- 34 percent of the workforce is now doing independent, self-employed work—up from 6 percent 20 years ago.
- The majority of workers in the sharing (gig) economy are NOT taking advantage of all the saving and tax mitigation benefits they’re entitled to.
- A Solo 401(k)/Profit Sharing Plan can help many sharing economy workers save for retirement and reduce their taxable income.
REMINDER–Spring cleaning barbecue event on Saturday, June 4, from 10am to 2pm.
On a recent visit to Phoenix, I asked my Uber driver how he was doing. “Not so good,” he lamented. “I just ran TurboTax and I’m going to owe $5,000 on the $25,000 I made working outside my regular job for Uber.” He said he had to hire an accountant for the first time. I said, “Just hold on a second,” and I asked him a few simple questions about his finances. Within 10 minutes, we realized that he could eliminate all the tax he thought he owed, and he was thrilled.
Situations like my driver’s are becoming increasingly common. According to the 2015 1099 Economy Workforce Report, more than one third (34 percent) of today’s workers are doing outside work to supplement their regular jobs or are doing independent work full time. That’s a huge increase from 20 years ago when just 6 percent of the workforce was in the gig economy.
A lot of folks like my Uber driver are doing these extra gigs out there. They’re now considered self-employed and don’t realize how many benefits are available to them. For that $25,000 earned from outside work, he has to pay Social Security taxes, as well as federal and state taxes. So, I suggested a Solo 401(k)/Profit Sharing Plan. It’s perfect for folks who don’t have 401(k) plans at their full-time jobs. In the Uber driver’s case, he could put away $22,650 of the $25,000 he earned—that’s right, almost all of it! In fact, in his 25 percent tax bracket, that’s over $5,000 worth of tax savings. He happened to have $40,000 saved up for retirement on a taxable basis, so we just flipped the money over to a tax-deferred basis, which makes a huge difference. If my Uber driver does this at age 40, just one time, by age 60 he’ll have an extra $32,000, assuming a 6 percent rate of return. Again, that’s just on one year. If he does this exercise every year until age 60, he’ll have accumulated an extra $300,000 (assuming 6 percent return)!
If you or someone you know is part of the gig economy, make sure they’re taking advantage of all the tax and savings benefits they’re entitled to. Contact us anytime for advice on this area, or stop by our spring cleaning barbecue event on Saturday, June 4, from 10am to 2pm, and we’ll talk you through it. We’re also going to have a document shredding area, a place to donate used electronics, a live band and great food. We hope to see you there.
Until next time, enjoy. Gary
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