Wanna talk about taxes? C’mon, it’ll be fun, right?
Okay, not fun. But it is kind of necessary. Taxes are maybe the biggest pitfall you can run into as a delivery driver. If not done, and if not done right, you can get into a lot of trouble.
The purpose of this is to help you get an idea of how taxes are different for those of us who are self employed. When you deliver for Grubhub, Uber Eats, Doordash, Postmates, and a number of others, you are not an employee. You are operating as your own business. And when you file taxes you file as an individual AND as a business at the same time. If you aren’t ready for that, you can run into real problems come tax time.
As someone who has operated businesses both with employees and with contractors, who has operated my own business as a self employed independent contractor, and now as a full time delivery courier, I thought maybe I can try to explain some of the things I’ve learned over time to try to help you understand some of the things you need to know around your own taxes.
This is very important: I am NOT a tax professional.
This is not meant to be tax advice, it is not meant to help you do your taxes, and it is not meant to be an in depth description of the tax code. This is only meant to help understand some basics around how taxes are different for you as an independent contractor. There is no one size fits all information out there, just because taxes are complex enough and varied enough that there are so many situations and combinations, it’s not possible to cover everyone. Here’s the deal though, I strongly recommend you get a tax professional. And I don’t mean the guys setting desks up at the big box stores – most of those people have been trained to run the software and that’s about it. Get an accountant who can help you understand your own situation and help you plan specifically. It’s a lot of money to pay, but you will almost always find that you save more on your taxes than what you pay your accountant, so it’s worth it.
You are probably used to using a 1040 or 1040A or 1040EZ. It’s going to have the following things on it:
Your Tax Bill
What you Paid
What you Owe (or Get Back)
Income is what you made from your job, money from investments, self employment income like you and I, maybe rental income, basically any kind of money coming in.
Your deductions can be an itemized list of things like mortgage interest, some health care costs, donations… it can be a long list of items. OR you can choose the standard deduction, you get to choose how.
Then you subtract your deductions from your income and that’s where you get your taxable income. Your tax bill is based on your taxable income. How it’s figured is a bit complicated but not rocket science, but it’s not hard to google IRS Tax Table, find your income and what the tax is.
So now you know what your tax bill is, the total tax for the year. Next you figure out what’s already paid. There’s usually three things here: Tax withholdings through an employer, payments you made directly, and tax credits. If you get tax credits for tuition, or energy efficiency purchases, these all get added in here.
And then, you take your taxes, subtract your payments and credits, and the difference tells you whether you owe money or get a refund.
How are things different as an independent contractor?
So first off, unless you incorporated in certain ways, your taxes are going to be pretty much the same. You still use the 1040 or possibly 1040A – there may be rare cases where you use a 1040EZ
But there are some things that are very different. And these are the things you need to know about. There are three major differences you need to know about.
Number 1: No one is withholding money for you
If you’ve worked as an employee you’ve received a W2 at the end of the year telling you how much money was taken out.
If you look a paystub you usually see things like Federal Withholding, maybe state or local, you’ll see FICA and Medicare. All of these are taken out before you get your money, mainly so you don’t get yourself in trouble and spend it all before taxes are due.
You don’t get that as an independent contractor, part of the reason being that you don’t get money withheld. These companies are not required to do so because you are not an employee. You’ll want to do that yourself – we’ll get into that later.
Number Two: You report your earnings and your write offs differently
This is an area that actually often works in favor of the driver, especially if you tend to take the standard deduction. There are a lot of mistaken beliefs around this, a lot of people think you put your 1099 income in like you do a W2 in the income section. There are those who give out advice saying you cannot claim your business expenses if you take standard deduction. Those people are wrong. Very wrong. You absolutely CAN take your standard deduction AND claim your business expenses. That is because you report your income differently as an independent contractor.
What you do instead is you will fill out a schedule C to report both your income and your expenses. All of this is part of the INCOME part of your tax return. The schedule C is called a profit and loss form for your business.
There is an income section, and that is where you put all your 1099 information, as well as any other self employment income. If you drove for Uber Eats, they do their 1099’s kinda weird, so you may have to report ‘other income’ for some of your earnings from them.
Now, you are going to enter all your expenses on the expense portion of the schedule C. Your car expense, which is usually going to be the standard per mile. Your cell phone charges, maybe supplies like cell phone holders, delivery bags, your accounting fees, etc.
