The gig economy is altering work cultures across the world, and India is expected to lead the way, with the total number of gig workers expected to rise to 23.5 million by 2029-30, according to a Niti Aayog.
The pandemic has played a huge role in this shift toward gig work, and according to Niti Aayog, the sector will witness global growth at a compound annual growth rate (CAGR) of 17% to become a US$450+ billion industry by 2024.
The gig economy takes a task-based approach to work, granting workers greater flexibility to design their own schedules, command premium rates for their specialised expertise and function independently akin to business owners or contractors.
However, just like any business, even gig workers are susceptible to a range of inherent risks, and those who participate in the gig economy should know that it can have a significant impact on their personal finances. Here’s what gig workers need to know:
Unlike conventional full-time employees who are on a company’s permanent payroll with a steady salary coming in every month, gig workers have fluctuating incomes. Their incomes can vary significantly depending on the volume and nature of work every month.
And while this very often does work in their favour as they can engage in short-term high-paying contracts, the unpredictability of monthly income poses challenges in budgeting. The variability creates a sense of financial uncertainty for gig workers, hindering their ability to plan for future expenses or save for long-term goals such as retirement.
Furthermore, the absence of a stable income stream may result in gig workers facing difficulties in paying bills on time, potentially necessitating reliance on credit cards or loans during leaner months. Overall, this can create a risk of financial instability and difficulty in meeting financial obligations.
Similarly, gig workers also do not have access to traditional employee benefits such as health insurance, paid time off, and retirement savings plans. They are typically responsible for making their own arrangements and this can result in significant financial risks for those who may not have access to affordable health insurance or retirement savings options.
For instance, without employer-sponsored health insurance, a gig worker may have to navigate the complexities of purchasing individual health insurance plans or may forgo insurance altogether due to the high costs involved.
This would not play out well in the event of illness or the need to take time off, the lack of paid time off can exacerbate financial strain, potentially hindering the worker's ability to find work and sustain their momentum in booking projects. For example, a major surgery without insurance coverage could significantly impact their savings and further compound the risk of financial instability.
Gig workers are typically classified as independent contractors or self-employed individuals. This has significant tax implications and legal responsibilities because the classification can carry both benefits and risks.
On the one hand, gig workers can claim a range of business-related expenses as deductions to reduce their taxable income and increase profitability. These expenses may include overheads such as electricity and internet connection bills, website costs, etc.
The volatility in income may often cause a serious hindrance to gig workers’ ability to borrow money from banks/financial institutions, as it is difficult for them to evaluate the steadiness of income along with other parameters. Hence, it’s essential that gig workers create steady cash flows and operate under a hybrid model of a few recurring projects on a retainer basis and a few one-time projects.
Savings, Emergency Funds
Gig workers may not have adequate capital to be able to manage health/financial emergencies. It’s also because most of the monthly earnings may be utilised for day-to-day expenses, and by the month’s end, there’s hardly any amount left to invest.
However, with the classification comes added responsibility for gig workers to maintain all relevant bills, and paperwork, and keep track of TDS certificates, among other tax-related tasks. This responsibility falls solely on the individual, making financial management more complex and potentially increasing the risk of errors or oversights.
As a result, gig workers must remain vigilant and stay informed about their tax obligations to avoid penalties and ensure their financial well-being in the gig economy.
Overall, while gig economy workers do stand to gain immensely from being independent contractors with greater control over their lives, personal finances do need careful management in order to mitigate risks and reap maximum benefits.
Gig workers also must be well versed with basic knowledge of enterprise risk management, so they are able to decide their risk appetite and also enhance preparedness for uncertainties - financial or non-financial.
Hersh Shah, CEO, Institute of Risk Management (IRM)-India Affiliate