or Work, and Minimize Student Loans. Yes, You Can Do It All.
- How to Start Planning for Retirement if You Haven't Already
- It's Time to 'Rethink Retirement'
- Social Security: Encourage Young Workers to Check Their Benefits
- Split Deposit: The Workplace Perk that Will Help Employees Build Wealth
- You work. Why not let the EITC work for you?
Resources and Research
- Sharing Economy Tax Center
- Free File: Do Your Federal Taxes for Free
- Free File Fillable Forms
- Free Tax Return Preparation for Qualifying Taxpayers
U.S. Bureau of Labor Statistics
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