Want to know one of the biggest mistakes that you can make as a business owner?
Thinking that the money you are paid for your work is your income.
It is a great way to get in trouble. You think you have all this money coming in, so you spend it. But the thing is, when you are running a business, THAT’S NOT YOUR MONEY TO SPEND. Not yet. Not if you’re taking good care of you.
Say you received $10,000 each from Postmates, Grubhub, Doordash and Uber Eats. You did not get $40,000 income. That’s $40,000 business revenue.
The money you have left after your expenses is your income. In other words, it’s your business profit that is your income.
Why this is important to understand.
This is especially important to know since this is part of the Delivery Driver’s Tax Information Series for Grubhub, Doordash, Uber Eats and Postmates delivery drivers. If you think of the money you received from each of those companies (and any other gig companies) as your income, you will pay too much in taxes. As in waaaaaay too much, especially if you drive very much to earn that money.
It’s also important to understand this because you do have expenses, and you will have taxes to pay. If you treat that as money to spend instead of treating it as business revenue, you won’t have money to pay your taxes. You won’t have money to fix your car when (not if but when) you need to fix it.
How do you determine your self employed income?
There’s a big misconception among a lot of contractors, that your expenses are tax deductions. They are not. They have nothing to do with any of the itemized deductions you take on your tax form.
Your expenses are….. expenses. They act like deductions in that they deduct from your earnings, but it’s done in a different way than deductions. Here’s the good news for a lot of people: It doesn’t matter if you itemize deductions or take a standard deduction. Your business expenses are actually handled as part of the income part of your taxes.
Is that a little confusing? It probably doesn’t seem logical but you’ll find it makes perfect sense.
Hello, Schedule C.
When you list your income on your taxes, if you are an employee you will enter your W-2 information. With all the numbers on your W-2, there’s only one that is used for declaring your income. All the others indicate other things. But only one of those numbers is considered your income.
Independent contractors get a 1099 form, not a W-2. We think that means it’s the same as a W-2 but it isn’t. You don’t put move the information from your 1099 over to your taxes like you do with a W-2. Remember, this is not a job, it’s a business. Your 1099 is just a way to record some of the money your BUSINESS made. What you made is very different.
Being self employed, YOU create your own version of a W-2. That something is called a Schedule C, also known as “Profit and Loss for Business.” You take your information from your 1099’s, you add in other income that wasn’t on the 1099, and you total those up. That’s your revenue. Now you list all your applicable business expenses and add those up.
If you had more revenue than expenses, you had a profit. If the expenses where higher, you had a loss.
It’s THAT number, the profit or loss, that then gets moved on to your tax form. And it is that number that directly impacts what income tax and what self employment tax you will owe.
You are taxed on your PROFIT, or the money left over, not the payments you received.
Why wouldn’t you claim these on your deductions instead?
There are a few reasons.
For one, most of your business expenses can’t be claimed on your itemized deductions. They are very different things.
The other has to do with self employment tax. Self employment tax is based on your profit (the final number on your Schedule C). The higher your profit, the higher your tax. When you list your expenses on your schedule C, you increase expenses, reduce profit, and reduce your self employment tax. However, if you listed those expenses in the itemized deductions INSTEAD of your Schedule C, you don’t reduce your profits. In the end, you pay more in Self Employment tax.
Use your Schedule C keep your taxes down.
Okay, I admit, the Schedule C is one long bugger. But it’s not bad when you use a tax software that walks you through all the questions.
There’s a common misconception that you don’t have to file a schedule C if your profit was below $400. The IRS defines that you have to pay Self Employment tax (Schedule SE) if you had $400 in profit. Because of the miles we drive, it’s very possible to earn enough to receive a 1099 (earning $600 or more from a particular platform), yet have enough mileage expense that profits are less than $400. The thing about that is, if you had income reported you do not want to not file anything. The Schedule C will allow you to document that your profits WERE less than $400. My understanding is that filing Schedule C with profits below $400 allows you to not file the Self Employment tax.
It’s a pain, I know, but especially with the kind of miles that we drive, Schedule C is your friend. It helps keep your income tax AND your self employment tax lower.
Next up, we’ll get into what kind of income you have to report, and THEN we’ll go deep on the things you can claim as expenses.
The Tax Information Series for Delivery Drivers (Grubhub, Doordash, Postmates, Uber Eats, etc.)
- 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?