As a delivery contractor with Grubhub, Postmates, Uber Eats, Doordash or any number of other independent contractor delivery gigs, you get this rude awakening that you are on your own with taxes. Maybe you just finished taxes for the previous year and you want to make sure you are okay for next year. Or you just started out and you want to make sure you don’t get into trouble.
How much should you save? Answering that question is a lot like answering the question “how much will I owe?” The answer to that depends on so many other things involved that it’s impossible to give you a good answer.
Everyone’s income tax situation is different.
There are so many variables related to income taxes that it’s impossible to say this is what you can expect. One would need to know all the variables. I really recommend you sit with a tax person to work out your own particular details.
Do you have other income? Are you filing a single or joint return? Do you have dependents? Are you withholding money from a job? Is that money enough to cover your taxes as a self employed person or are they not enough?
If you are single and this is your only income and your profits are less than about $16,000, chances are you won’t owe any INCOME tax (we’ll talk about self employment tax in a minute). Suppose you have a lot of deductions, or if you’re the only income on a joint return, you may owe little to nothing in income tax. If you have a lot of other income, or a spouse who has a good job, you could end up owing income tax on every dollar of profit. A lot of us are somewhere in between.
Everyone’s Self Employment Tax Situation is pretty much the same.
Deductions and dependents and other income really have no bearing on your self employment tax. It’s just like your Social Security/Medicare/FICA taxes on a paystub, it’s charged on every dollar. The difference being that as a contractor, it’s charged on every dollar of profit.
As an independent contractor with Grubhub, Doordash, Uber Eats, Postmates or any other delivery gig company, you owe self employment tax of 15.3% on EVERY. DOLLAR. OF. PROFIT. In other words, you pay that tax on every dollar that is left over after counting up your expenses.
My suggestion: Save money each week based on your profits for the week.
At the very least, save the 15.3% self employment tax. For income tax, you need to know how you stand with other income. If this is your primary income, you can probably save a smaller part for income tax. If this is income that is added to more substantial income, you might want to save 10 percent or more of your profits on top of your self employment tax.
Here’s what I do personally:
- Calculate my expenses. 58 cents per mile. Okay, 2020 is 57.5¢ – that half cent isn’t very consequential. If I drove 1000 miles, my expenses were $580.
- Calculate my profit. Subtract the expenses I just calculated from what I earned. If I drove 1000 miles and earned a thousand dollars, my profit is $420 ($1,000 minus $580).
- Calculate my taxes. I save 25% of that profit. In the examples above of $1,000 earnings and $580 expense and $420 profit, 25% of that profit is $105. I chose 25% because of 15% for Self Employment and 10% for income tax.
- Save it and file it. I put the money into another account immediately. I don’t leave it in my checking because it would be too tempting to spend it. With each quarterly payment date, I send in what I saved up.
Aren’t there more expenses than just miles?
There are. My experience is that all of the other expenses are miniscule compared to the miles. They really don’t make that much of an impact. I would rather calculate my profit a little higher than what it is and save based on that, as it leaves a little bit of a cushion for the final total.
Is 25% of profit the best number?
That all depends on your situation and your income taxes.
I chose 25% because of 15% self employment and 10% income. Looking at the last two years, 20% actually would have had me more than covered. I’m tempted to bring it down to that, but I like having the cushion, just in case.
If you want a more precise calculation of what taxes to save, check out Quickbooks Self-Employed. It tracks your mileage and expenses, all in a Schedule C format, and has a feature that calculates what to save for taxes.
Save up to 50% off QuickBooks Self-Employed. Track every deduction! Buy Now
I think a lot of people would be in good shape with 15% and only covering their self employment tax. They’ll have enough deductions that the income tax portion would be next to zero. However, people who have substantial income besides this might find that they need to be saving closer to 30%. It all depends on all of your other factors.
Sending in Quarterly Payments.
The first time I did a quarterly payment, I about freaked out over how complex the worksheet was. The IRS gives you a way you can calculate what you should send in, and personally, it made my head spin. But the thing is, you don’t turn in that worksheet. All you do is fill out a coupon with how much you are sending in.
THIS IS NOT ADVICE. This is only what I do. I honestly don’t know what anyone who works in that field would say about how I do it, but I find it works well for me and it’s easy. I would recommend you get with someone who knows what they’re doing before just following what I do.
That said, here’s what I do:
- Every week I save the money the way I mentioned above.
- On April 15, June 15, and September 15 (quarterly filing dates) I send in everything that I had saved up to that date with the coupon.
- At the beginning of January I do a rough run of my taxes. I don’t have all the documents in yet but I have enough of an idea what everything will be that I can get in the ballpark. I get a ballpark of where I think our taxes will be. How much do I think we’d owe based on those taxes and based on everything we’ve already paid in and all our credits, etc.? On January 15, I send THAT amount in (not all I’ve saved). If it looks like I’ve already sent everything in that I need to at that time, I don’t send any money in for the January payment. Any money left in the savings, I hang on to until taxes are filed, just in case, and at that point I treat it just like I would a refund.
Why don’t I just send the whole savings in on January 15 and just collect the refund?
You can do that. It’s not all that different because I’m hanging on to it anyway until I know for sure what the final tax bill will look like.
To me, I’d rather have that money at my disposal. The thing is here, you don’t want to be owing a lot of money. If you’ve already saved enough money early on that you don’t need to send in that last payment, my understanding is things will be fine. I’d rather keep the money where I can get a little bit of interest than give it to Uncle Sam only to get it right back.
This isn’t the only way to figure your tax savings.
There are probably a lot of better and more accurate methods. The IRS has their worksheets. A lot of book keeping programs like Quickbooks Self Employed will do a calculation for you. I’m not sure that any of the programs or methods do a great job of taking into account all the other factors.
In the end, you’re always better off to over save than not save enough. The worst case scenario, even if you send every penny that you saved in for that 4th quarter payment, is that you get a refund. If you haven’t saved enough, now you’re figuring out how to come up with the money and possibly looking at some fines and penalties.
Stay on top of tax savings from day one. You’ll make life a lot easier.
The Delivery Driver’s Tax Information Series
- Introduction to the Delivery Driver’s Tax Information Series
- Your Taxes are Based on your Profits, not Revenue
- Understanding your Revenue: Money In
- Understanding your Expenses: Money Out
- Filling Out Your Taxes
- Preparing for next year: How much should I save?