A side hustle can be a responsible way to boost your income if you’re having trouble making ends meet — or if you simply want some extra spending money in your pocket.
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But if you look at the big picture, you might find that not all side hustles are actually improving your financial life.
Before you agree to a side hustle, take a good hard look at what you’re giving up to earn that money. Here are some questions to help you determine whether your side gig is more costly than you thought.
How Much Do You Keep?
If you’re not familiar with gig work, the pay structure is quite different from what you earn at a salaried job.
As a gig worker, you’re usually classified as either an independent contractor or a small business owner. That can result in two of the tax traps below.
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Taxes aren’t usually withheld from your paycheck
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You’ll owe both the employer and the employee portions of the self-employment tax
Imagine, for example, that you earn $1,000 from freelance or gig work.
As a traditional employee, your employer would normally withhold taxes on your behalf, including your 7.65% portion of required Social Security and Medicare taxes. It would also pay the 7.65% employer portion of your Social Security and Medicare taxes, per the IRS.
But as a self-employed worker, you’re responsible for the full 15.3% self-employment tax yourself, per the IRS, which comes to $153.
On top of that, you’d be responsible for setting aside and paying your own income taxes. If you’re in the 12% tax bracket, that could add another $120 in taxes. In the 22% bracket, you’d be closer to $220.
The bottom line is that if you’re a gig worker earning $1,000 a month, you might realistically need to set aside between $270 and $375 for taxes. And that doesn’t even take into account any state taxes you might owe.
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What’s Your True Hourly Rate?
A gig that pays your $200 for four hours might seem like a good pickup. But if it takes you an hour to drive there and back, to do research, to buy supplies or otherwise spend your time, that four-hour job might turn into a seven- or eight-hour one instead.
That might drop your hourly rate to $25 — and that’s before subtracting taxes, fuel and any other expenses.
Depending on your financial situation, the work involved and your attitude towards it, that gig might still be worthwhile. But it’s important to factor in all of these variables so you can make an honest evaluation.
How Is It Affecting Your Quality of Life?
Taking on extra work in the form of a side gig can lead to burnout. In some cases, it can contribute to health-related issues as well.
If your side hustle leaves you exhausted and stressed-out, for example, it could impact your performance at your main job. Anything that puts your biggest and most reliable income source at risk is dangerous.
Working an extra gig could also eat into your time for personal and mental health. If you can no longer exercise or have time to relax, it can affect your long-term health and well-being.
Are You Missing Out on Better Opportunities?
Opportunity cost is what you give up when you choose one option over another.
Every hour you spend on your gig is an hour you can’t spend doing other things, like learning additional skills, finishing certifications, networking or making yourself available for better-paying jobs.
If you enjoy your gig, it pays well and there are no other job options available, then the side hustle may be absolutely worth it.
But sometimes, a side gig can be a trap. If you’re spending all of your time taking random gigs just to cover short-term bills, you may never get a chance to develop the skills that could actually improve your income over the long-term.
How To Evaluate a Side Gig
While most people work side hustles to earn extra money, that can’t be the only consideration. Below is a quick checklist you can use to evaluate a side gig.
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Does it impact your primary job in a negative way?
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Does it take time away from improving skills that can boost your long-term income?
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Is it impacting your mental and physical health?
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Is it damaging your relationship with your family?
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Is it worth it financially, after taking into account the extra taxes?
Extra work can absolutely help you build financial momentum. Just make sure it’s a bridge to a better life, not a hamster wheel that you can never get off.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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