KEY POINTS

Gig workers face financial risks spanning budgeting, cash flow, taxes, insurance, and more.
They face different obstacles than traditional workers related to housing, access to credit, and career trajectories.
Workplace protections, group benefits, and emergency savings can be lacking for many in the gig economy.

The gig economy can provide financial freedom, flexibility, and independence. However, it also comes with a myriad of financial risks.

Freelancers, independent contractors, consultants, and on-demand workers may have attractive income potential, but they often face these financial risks with little training or support.

We will explore 10 of the most prevalent risks. A thorough understanding of the risks should lead to making informed decisions while mitigating risks and building a more secure financial future.

The Gig Economy

Top 10 Financial Risks

1. Increased Financial Responsibility

Financial planning can be an overwhelming responsibility. It includes budgeting, marketing, insurance, personal taxes, accounting, and more.

Many of these responsibilities are ongoing and may require professional assistance. Such can be time-consuming and expensive.

Time spent developing a comprehensive strategic plan and budget will pay dividends over time.

As your gig evolves from a side hustle, you may need to learn how to raise capital to convert your gig into a real business.

2. Inconsistent Expenses

Not all expenses are consistent or predictable. Such can wreak havoc on a poorly conceived budget. This reality leads to a core principle all gig workers must understand,

Cash Flow ≠ Profitability

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Cash Flow ≠ Profitability 〰️

To be clear, the formula states that cash flow does NOT equal profitability.

Some expenses are incurred concurrently while the service is being provided (e.g., gasoline, paint, materials).

Other expenses occur infrequently over the lifespan of an asset. Such may include repairs and maintenance, software upgrades, marketing, cleaning, and more.

One-time expenses can be devastating to cash flows if not properly budgeted. Such may include the purchase of computers, machinery, or an automobile. The underlying depreciation of such assets can typically be estimated using a variety of free sources.

Ride sharing services provide a great example of these concepts.

Daily, cash flows are generated by earning fares and paying for gas. However, such cash flows do not equate to profitability. Profitability must also factor in the repairs, maintenance, and depreciation expenses generated by the daily services provided.

3. Competition and Pricing Pressure

The gig economy typically has low barriers to entry and is highly competitive with multiple workers vying to provide the same services.

It can be challenging to differentiate yourself against others in the marketplace. The promotion of a unique service offering, if applicable, may provide a competitive edge.

The laws of supply and demand dictate that increased supply (i.e., competition) will exert downward pressure of prices. Lower prices equal lower profitability.

4. Limited Upward Mobility

Many gig workers find it difficult to advance their careers or increase their earnings over time.

Traditional employment involves working for a company that often has a tiered organizational chart. For example, an accounting department may report to the CEO and include a CFO, controller, assistant controller, accounts receivable clerk, and data entry clerks.

Each one of these roles may have access to internal and external training that can be utilized to obtain promotions and the related financial benefits.

Gig workers are independent and must create their own career paths. This involves incurring costs for training and skills development. The financial impact of training is compounded as traditional workplaces may pay their employees while training whereas gig workers are not compensated for their time spent training.

The isolation of working independently may also result in reduced networking opportunities or professional connections that may lead to better job prospects or financial growth.

5. Lack of Steady Income

Gig workers often experience irregular and unpredictable income streams. Such can make budgeting very difficult.

The volume of work available can fluctuate, resulting in periods of high demand and periods of scarcity. The cost of advertising, if applicable, to generate new business leads may prove cost prohibitive.

A volatile income stream exacerbates the low level of job security relative to traditional employment. Gig workers are subject to changing market conditions and platform policies that are beyond their control.

6. Lack of Benefits

Unlike traditional workers, gig workers typically do not receive benefits. Such benefits may include health insurance, retirement plans, matching pension contributions, paid sick days, health and fitness allowances, and more.

These benefits can be life changing from both a financial and non-financial perspective.

Retirement plans often include access to financial advisors and matching contributions that accelerate an individual’s savings potential. Health insurance plans may include counsellors and therapists in addition to the medical and dental coverage provided.

The after-tax cost of procuring comparable benefits is often prohibitive for an individual.

7. Limited Workplace Protections

Overall financial security can be negatively impacted by a lack of traditional workplace protections.

Such may include health and safety policies, paid time off, paid sick leave, leave of absence, equal opportunity measures (anti-discrimination), family leave, physical security, cybersecurity, privacy, and more.

8. Taxes

Gig workers are responsible for remitting taxes. Such can be a time consuming and complex process. A professional advisor may prove essential, and costly, to ensure tax compliance is maintained.

Failure to maintain tax compliance can lead to substantial penalties and interest.

Taxes may include,

Income tax
Employee and employer portion of government program premiums (U.S.: Social Security and Medicare, Canada: Canada Pension Plan and Employment Insurance)
Sales taxes
Federal and state / provincial licensing requirements

Tax remittances must be throughout the year (typically quarterly) as opposed to a lump-sum when filing the annual tax return.

Business deductions may be permitted, but such will require maintaining detailed accounting records and supporting documentation (e.g., receipts, invoices, vouchers).

9. Limited Access to Financial Services

Traditional financial institutions may be less likely to provide services to gig workers due to their unconventional employment status and perceived higher risk profile. Such can impact decision-making related to housing, job opportunities, and more.

Mortgage and Rental Agreements

The additional obstacles involved in securing a mortgage or rental agreement could lead to accepting inferior accommodation options. Denial of home ownership also takes away a fundamental investment tool for building generational wealth.

Credit

Access to credit cards and car loans may also be restricted and hinder the individual’s ability to build a credit history. Credit cards can provide a key financial safety net during emergencies. The lack of credit can also lead to limited options for making large purchases or handling unexpected expenses.

These restraints may unduly influence major life decisions. For example, the inability to purchase a car may limit your job options due to the inability to commute to clients or provide ride sharing services.

Insurance

Insurance affordability may become elusive and deny access to coverage related to health insurance, liability insurance, and workers’ compensation.

The individual is left financially vulnerable due to the potential for accidents or injuries.

10. Inadequate Savings

Long-term and short-term savings can be at risk.

The unpredictable nature of gig work can make it difficult to build an emergency fund to protect against unexpected expenses or loss of work.

Retirement savings can also be put at risk without access to employer sponsored plans. Such plans often provide access to a financial advisor which can develop an investment plan aimed at reaching your short-term and long-term financial goals.

Employers may also offer matching contributions whereby they contribute to the employee’s account (e.g., employer contributes $2 for every $1 contributed by the employee).

Bottom Line

The gig economy can be a great way for individuals to utilize passive assets or offer their skills and services to the marketplace. However, the journey can be fraught with financial risks. Individuals can mitigate these risks by strategically planning at the onset and engaging professional advisors (e.g., tax accountant, investment advisor).