And then when you’ve put everything in, you add up your income on top, add up your expenses on the bottom, and your income minus expenses is your PROFIT, which you list at the bottom. And when it’s all said and done, it is your PROFIT that goes into your income section.
So the good news is you get to claim all your business expenses, as that’s all handled up here. And then you deal with whether using standard or itemized deductions on your personal stuff like you normally would. This will normally lower your taxes a fair bit.
You also have self employment tax
The third major tax difference when you are self employed is you have self employment tax along with your income tax.
This is the big one that gets a lot of people into trouble. A lot of people have never even heard of this tax – why do we have this extra tax??? See, it’s not actually an extra tax, just our version of Social Security (FICA) and Medicare tax. Remember those from pay stub days? Employees have 6.2% of wages taken out for Social Security, and 1.45% for Medicare. Let’s go back to difference #1 that nothing is withheld for us. So that means that when we file income tax, that’s when we also have to pay for those taxes. Our self employment tax is 15.3% of your Profits.
Now this is like one of those I have good news and I have bad news jokes… the good news from Difference #2 is that we pay on Profits, not on all money coming in. That’s good, but what’s the bad news? Notice that employees pay 6.2 + 1.45%? Why are we paying double?
See, your employer has to pay half of your social security and medicare taxes. This is why these gig companies don’t want you as employees, they don’t want to pay that. Guess who gets to pay that other half? Since you are your own employer, that’s you. Taht’s why it’s called self employment tax, we get to pay BOTH halves, equalling 15.3%
But wait, there’s more. No, we’re not talking about Ginsu knives here…
We’re used to income tax being based on taxable income – what’s left over after deductions. Well, self employment tax is like FICA and Medicare, which are charged on every. Single. Dollar. You. make. That 15.3% is on every single dollar of profit. So say you had $30,000 in profits, $30,000 of deductions and no income tax. You still end up owing 15.3% on the whole $30,000, or $4513. If you are full time, your self employment tax can be huge.
Now there is a little bit of good news here. New tax reforms have allowed self employed people to take deductions for up to a fifth of their self employment profits AND half of their self employment tax. And even better, you don’t have to itemize to claim these. This will help your INCOME tax, but doesn’t reduce the dreaded self employment tax.
What steps can you take?
Employees don’t usually get into much tax trouble because of how money is withheld from their checks, and when they do it’s more like hundreds as opposed to thousands. It’s the business owner, which includes you and I, who can get into real trouble. So how do we avoid that trouble?
Number 1: Understand your own situation.
You never knew when you got into this that you had to be a tax expert. You don’t – but you do need to find one. Seriously, get someone who understands self employment tax, and go over your personal situation. Is there other income from you or a spouse? Have them help you understand what you can expect as far as your own taxes. You need to understand this, whether it’s learning it yourself or getting help. I strongly recommend getting the help.
Number 2: Plan ahead and save.
As part of getting that help, get a feel for what your taxes will be at the end of the year. I know it’s impossible to say, but you have a good idea how much you plan to work. Take that amount and divide it into a weekly amount. Take money out every single week and set it aside before you can touch it for anything else. Treat it just like withholding – there’s a reason they do it. Set it aside, and once a quarter, pay estimated taxes. Get help if needed.
Number Three: Keep Immaculate Records.
Record everything you spend. Record every mile you drive. As part of your getting help, learn what things you can record. Remember that you pay taxes on your profits – if you are not recording your expenses, you are paying tax on money you don’t have to. Every dollar you do not record costs you 27 cents or more in taxes. Every mile you forget to record costs means you pay 16 cents or more in taxes than you have to. Keep excellent records.
Now this only scratches the surface… as I said it was never meant to be in depth. If nothing else, I hope you can take away how important taxes are as an independent contractor.
And for gosh sakes, get a tax pro – not a tax preparer – someone who understands how taxes work and can help you understand your own and help you stay out of trouble.
Here’s the deal: YOU are the boss. We love the flexibility and freedom, not having to answer to a micromanaging supervisor, but there are responsibilities. You are responsible for looking out for your employee, who happens to be you. Don’t get your employee in tax trouble. Take care of business when it comes to taking care of your business.
Now, go out and be the boss.