You've done it; you've finally joined the Gig Economy. Of the seemingly endless ways there are to earn a living these days, the Gig Economy is fast taking hold of our world, with people of all ages using side gigs to make an extra buck. Two of the more popular platforms for side-gigging are Uber and Lyft, ride-sharing services that allow you to decide when and how often you want to turn your car into a money-maker. If you've decided this is the path for you, we are here to not only wish you safe and prosperous travels, but also to provide you with a few tips on protecting your finances along the way. Here are some steps to take before you hit the road:
1. Check Your Insurances
Both Uber and Lyft offer insurance to their drivers. And while their coverage has expanded over time to protect drivers for more than just the time they have passengers in the car, there are two issues that can confront Uber or Lyft drivers regarding insurances. First, the coverage provided by these services may not be enough to protect you from your full level of risk. For example, ride-sharers' insurance might cover you from the time you accept a fare until the time the passenger exits, but may not cover damages while you drive around waiting for fares. If you find yourself in this situation, any extra coverage needs would have to be purchased through your personal car insurance policy. Thus, the second issue: certain auto policies specifically PROHIBIT their policy owners from using their vehicle for ride-sharing services. If you would like to be covered, you must alert them when applying for coverage that your car will be used for ride-sharing. If they offer coverage while driving Uber and Lyft, they will either add a rider to your current policy protecting you while working, or direct you to policies offered exclusivley to ride-sharers.
2. Make a Plan for Repairs and Maintenance
When purchasing any car, it's important to estimate the annual costs of repairs and upkeep so you can build them into your budget. For example, if you look at your past history and see that you typically spend $1,200 per year on things like new tires, oil changes and services, saving $100/month for repairs would make sure the money is there when needed. When using a car for ride-sharing, you're increasing the wear and tear, which will likely increase the cost of upkeep and shorten the length of time you can go before needing a new one. For these reasons, you should also increase the amount you've set aside to cover these costs. Whether you're using a car you've had for years or one you purchased specifically for ride-sharing, ask the dealer for your car's recommended service schedule so you can plan out the costs for maintenance based on the additional miles you're driving each year.
3. Separate Money for Taxes*
If you're a salaried employee, you may have never had to understand the difference between a W2 employee and a 1099 contractor. As a W2 employee, every so often your employer will ask you to fill out a Tax Form W4, which states your allowances so that your employer knows how much federal income tax to withhold from your paycheck. In addition to federal income tax, your employer withholds HALF of your Social Security and Medicare taxes (6.2% and 1.45% on the first $127,00 of income for 2017), while they pay the other half. When working under 1099 status, which is the case for Uber and Lyft drivers, you are not an employee but an independent contractor. This means you are responsible for estimating your tax bill and sending in payments to the IRS every quarter. It also means that there is no employer to cover half of the Social Security and Medicare taxes levied against your earnings, meaning you must pay the entire 12.4% and 2.9%! If you make a significant amount of money each month as a 1099 contractor, consider meeting with a tax professional who can help estimate an amount to save each month for taxes. If you're worried you'll lose track of how much to pay by keeping the money in your traditional savings or checking accounts, open up a new account specifically for taxes so you'll know 100% of the money is for quarterly payments.
4. Don't Forget Retirement
Some people drive Uber or Lyft to make ends meet, while others use it to save for a specific goal such as paying down debt or buying a home. And for some, maybe you in fact, driving for a ride-sharing service is more of a luxury than a true need. In 2017, Earnest published an article estimating that Lyft drivers make $377/month on average. Over 12 months that would be an additional $4,524, which I'm sure you could get used to seeing in your account! Even the most disciplined of savers will likely use a portion of those funds for entertainment and lifestyle needs; after all, we're only human! If you start to consider these monies a consistent part of your monthly income, you will likely want to include them when deciding how much to live off of in retirement. As a 1099 contractor, you won't have access to a company retirement account where you can save for retirement and possibly receive an employer match. Instead, you'll need to open individual accounts, such as an Individual Retirement Account (IRA), Simplified Employee Pension IRA (SEP IRA), or even a Solo 401(k). Meet with a tax professional and a financial advisor to walk through the steps of how much you're eligible to set aside each year, determine which type of account is appropriate, and start saving each month towards your goals. Even if you start small, these savings can accumulate over time and help provide a retirement income for you and your family.
*Representatives of Signator Investors, Inc. do not provide tax advice. Please consult your tax advisor for such guidance.