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How Does a Side Hustle Impact Your Unemployment and Social Security Benefits

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Side hustles have an impact on SSI and UIA benefits

2020 was a crazy year for most people and their money. Not only did many businesses and restaurants close for several months at a time, but millions of people also filed for unemployment for the first time in their lives (myself included).

It’s no wonder that during this time side hustles became more popular than ever.

With so many people out of work and looking for ways to make ends meet, Bankrate reported that nearly half of Americans now participate in some kind of side hustle.

But while side hustles can be a great way to bring in a little extra needed income, there are a few things that you’ll have to watch out for; especially when it comes to your unemployment and Social Security benefits.

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In this post, we’ll explore how both are affected and what you can do to stay on track with your retirement savings.

What Is a Side Hustle?

Do you know anyone who drives for Uber, grocery shops for Shipt or delivers food orders for Grubhub?

These are all side hustles. A side hustle is basically an extra job that you take on outside of your regular day job to supplement your full-time income.

I’ve personally been doing various side hustles over the past 10 years:

  • Freelance writing
  • Blogging
  • Writing ebooks
  • Website development
  • Etc.

One of my favorite things about them is that I can call the shots on when I work and what I do. I can work for one hour or twenty hours depending on what my schedule permits that week.

I can also pick which type of jobs I’d like to work on and pass on the ones that don’t seem like a good fit for me.

The other thing I really like about side hustles is that there’s a potential to make a lot more money than you might realize.

For instance, with some of my freelance writing projects, I can earn more per hour than I actually make at my day-time job.

This makes my talents feel valued and has even led me to consider if I should continue this activity as a potential second career when I retire early.

However, before you get involved with a side hustle, it’s important to know that there can be a few potential drawbacks.

In particular, your ability to qualify for unemployment as well as Social Security may be restricted. Here’s how each one of these areas gets affected.

How Do Side Hustles Affect Unemployment Benefits?

When I filed for unemployment, I noticed right away that several of the questions they ask in the application relate to whether or not you’re receiving income from any other sources.

Why do they need to know this? It’s because the money you’re making from your side hustles will count towards your eligibility to receive unemployment.

The government only wants to give benefits to those people who truly need them.

So, if you’re already making an adequate amount of money outside of the job you’ve been laid off from, then they might determine that you don’t need any government assistance.

In other words, they want to prevent people from double-dipping.

They don’t want those who are capable of working to milk the system and collect unemployment benefits while they’re also pulling a second income from another source.

And they’re very serious about it. As you’re filling out the application, it says very clearly that failure to report any additional income could be considered insurance fraud.

That means not only having to pay back those benefits plus fines, but it could also result in community service or jail time.

The good news is that depending on how much you make from your side hustle and when you get paid, it may not affect your unemployment benefits at all.

For instance, many states permit you to earn up to a certain percentage of your benefit through freelancing before it starts decreasing the amount you’re eligible to receive.

It’s also worth noting that if this additional income is related to a rental unit, then it won’t count (as long as this isn’t your primary source of income).

This is because rental income is classified by the IRS as passive income and treated differently from a tax perspective.

Side hustles affect social security and unemployment benefits

How Do Side Hustles Affect Your Social Security?

I know for a lot of people, the thought of retirement and collecting Social Security is a long way away.

However, if your retirement plan does include some light, part-time work, then you may be surprised to learn that you won’t receive as much from Social Security as you might be anticipating (at least temporarily).

How Much Are Benefits Reduced?

According to the way the program is designed, most people can start taking “early” Social Security benefits starting at age 62.

Or, they can wait until they reach “full retirement age” to collect a higher amount (which is between ages 66 and 67 depending on what year you were born).

If you start taking benefits at age 62 and also make money from a side hustle, then you can only earn up to $18,960 (as of 2021) before the program says your benefits will be reduced.

Beyond this amount, you’ll only be paid $1 for every $2 benefit that you’re entitled to.

Then, after the person reaches full retirement age, this reduction is eliminated. You’ll receive your full retirement benefit based on a recalculation of the money that was withheld.

Any money you earn from your side hustle will no longer make an impact on the payment amount.

Why This is Important

This is really important information to know because a lot of people take on side hustles and part-time jobs as they ease into retirement.

