13-05-2025
'Money illusion' explains why side hustles are actually making you poorer… and how you can earn more
More than half of Americans now have a side hustle alongside their nine-to-five job — but it might not actually be making them richer.
The rise of the side hustle has gone hand in hand with a real time drop in workers' earnings and years of high inflation, which has led to a cost of living crisis.
Sky-high house prices and mortgage rates, as well as spiking rents and grocery bills, has meant gig work is essential just to make ends meet for many Americans.
Last year the Federal Reserve found that 38 percent of gig workers couldn't cover a surprise $400 expense if they needed to.
And new research shows that for many, a side hustle is not helping to boost their financial position.
In some cases, their wallets are actually taking a hit.
One of the reasons for this is because of so-called 'money illusion.'
According to psychologists, this is when people treat money differently when it lands unpredictably — like from a side hustle — rather than from a steady paycheck.
The 'money illusion'
Net loss after gig work is partly due to the 'money illusion' that leads people to treat sporadic injections of cash as free change or money to play with.
'Irregular earnings tempt irregular spending,' researchers at KillerStartups noted.
By contrast, a regular paycheck can help workers to plan ahead by consistently divvying up their money into different pots.
This might include an account for spending on needs such as bills, one for wants, and another for an emergency savings stash.
It also helps that a regular paycheck can siphon off savings in to a 401(K) without the earner having to think about it.
Furthermore, tax for most employees is taken straight from their paycheck.
This means there is less risk of overspending and not having the cash to meet a large IRS bill.
Nominal versus real rate of return
Another reason side hustlers are not making as much money as they might think they are, experts say, is a failure to understand the difference between nominal and real earnings.
A recent study by MarketWatch found that a typical gig worker earns just $250 a month from their side hustle.
But this is not the take-home pay it may initially appear to be.
This is because the input costs of the side hustle can quickly eat in to the overall figure.
For example for ride-share drivers — which is a common side hustle — platform fees for companies such as Lyft and Uber can add up.
Other costs such as insurance, unpaid wait times and fuel, also reduce the real return on workers' time.
For other side hustles, such as reselling used items or art online, fees such listing charges, payment-processor percentages, and 'boost' fees to push products up a site's algorithm can all eat into profits.
Hidden tax traps
Tax on a side hustle can often come as a shock to gig workers.
Any side hustle net income over $400 will incur a 15.3 percent self-employment tax.
With state income taxes and the previously mentioned input costs, an extra $250 a month can dwindle quickly.
Tax experts have also warned that new rules for reporting side hustle and app-based income took effect this year and freelancers need to pay attention.
'A lot of people think that if it's a hobby, or it's part time or it's a side gig, then they don't owe money on that. Totally wrong,' tax expert Mark Steber previously told
The hidden math everyone ignores
There are three more factors to consider, even after working out the rate of return after costs, fees and tax.
Firstly, the opportunity cost of the time spent on the actual labor. In a lot of cases, spending this time up-skilling or gaining further educational qualifications to get a higher paid job could yield better financial results.
Secondly, assessing the financial gains against the risk. Experts argue that there should be a 'volatility premium' to gig work because it is sporadic and hard to predict.
This leaves the worker at risk of not being able to earn enough to meet their monthly bills or balance the costs they are putting in.
Lastly, many workers do not factor in the financial side effects of burnout.
As such, it is recommended that gig workers track any sick days, or extra expenses such as takeout meals because they were too tired to cook.
Americans working across many different industries are increasingly receiving some or all of their income via apps like Venmo or PayPal, which they have to report to the taxman
One side hustler's regret
KillerStartups analyst Nathaniel Foster detailed his own disastrous foray into making some extra income.
Foster said he started working as an Uber driver on the weekends to pay down student loan debt.
'The plan felt brilliant — until I penciled out the real return,' he wrote.
Factoring in the costs of fuel and car maintenance brought his hourly earnings rate down to $14.
Self-employment tax reduced the figure further, and then the real clincher came after a minor crash.
'A fender-bender, uninsured because my personal policy didn't cover commercial driving, swallowed three months of profit,' Foster lamented.
'By year's end, the loans had barely budged, while my Camry's shocks groaned like an old floorboard.'
