Fortify your financial future: Essential tips for gig workers

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BOITUMELO NTSOKO: With rising unemployment and the increasing number of people working from home, gig workers have become an integral part of our workforce. However, without the safety net of permanent employment they can often face limited employee protection and benefits, making financial planning essential to their success.

To shed light on this crucial topic we are joined by Gareth Collier, who is a certified financial planner at Crue Invest. He will share valuable insights and practical tips for navigating the freelance and independent contractor world. Welcome, Gareth.

GARETH COLLIER: Thank you very much, Tumi.

BOITUMELO NTSOKO: Gareth, can you explain what the gig economy entails, and how it has been impacted by recent events?

GARETH COLLIER: Tumi, I think the first thing is to understand what that gig economy is. It really talks to the characteristic of being sort of work on demand, where work activities and demand are sort of matched online. I think a frequent misconception is that there’s a gig economy and also these freelancers, which is maybe a more traditional kind of [concept].

When you engage with work and you are a freelancer what’ll often happen is you will contract with someone in terms of doing a set amount of work for a period of time. That creates a bit of an employee-employer relationship for that period of time.

The difference with your gig economy is that invariably people are providing a service or work where it’s needed, as and when it is needed.

And they’re doing that via platforms, typically online, which are providing a space for people who need these activities fulfilled, and people who are willing to fulfil these activities. So typically it will be that, if somebody needs to get somewhere, they will use an e-hailing platform and a driver can come and collect them and take them where they need to go. Possibly you need some domestic work done at home for a particular day [and] there’s a platform that you can engage with on that.

This is expanding. We’re seeing services the likes of food and catering. People who are trained chefs can go onto certain platforms and, if you are having maybe a special dinner party at home or a big birthday celebration, that person can come in and maybe prepare a nice meal for the event. That would kind of fall under the spectrum of a gig economy where you’re not really going to have an explicit contract with that person. You’re paying them explicitly for the work that they’re there to do on the day that they’re there to do it.

If you look at how recent events have played out, and you take how these work-on-demand situations are taken, particularly in the last sort of 18 months, with rising interest rates, it’s putting pressure on people to manage budgets and costs.

A lot of the work that’s provided on these platforms is very sort of discretionary; people can choose to engage with it or not.

People might find that personal needs and cash flow restrictions may hem in what they are able to engage on [in terms of these] services, which obviously directs the people who work in that gig economy space to provide that work to [such] individuals.

BOITUMELO NTSOKO: For gig workers who are just starting out, what advice do you have for them in terms of choosing the right business entity?

GARETH COLLIER: Look, I think that talks to what we explained in the first question – that when you look to set up a business entity, if you’re going to start working as a gig worker, naturally you’re going to be somebody who is self-employed and therefore you and your business are pretty much indistinguishable because you’re just operating in your personal capacity.

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If that grows to a certain point where you can provide a slightly more formal service, or a more organised service possibly – let’s say you’re in the e-hailing space and you are growing from just you and your single vehicle to maybe being able to afford to employ a few people, providing additional vehicles and you are coordinating those rides – you may want to engage in something like a small business or a private business entity. But until that point it’s going to primarily lean more towards simply just the self-employed individual.

BOITUMELO NTSOKO: How important is it for gig workers to keep their personal and business finances separate?

GARETH COLLIER: I think whether you’re a gig worker or someone who’s a business owner, an entrepreneur, keeping those financial aspects separate is vital. We all may fall into the trap of possibly receiving revenue and not having a separation between what you need to hold back for business expenses or costs or fees that you need to pay over – taxes in particular – versus what you need in your personal and your family’s day-to-day life to provide a certain lifestyle.

So keeping those two [separate] is a vital first step right from day one when you get going.

BOITUMELO NTSOKO: And what steps should they take to maintain the separation?

GARETH COLLIER: Well, you can use very simple practical steps, so something as simple as setting up a separate bank account that all of your payments [received] will be going into.

Remember, when you are in that gig economy space what actually happens is that you are invoicing the end user, the client, directly. They are actually paying you, and part of that payment is then being used to pay a fee or commission or something like that to the platform. That’s where you see that the relationship is actually between yourself and the person that you’re engaging with, and the platform is merely facilitating that.

