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?
Say you’re single. This is your only income. If you have a lot of miles, you may owe nothing. If you’re crushing it and delivering twelve hours a day, you could owe a bunch.
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.
Say you have a lot of other income. You have another job or business. If filing a joint return, your partner has a good income. All your deductions are swallowed up by that other income and you owe income tax on every dollar of profit.
Most of us are probably somewhere in the middle of these scenarios.
Everyone’s Self Employment Tax Situation is pretty much the same.
On the flip side, your self employment situation is pretty much the same as anyone else’s. Deductions and/or dependends really make no difference. You owe 15.3% on every dollar of profit.
Think about Social Security and Medicare – the FICA taxes on a paystub. Ever notice those are taken out of even the smallest paychecks? They’re charged on every dollar earned.
There are a couple of differences between that paycheck and independent contractor earnings. It’s a good news bad news scenario:
The good news is, your Medicare and Social Security are taxed only on your PROFIT. That means you pay based on what’s left after your expenses and whatever miles you drive for your business.
The bad news is this: As an independent contractor with Grubhub, Doordash, Uber Eats, Postmates or any other delivery gig company, you pay double what an employee pays. It’s 15.3% of EVERY. DOLLAR. OF. PROFIT.
You can learn more about how self employment tax works here. The one thing you have to understand is, it’s usually the self employment tax that kills contractors at tax time. This is the one you really need to prepare for.
My suggestion: Save money each week based on your profits for the week.
At the very least, save the 15.3% self employment tax. Your medicare and social security get taken out of your paycheck no matter what you owe. Since this is the one that gets people in trouble, definitely save this much.
For income, it depends on what other income is coming in. As mentioned above, a lot of things outside your business factor into the income tax.
You could owe nothing.
You could owe a ton.
Where I’m going with this is, you need to know how you stand with other income and your deductions.
If this is your primary income, chances are you don’t have to save as much (if any) for the income tax portion of your tax bill.
If you have a substantial income other than your delivery business earnings, every dollar of profit you make is likely to be taxed according to your tax bracket. What this means is that on top of the 15.3% you save for self employment tax, you may want to save an additional 10%, 15% or 20% of every dollar of profit.
In this article in the tax guide, we go into more detail on how your income tax is calculated.
Here’s what I do personally:
I do this process every week. Each week, after I’ve received all of my deposits from Uber Eats, Grubhub, and Doordash (and maybe one day again, Postmates, if they ever fix some things), I will do the following:
I do a quick calculation of my expenses.
You could add up EVERYTHING, but I don’t do that. I just base it on miles. In 2020 it’s 57.5¢. If I drove 1000 miles, my expenses were $575.
Next, I calculate my profit.
Subtract the expenses I just calculated from what I earned. In the example above that’s the $575. Say all my deposits from Grubhub, Uber Eats and Doordash for the month totaled $1,000, my profit is $425 – $1,000 minus $575.
Now, I calculate my taxes.
Remember, taxes are based on your profit, not total earnings. I choose to save 25% – I figure 10% to cover income taxes and 15% for self employment tax. So, with the examples above, that $425 of profit is $106.25
Finally, I save it (and eventually send it in each quarter)
I put the money into another account immediately where I can’t touch it with my checking account. Then, each quarter, I’ll send in what I’ve saved. You can learn more on quarterly payments at this article.
This is more or less you doing your own payroll deductions. Doing something similar will keep you out of trouble come April 15 (or whatever deadline there is for the year). Something I really encourage you to think about is, take it a step further. Think about this like giving yourself a paycheck.
Personally, I have all my payments deposited into a different account than my checking. I don’t consider it mine yet. Then, each week I go through the steps listed. I’ll also set aside money for car expenses and a paid time off fund. Only then do I transfer what’s left to checking – it’s my version of giving myself a paycheck.
Here’s a sample from a week of earnings:
This is my latest week: I made $799.38. I drove 387 miles.
The quick calculation of my expenses came out to $225.52 (387 x 57.5¢) That means my profits were $573.86.
I saved 25% of that for taxes, or $143.47.
Aren’t there more expenses than just miles?
I mentioned above that I do my calculation of expenses just on miles.
Yes, there are other expenses we have to pay. All of those expenses, like the cost of our cell phones, delivery bags, all that, also count. Your real profit involves all of those things.
You can learn more about the non-car expenses you can claim in this article from our tax guide.
You can absolutely figure those into your calculation if you want. The main reason I don’t do that is just that they don’t add up to much compared to my mileage deduction.
There’s not that much of an impact from all those other things. Because of that, I’m okay with the fact I’ll save a little more than I need to. That’s just a little bit of cushion, just in case. If I saved too much, it’s pretty much like giving myself a tax refund.
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. As I mentioned above, I’m okay with having that cushion.
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
A lot of people are going to be in good shape just saving the 15.3% for self employment tax. If you have other tax credits and dependents, you might not need even that much. If you have a lot of income other than your self employment earnings, maybe 30% is better for you.
Sending in Quarterly Payments.
Each quarter, I’ll send in everything I’ve saved. It’s that simple.
The reason that I put my savings in a separate account is, it’s harder for me to touch it and spend it elsewhere. The beauty of the quarterly payment is, now I can’t touch it at all.
Let’s be real: having that much money set aside, there are times it gets tempting to pull it out and use it somewhere.
Now the quarterly payment routine is intimidating. I go into more detail here about how it works. But the thing is, the IRS worksheet is complicated and can make your head spin. But here’s the thing: you’re not sending in the worksheet, only a form that says who you are and how much you’re sending in.
That said, here’s what I do:
Understand: THIS IS NOT ADVICE. This is my method. You may want to consult a tax professional to determine your own method.
I do the tax savings process I mention above.
Each Quarter for the first 3 quarters:
That’s April 15, June 15 and September 15 (I know, those aren’t all 3 months apart – that’s a weird IRS thing) I just send in everything that I’ve saved. I fill out a 1040-ES that just has my personal information and the amount I’m sending and mail that in with the check.
On January 15:
This is the last quarterly filing. I do a quick run of what I think my taxes will be. It won’t be precise because I won’t have all the documents in, but I can get a ballpark.
What does it look like the tax bill will be? What have I sent in so far (combination of my deposits, my wife’s withholding, and whatever tax credits we think we’ll get)?
- If I’ve sent in more than I think I’ll owe, I don’t send in a deposit for the quarter.
- If I’ve sent in less than I think I’ll owe, I’ll send in the difference. I should have at least enough saved to cover the difference if I’ve been saving as I should.
- If there’s anything left in my tax savings account after sending it in, I keep it there until I file my taxes. Once I know I won’t need it, I give that back to myself as my version of a tax refund.
Why don’t I just send the whole savings in on January 15?
Nothing says you can’t do that. On one hand that’s simpler than doing an early run on my taxes. If I sent in too much, I’ll get a refund. Nothing wrong with that, right?
Personally, I’d rather have the money at my own disposal. If I know I’m getting it back, it’s kinda like giving Uncle Sam a tax free loan. That’s just my preference.
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. You can always go by those, if you like to torture yourself.
One thing I love about Quickbooks Self Employed is that they’ll calculate it for you. (This is an affiliate link). I’m not 100% sure but I think they calculate based on the IRS worksheet.
It’s not really as important how you calculate it as it is that you save enough.
In the end, you’re always better off to over save than not save enough. The worst case scenario is that you get a refund. That’s better than scrambling in the end figuring out how you’re paying this massive tax bill.
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?