Ever thought about taking up a "side hustle" or part-time gig to earn extra cash? Digital platforms are making it easier than ever to land secondary sources of income. But before plunging in headfirst, investigate the hidden costs of your new money-making venture. It may sound good, but will the paycheck really make it worthwhile?
In 2016, 24 percent of Americans reported earning money from "gig work" on digital platforms – and that number continues to grow according to the Pew Research Center. Some Americans acquired jobs or tasks using a digital platform (Uber, Lyft, Rover). Others sold items online (eBay, Etsy) or rented out properties on the Internet (Airbnb, HomeAway). While the financial benefits of earning additional income through a side hustle are clear, there are definitely things to consider besides the paycheck!
The most obvious financial advantage of secondary employment is additional income, and for some people having a secondary source of income is a necessity. But for many people, venturing into a side hustle is a way to explore a hobby, learn a new skill, or even gain a foot in the door for a new career or job switch – all while simultaneously increasing their spending or savings potential.
In addition, side hustles are generally flexible employment options. For example, ridesharing drivers for Uber and Lyft are in control of the time of day they want to drive and the length of time they want to work. The flexibility most gigs offer is crucial if you already have an 8 to 5 job.
If you do have a full-time job, be sure to read the fine print in any employment contracts you’ve signed with the company. Some employers may not allow employees to have "outside" jobs.
The biggest factors to think about before becoming a side hustler is the time commitment involved and the additional stress you’ll be under. Calculate the amount of time you’ll need to devote to a side job to make a meaningful profit. According to Bankrate.com, the average monthly income for side hustlers is $686, but only about half of those surveyed make $200 or more per month. Is $200 worth jeopardizing your primary job, health, and relationships?
Depending on the type of gig you take, you may need to pay for liability protection. Ride-sharing (Uber and Lyft) and home-sharing (Airbnb and HomeAway) are two of the most well-known side hustles on the market. In most cases, additional auto or homeowner’s insurance – maybe even a different type of insurance – is necessary to ensure complete coverage. Once you begin using your personal car or home on a ride-sharing or home-sharing platform, you must inform your insurance company. If you don’t, your policy could be subject to cancellation. Often insurance companies will require additional insurance (at an additional premium cost) or a commercial policy (which also comes at a higher price tag). Ensuring that you aren’t only properly insured but are also able to afford the additional premium costs that come along with ride-sharing or home-sharing is extremely important!
You’ll also need to consider the impact a side hustle will have on your income taxes. For example, if you’re a dog walker for Rover (an online site providing house sitting, walking and boarding services for dogs) you’re not considered an employee of the company. Instead, you’re classified as an independent contractor. Why does that matter? When you’re an employee, the company withholds income tax, Social Security, and Medicare from every paycheck. This reduces the amount of taxes you’ll owe at tax time. When you’re an independent contractor, nothing is withheld from your paychecks. You’ll need to make estimated tax payments part of your routine if you expect to owe $1,000 or more in taxes for the year. If you fail to make estimated payments, you could be subject to an IRS penalty.
We now have the unique ability to leverage technology to enhance our financial freedom. Side hustles, if thoroughly thought through and researched, could be a great option for those looking for an additional income stream. Consider the time commitment, income tax implications, and potential increased liability that accompany a second gig. Calculate how much you are really netting from a side hustle and determine if that amount is worth your time and effort before jumping on an opportunity. This will not only relieve your stress but will set you up for success!
Abby VanDerHeyden, CFP, is a Financial Planner with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Abby.