Because they are going to be paying you directly, you obviously have the ability to kind of set up a separate account that receives all of those payments, and then you can make sure that you understand what is available in my business – because you’ve got to view it as that – and what is available in my personal capacity.

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And of course you’ve got to make sure that there’s money in your business account, not just to pay the things you have to pay – the likes of fees and taxes – but again, if you are a driver your car may need maintenance or breakdown/emergency costs, that sort of thing. You want to make sure there’s some cash within that space to take care of those things.

BOITUMELO NTSOKO: What costs and overheads should gig workers consider when creating their financial plan?

GARETH COLLIER: I think we’ve spoken to a good number of those, primarily in terms of tax. We see this a lot of the time. People may not be aware or fully kind of guided in terms of what tax they’d be liable to pay – depending on what entity they they’re operating under. So [they should make sure] they’re aware of what those obligations are going to be.

Depending on the size of the business, you may need to engage with an accounting firm to help you with tax returns, like a tax practitioner. There are fees and costs involved there.

And then there are other more practical things – the bank charges, the simple costs.

Have a budget to make sure what it costs to run your business.

Again, if you’re driving vehicles, there are running costs, maintenance costs, depending on the level of service. If you are providing domestic work maybe you need to provide your own cleaning products. If you are in the kind of ‘cheffing’ space, obviously there’s a cost to providing the ingredients and the time and the other equipment that you’re going to need to provide for all of that.

So anything production-related to the line of work that you’re doing should be factored in when you’re drawing up your business and financial plan.

BOITUMELO NTSOKO: Gareth, you mentioned tax quite a few times. Could you maybe delve into that and tell us how it affects the gig worker’s tax affairs?

GARETH COLLIER: I think typically if you are operating just as an individual, all of that income and revenue is going to be taxed as pay as you earn, PAYE, less any of those costs that you [have incurred]. So, if we look at your tax situation, the way Sars would view you is that you and your business are one and the same.

You might keep separate bank accounts, but in terms of your tax affairs, Sars sees you as a single entity. That’s why it becomes so important to make sure that you are keeping proper records of all of the other costs that you’re incurring.

Because, remember, those things can be used as deductions in what they call the ‘production of income’ when you are doing your tax return.

If you don’t have proof of those, you’re going to have sort of a paper trail of revenue [but no] record of those expenses, and you might inadvertently overinflate your tax liability because of poor record keeping.

BOITUMELO NTSOKO: Managing multiple income streams can be complex for freelancers. What strategies can they employ to effectively handle this aspect of their financial lives?

GARETH COLLIER: I think we’ve touched on that. The most practical one would be separate bank accounts.

Maybe taking it a step further, I think what a lot of people have experienced in the past is that even the more traditional worker may be like a commission-based worker who is very similar to a gig worker where their income stream is not very stable. It can be quite lumpy; it can be up and down. So a good technique there is to kind of first look at what your living costs are going to be and start with that.

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So if you’re sitting with a certain amount of income in, say, your business bank account, try to have the discipline not to draw more than what you need to live on; in fact, like a self-imposed salary, just make sure you manage your cash flow month to month because you don’t want to have a month where you’ve been particularly busy and, because you don’t know what the next month holds, you land up overspending and then you haven’t provided for maybe a slightly leaner month. That tends to be a very, very good way to bring some stability to your personal income, where your business revenue can be a little bit up and down.

BOITUMELO NTSOKO: Just staying on the effects of fluctuating income, how can gig workers build emergency funds as a buffer against that?

GARETH COLLIER: Again, I think there are specific types of accounts you can use. In the banking space [there is] your typical money market account, or maybe even an access deposit, maybe with a seven-day-wait call period or something like that – just cash that you can have on hand that’s available for any kind of surprise emergency expenses. When you are holding money in that space, it’s not about sort of ‘if I did X, Y and Z, or if I invested that money here I could possibly make more’.

The value and the return that you get out of that is by not having to go into debt and [take on] credit to cover that emergency expense, rather than what else you could have done with that funding.

