Today, we talk about something we could spend several days on.
This tops the list of “no one told me” when it comes to being an independent contractor. Employees have their bosses holding money out for them for taxes. We're on our own here, and if you aren't paying attention, you could get into trouble.
What I'm going to do today is touch on the highlights. This is all about understanding the basics. If you want to get into a lot more detail, you can go to the sidebar (or scroll down if you're on a mobile device) and look for the Delivery Driver's Tax Information Series. There are several articles on this site that go into depth on taxes for you.
Here's the important stuff you need to know.
You are on your own.
No one is taking money out of your check for you. It is completely up to you to make sure that you have paid enough money in on your taxes by the end of the year.
That's dangerous. It's real easy to let it go. I need the money this week, so I'll wait til next week to start thinking about it. How many times do you do that and all of a sudden it's the end of the year.
Your taxes are based on your profits, not your overall money coming in.
This is good news.
You subtract your expenses from what you are paid, and it's the amount left over that you owe taxes on. Your profit is added to your taxable income for figuring out your income tax. Your profit is also used to calculate your self employment tax.
There's more good news:
We get a nice little windfall because of how much driving we do.
You can claim what it costs to use your vehicle for deliveries. We've already walked through figuring out some of that cost. Tracking all the gas and depreciation and all of that is complex and time consuming.
To simplify things, the IRS lets you claim a standard amount per mile.
The really good news is, the amount we can claim is generally higher than your actual cost.
Most of us have been figuring out it's costing around 30 cents a mile to use our cars. The IRS lets you almost double that. In 2020 the allowable deduction is 57.5 cents per mile.
For example, if you drive 1,000 miles and earn $1,000 dollars, you can take 57.5 cents per mile off your income, meaning in this instance your income is only $425 (1,000 miles at 57.5¢ per is $575, which you subtract from the $1,000 you made).
This is one situation where we can legally claim higher expenses than what our actual expenses are.
But that doesn't mean go drive more miles.
A lot of people make the mistake thinking your taxes are reduced by 57.5¢ per mile. They aren't. Your taxable income is reduced by that much.
The bottom line is, your cost for driving is still higher than what you save on taxes. Most people only save 9 cents off their taxes for each mile they drive. If it costs you 30 cents to drive a mile, and you save 9 cents on your taxes…. do the math and tell me if it makes sense.
The mileage deduction is meant to simplify tracking car expenses.
Your miles are a replacement for tracking actual car expenses. You cannot claim miles AND your gas, maintenance, repairs, etc. It's one or the other.
There is other good news here:
A lot of people get confused on this miles vs actual vehicle expenses.
They think miles vs expenses. They think if you claim miles, you cannot claim ANY other expenses.
They're wrong. Remember, the miles deduction was a way to simplify claiming the cost of using your car.
If you have other expenses such as your cell phone, delivery bags, phone holders, you can claim those expenses as well.
Wait, what? You said something about Self Employment Tax? What's that all about?
The name is deceiving. It makes it look like there's a tax on being self employed that is different than anyone else has to pay.
Self Employment tax is basically our version of FICA (Social Security and Medicare). We're not used to dealing with that because when you're an employee, you don't deal with filing forms or filing taxes. The money just gets taken out of your paycheck.
But when you're self employed, there's no employer to do all that for you. So that brings us back to #1 above: You are on your own. You get the honor of doing it.
Self Employment tax is the one that gets most contractors in trouble.
We're used to all the deductions and everything that go with income tax. You have to earn so much money before you start owing much in taxes.
Have you ever noticed that even on a very small paycheck, there would be money taken out for Social Security and Medicare? That's because that tax is owed on every single dollar you earn.
Many of us can have no income tax debt but have thousands due in self employment tax.
We pay double of what an employee pays for Social Security and Medicare.
This is because as an employee, your employer is required to match the money taken out of your check. They pay half.
Guess who your employer is?
You lucky devil. You get to pay your portion AND The employer's portion.
As an employee, Social Security and Medicare add up to 7.65% of your pay. When you are self employed, you pay 15.3%
As a reminder: That's on every dollar of profit. Deductions and exemptions don't stop that or cut back.
You do not need to itemize deductions to claim your business expenses.
A lot of people don't track their expenses because they think that it doesn't matter since they take the standard deduction. Don't make that mistake.
Because they are business expenses, you claim them in a different place.
Six things you should do about your taxes:
After touching on some basics about how taxes work, here's what I recommend:
1. Understand as much as you can about how taxes work.
I didn't go into a lot of detail here because there's such a huge variety in how delivering will impact what you owe in taxes.
Your tax situation is so very different than mine. For that reason I can't tell you what to expect. I can try to help you understand how taxes work so you can figure out what you can for yourself.
2. Get help.
I'm not a tax professional. I cannot offer tax advice. None of what I write is meant to be tax advice. The idea is to help you get a feel for how it works.
You should get your own help.
If you find this topic challenging or intimidating at all, get with someone who knows taxes. Sit down with them to try to understand as well as you can how this whole tax thing impacts you.
I'm hoping the information in the tax guide I have on the site helps. But if there's any doubt at all, it's well worth the money to let someone help you through the specifics of your situation.
3. Keep records. Track everything.
If you think something is related to your business, keep track of it. Keep a record of it and keep receipts. Even if you're not sure, track it. It's easier to have tracked it and have a record and find out you can't claim it, then to have to go back and try to find a record when you find out you CAN claim something.
4. Track EVERY. MILE. YOU. DRIVE.
For those of us who use our cars, those miles are far and away our greatest expense.
The IRS requires you keep a written record of your miles in order to claim them.
It's worth the time. I mentioned earlier that for most people a mile saved will “only” reduce your taxes by 9¢. That doesn't seem like much, but take that times 10,000 miles. Now that's $900 less that you pay in taxes.
See how that adds up?
5. Do not touch a penny of what you are paid by these gig delivery apps until you have taken money out for taxes.
I introduced this concept earlier, when talking about setting money aside for your car.
This is just as important. Maybe more so.
Get a separate account for tax savings. Every week, the first thing you should do is figure out how much to set aside and put that money in your tax account.
Do not touch that account for anything else. That's why I say get a different account. It makes it less tempting to spend it on other things.
Take your tax money out first, put money aside for your business expenses, and then you can do what you want with what's left.
6. Get Help.
I may have mentioned that one before.
Consult a tax pro. Have someone help you understand how your work will impact your taxes. They can help you figure out how much to save each week.
Get a good tax pro to help you out.