How to manage credit and avoid debt as a gig worker

Do you know how to manage credit and avoid debt as a gig worker?

The gig economy can be autonomous and independent for workers, but it has economic issues. Most importantly, these consist of controlling credit and not falling into debt.

A gig worker does not receive a stable paycheck, employer-sponsored benefits, and withholdings like a regular employee. This means that they have to be thrifty with money.

This guide will teach you how to manage your credit and avoid debt as a gig worker.

Disclaimer: Always consult with your lawyer for proper legal advice for your individual situation.

Understanding credit and debt

Credit allows you to borrow with the expectation to repay, typically with a fee.

Credit is okay to utilize responsibly, but with irregularly paid gig workers, it's easy to fall back into using loans and credit cards because they're so readily available to cover gaps in paycheck money. This can lead to taking high-interest loans and losing financial security.

Understanding how to utilize credit and not fall into debt as a gig worker means being able to achieve financial security and independence.

Tax obligations for gig workers

Another important factor to keep in mind is that gig workers in America have a lot of tax liabilities.

First and foremost, gig workers themselves are paying taxes. Since their employer isn't taking taxes from their paycheck, it would be a great idea to be ahead and plan ahead to avoid being in arrears and incurring surprise penalties.

Here are some things gig workers have to take into account:

Self-employment tax

In the US, gig workers are classified as self-employed and therefore must pay a self-employment tax, which is for Social Security and Medicare. 

Self-employment tax is 15.3%, and this is divided into:

• 12.4% for Social Security, which covers old-age, survivors, and disability insurance.
• 2.9% for Medicare, which covers hospital insurance.

However, the actual rate can vary in terms of how much your salary is. Whizz would advise you to check with the IRS and see whether you are liable for an additional 0.9% in Medicare taxes, which can happen if your wage is above a certain threshold. 

Also, the IRS web page provides information about any available deductions. 

Quarterly estimated tax

Self-employed workers must submit quarterly estimated tax payments to the IRS throughout the year since taxes are not deducted from gig income. 

Payments are due in September, April, January, and June. Penalties and interest will be charged for failed estimated tax payments.

Tax deductions for independent contractors

One advantage to being independent is that you can write off business-related expenses, and these can slice into taxable income. Business-related expenses can include:

• Mileage and travel: You can deduct travel to and from work as business travel.
• Home office deductions: You can write off business expenses in case you have a dedicated home office room.
• Equipment and supplies: Cellphones, computers, and other equipment can be claimed.
• Health insurance premium: You may be able to deduct taxes if you pay your health insurance premiums yourself.
• Marketing and advertising: You can count marketing and advertising your gig work as a business expense.

Keeping accurate records is crucial for reporting income and outgoings to prevent any discrepancies in reporting to the IRS. 

Freelancers can use software, such as TurboTax and Manager, or professional help to optimize their deductions and meet IRS regulations.

Budgeting for irregular income

Now that we have covered the basics, let's get to the best part—learning to use credit and avoid debt.

One of the largest financial barriers to gig workers is getting used to incomes that can vary from week to week.

To be stable financially, you will need to have a budget with a fluctuation that it can handle. Calculating your average monthly income from previous incomes would be a fine place to begin.

Set aside basic expenses like rent, electricity, water, and food, and add a buffer fund with enough money to pay these bills for three to six months to stay afloat during lean times.

Budgeting and saving with a savings goal can provide a cushion and reduce borrowing.

Using credit wisely

Having access to credit can be very convenient, but, as a gig worker, you must use it in a smart way. Here are some tips to use credit responsibly:

• Pay off credit card balances in full each month to avoid being charged interest.
• Avoid maxing out credit cards since high utilization will hurt your credit score.
• Choose credit cards with low fees and rewards for cashback that suit your spending.
• Use credit for emergency and unavoidable use rather than for normal purchases.
• Monitor your credit score periodically to understand how you are progressing financially.

By following these steps, you are reducing your chances of falling into a big credit debt you’ll have trouble getting out of. 

Avoiding common debt traps

Many gig workers will use high-interest credit cards or loans when funds are low, but both have a tendency to lead to long-term debt issues. You need to look out for them, recognize them on time, and not fall for them.

Traps to avoid include:

• Payday loans: High-interest, short-term loans that trap consumers in a vicious cycle.
• “Buy now, pay later” schemes: Convenient, but likely to lead to consumers overspending and to unexpected charges.
• Minimum credit card payments: Paying minimum credit card payments will cost you a high-interest fee in the long run.
• Borrowing without a repayment plan: Borrowing a loan without a plan for repayment can easily lead to runaway debts.

Paying off debt strategically

If you do have a pre-existing debt, focus on paying that off efficiently. There are two most crucial strategies:

1. Snowball method: Eliminate the least important debts to create a sense of progress and encouragement.
2. Avalanche method: Prioritize reducing high-interest debt to end up with the most saved in the end.

Both tactics have pros and cons, so it’s best to think about your goals and priorities and decide which one would work for you better. 

Additionally, if you are experiencing difficulties with debts, you might ask lenders to accept lower rates or more reasonable payment schedules. Some lenders are more versatile than the others, and it doesn’t hurt to try.

Building long-term financial security

Beyond managing debts and credit, gig workers should worry about economic security in the future. 

Funds and tactics that can help achieve long-term financial security are:

• Retirement savings: Open a SEP IRA or a One Participant 401(k) to save for retirement.
• Health insurance: Explore alternatives via the Affordable Care Act (ACA) Marketplace or private insurance providers.
• Income diversification: Having multiple income sources can add more stability to your finances.
• Business entity setup: Some independent workers like having an LLC for liability protection and tax benefits.

It’s always better to plan ahead and make sure you don’t run out of savings. 

Related: How to build credit while working as a 1099 worker

Conclusion 

Managing credit and avoiding debt as a gig worker is a question of discipline, budgeting, and awareness of economic responsibility. 

By being responsible with credit, taking into account provisions for taxes, and securing economic security in the long term, gig workers can weather the fluctuations in uncertain income and achieve economic security.

Staying informed and being a go-getter will make gig work a successful and fulfilling career choice. 

By changing habits and being cautious with credits, it's possible for everyone to learn how to manage credit and avoid debt as a gig worker.

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