Basically, by being able to self-fund through those accessible more cash-based savings rather than investments, you put yourself in a position that if these things do arise you’re going to be able to cover them.

BOITUMELO NTSOKO: Gareth, what types of personal insurance policies should gig workers consider, and how can they ensure they are adequately covered?

GARETH COLLIER: This is a very challenging one, I think, because we referenced it earlier.

As there’s no real employer-employee relationship with a gig worker, it’s very difficult for an insurance company to objectively look at that as an occupation, because today you might be doing e-hailing, tomorrow you might be providing some sort of other domestic service or something like that.

So, when it comes to insurance, typically you would want to be able to cover your income. And if your income varies, if it is very difficult to determine what your occupation is, and what you do to generate that income, an insurer is going to find it difficult to insure you against that.

So that tends to rule out the likes of an income protection [account], which would be the ideal starting point.

However, what you could look at doing is providing what they call ‘impairment cover’. What that means is, rather than being an occupation-based insurance it looks more at your physical body.

Typically a lot of gig work [requires you] to be physically capable in a lot of instances, and if you were left in a position where you are physically disabled or impaired in a certain manner, there might be full or partial payment of a lump sum of cash that can kind of help protect against a future loss of earnings.

But unfortunately the ideal would be the ‘income protection’. So the real danger is that if you are unable to work on a temporary basis there’s no sort of easy solution to protect yourself against that at the moment.

BOITUMELO NTSOKO: And retirement planning can be challenging for gig workers without the benefits of a group retirement fund. What options do they have for saving towards retirement, and how can they make the most of their contributions?

GARETH COLLIER: I think [by] looking at your earnings. Obviously once you get into an earnings level where you’re actually paying tax your best option is to look at the personal retirement annuity. That’s obviously an investment vehicle that’s specifically designed for generating capital for retirement earnings one day, as well as those contributions being largely tax deductible.

But [with] those you’ve got to be balanced in your approach, because obviously the money you put into those investment accounts is inaccessible until retirement. We’ve kind of already looked at the challenges around the infrequency of income, and good and bad months in the gig space.

Having said that, if you do have the likes of a retirement annuity, using a unit trust platform is obviously ideal, purely because those investment accounts, should you need to stop your monthly contributions, don’t charge you any penalties or admin fees or anything like that for doing so.

If you need to kind of put it on hold and only pick it up again six months later, you can do that. Maybe you don’t return to the debit-order structure; you might actually only go to an ad hoc [situation]. As you generate some income and you’ve got an extra R5 000, you can just transfer that in at any point. So that flexibility becomes really, really valuable.

The other way to do it is, if you’re not sitting in a tax-paying space, the tax-free investment accounts also works really, really well. Those of course require quite a bit of self-discipline because you get the same sort of tax-free growth in that investment as you would in a retirement annuity; the flip side of it is that the contributions aren’t tax-deductible, but the money is always freely available. It is a discretionary investment.

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So you need to be quite self-disciplined in that, if you are investing there with the intention of using that money for long-term retirement one day, you don’t access it. But there’s always the safety net in that life doesn’t happen in a straight line, and if something very unforeseen happens and you simply don’t have the emergency funding in place, at very least we’ve got the backup to know that we can access that at any point if it becomes desperately needed.

BOITUMELO NTSOKO: Gareth, as we wrap up, are there any last words of advice you’d like to share with gig workers?

GARETH COLLIER: I think just be very aware of the terms and conditions on the platforms that you engage with. Obviously they can be wonderful, useful places to go and find work.

But just make sure that you take the time to read the terms and conditions, understand what it is that you’re going to be engaging with, and never be afraid to look for alternatives.

I think that’s probably the key.

One of the benefits of being in the gig working space is the freedom and the flexibility. Don’t get too stuck in ways of doing things just because that’s how you’ve done it before.

BOITUMELO NTSOKO: Thank you so much for joining us on this episode, Gareth.

GARETH COLLIER: It’s a pleasure. Always a pleasure to be here.

BOITUMELO NTSOKO: That was Gareth Collier, who is a certified financial planner at Crue Invest.

Listen to previous Money Rules podcasts here.