For both financial and mental health reasons, there can be a lot of benefits to working for as long as you’re capable.

While you will eventually get your full Social Security benefit in the future, it can make a big difference; especially if you were planning on this money as part of your retirement income.

For instance, using round numbers, if you were planning to receive $2,500 per month from Social Security but this figure has now been slashed to $1,500 per month, then that means you may have to rework your plan.

On a positive note, your 401k and IRA withdrawals do not affect your Social Security benefits.

Since you’ve already paid SSI and Medicare taxes back when you earned this income, it won’t count the same as earned income from a side hustle or part-time job.

How to Have Enough Money to Retire

Despite the potential drawbacks to unemployment and Social Security benefits, side hustles don’t scare me when it comes to retirement planning.

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In fact, I like to use them as much as possible to accelerate my savings rate and put as much into my nest egg as possible.

With that said, let’s go over the basics of what’s needed for a successful retirement strategy:

Step 1. Estimate Your Annual Living Expenses

Take a look at your budget and determine what it would take for you to live comfortably year after year in retirement.

If you don’t have a budget and don’t know where to start, most experts recommend using 80% of your current monthly income as a starting point.

Step 2. Calculate Your Nest Egg Target

Take the number you just came up with and divide it by 4 percent (0.04).

This figure comes from the 4 Percent Rule which says that you should be safe for at last 30 years making inflation-adjusted withdrawals from your portfolio every year based on 4 percent of your starting portfolio.

For example, let’s say you determined that you’ll need $60,000 per year to cover your living expenses in retirement. Using the 4 Percent Rule, this means you’d need to save $60,000 / 0.04 = $1.5 million in your nest egg.

Step 3. Figure Out How Much You Need to Save Per Year

With your target goal in mind, figure out how much you should be saving per year to stay on track. Use a calculator like this one to determine:

  • How many years you should save
  • How much you should contribute

Save your money efficiently by minimizing the amount of taxes that you’ll eventually owe on it.

Contribute to your workplace a 401k plan and Roth IRA so that a mixture of your savings will either be tax-deferred or tax-free.

Step 4. Include the Impact From Social Security

Remember that most Americans are entitled to some form of Social Security benefits starting around age 62. To know how much you can anticipate, use this online calculator from Social Security.

Even if you’re like me and plan on retiring long before age 62, these benefits can still make a pretty significant impact on your retirement plan.

In fact, they may even offset the amount of money you’ll need to withdraw from your nest egg, and that could mean not having to save as much as you previously thought.

Step 5. Determine If You Will Work or Not

If after all of that you’re still coming up short of meeting your retirement goals, you always have the option to supplement your income with side hustles and part-time income.

But this is also at the possibility that your Social Security benefits will be reduced.

At today’s rates, if you can keep your side hustle below around $1,500 per month, then it should not trigger the Social Security reduction.

However, if you need more than this, then you’ll have to do some number crunching to figure out what your overall income will be.

If you’re not already handy with spreadsheets, then you may want to work with a financial professional to make sure you get this part right.

The Bottom Line

There are lots of opportunities these days to make a little extra money through side hustles.

But if you’re going to get involved with one, then you need to know that it may have some impact on your unemployment and Social Security benefits.

With unemployment, if you make any extra money from a side hustle, then you legally have to report it to the IRS. Depending on how much it is and what your state laws are, it may reduce some of the benefits you’ll be entitled to receive.

When it comes to Social Security, if you start taking withdrawals before full retirement age, then your side hustle income may only make you eligible to receive $1 for every $2 of benefits you’re entitled to receive.

However, this reduction will only be temporary until you eventually reach the full age of retirement.

Regardless of these drawbacks, side hustles can be an incredibly useful way to accelerate your retirement savings.

The best thing you can do is work on your plan from an overall perspective and determine how side hustles may help or hinder your cause.

From my experience, if you’re saving often and building a lot of safety margin into your retirement plan, then you shouldn’t have to worry.

Taking up a side hustle will not only be one of the best things you can do to eventually reach financial freedom, but it will also be a great way to fill your free time doing something you enjoy.

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Written by DJ Whiteside

DJ writes about retirement and credit cards. He loves looking for new ways to optimize savings, build wealth, and sharing what he learns with others.

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