I have good news and bad news if you're an independent contractor in the gig economy during tax time.
The good news is there's a free tax filing program that will let you run your taxes as an independent contractor. Most free programs don't let you do things like 1099's and Schedule C's, but Credit Karma does.
The bad news is, it's very easy to make mistakes that cost you way more than what a tax pro would cost when you use a free program like Credit Karma.
If you do this in a rush or you do this in a sloppy way, it can cost you a lot. I've noticed some very easy mistakes to make when using the free program.
Is the free Credit Karma tax filing a good option for independent contractors?
It can be. I've walked through the filing process several times and it can do all the things you need to do. I like some things about how it's structured. They ask some things up front and going forward they only walk you through the questions that really apply to you.
But if you don't know what to look for or don't understand the basics of taxes, Credit Karma can cost you a lot of money in lost deductions. It's easy to miss things. The program has at least one major flaw that can cost you money.
Don't mistake free with best.
In fact, free can be most expensive.
When it comes with taxes, especially if you don't really know your taxes, the less you spend the more it can cost you. It's easy to make some mistakes and miss some things and that can inflate your tax bill.
My advice is, if you can find it in your budget at all to get a tax pro who knows self employment, it's worth the money. They'll usually find the things that will save you more than what you paid, or they'll know the things that will keep you out of trouble.
However, if you decide to go forward with Credit Karma's free filing program as an independent contractor with Doordash, Uber Eats, Instacart or other gig apps,
Take your time, do it right.
And avoid these common mistakes.
Don't be sloppy, don't fly through it. It seriously will cost you.
I put together these tips to help you avoid the most common mistakes when using Credit Karma.
You can sign up for Credit Karma's tax program here. They will have you create a membership and put in your contact information for going forward. Before you do, make sure you understand these tips.
Before we go any further:
Understand this: I am not a tax professional. This is not tax advice. All I'm doing is pointing out some things to watch out for. If you need tax advice for your personal situation, you really should get a tax pro. See the section above. The right person can make hundreds or thousands of dollars of difference, depending on how significant your self employment earnings are.
Also, this article is focusing on things related to your self employment income. I'm going to focus on the parts of your process where you put in your 1099 income and other earnings. I'll talk about self employment related deductions. I'm not diving into personal deductions or credits or any of that stuff. That's another area where a tax pro comes in handy.
Okay, ready? Here we go.
1. Understand that free isn't always free.
Credit Karma doesn't cost actual money. You can file your taxes, even as an independent contractor with gig apps like Doordash, Uber Eats, Grubhub, Instacart and others, without paying fees.
That doesn't always mean it's truly free.
You pay for it with your information. You're giving Credit Karma your financial information. You're telling them what you earn. They can tell you your credit score.
One thing a lot of people love about Credit Karma is there are a lot of things they provide without a fee. Credit monitoring, tax filing. But they do take your information as a way to market things to you.
You're giving Credit Karma and their marketing partners the information they need to try to sell you credit cards, loan and insurance programs. How comfortable are you with that?
I personally walked through the process. I looked at it like, okay, they can try to sell me stuff – it'll just get lost in all the other stuff all the other people are trying to sell me. The way I see it, I already signed away a lot of my privacy when I started using Facebook and other social media.
That said, you have to decide whether this is a deal breaker. Pay close attention to what you're giving away.
Read the stuff you're signing off on.
At one point you'll be asked to sign off on an agreement before going forward. Make sure you read what you're agreeing to. If you click to expand, you get this:
I know the print's small. I'll point out a couple of things, but it's worth taking the time to read before you sign off.
First, you're not required to sign off in order to file taxes through Credit Karma. That said, I didn't find an easy way to decline this statement. I clicked around a bit and ended up back where I could proceed, without having to sign off. But I don't know how I did it. They don't make it easy.
Second, if you do sign off on their statement, they're saying they can share information with their employees outside the US for the purposes of helping you with your tax filing.
But they also say they can share information with Square (their parent company) and Cash App (a sister service) information including contact information, birth date, income, expenses, credits, spouse and dependents, bank accounts, refunds, taxes due, and where you are in your tax process.
That's a lot of information being shared. Now there are laws about what they can and cannot do with it. Their main purpose is, they want to use that information to market services to you.
Is that a price you're willing to pay? Only you can decide.
2. Take your time answering the initial questions.
Personally, I've used a different tax program for years. I'll continue to just because it's what I'm used to. One of the annoying things is all the things I have to wade through in the process that don't apply.
Credit Karma avoids that problem by asking questions up front and then only presenting options that fit your situation.
It's brilliant for not annoying you. It's a danger if you don't answer those questions correctly. I've found that sometimes the only way to get back to the questions is to delete the entire form and start all over.
Do. Not. Rush. Through. The. Questions.
I know a lot of people want to fly through this. They fly through it. They don't pay attention.
And they cost themselves a lot of money.
This one question in the Credit Karma free tax program can get you in real trouble if you answer it wrong.
If you rush through this you might think, I worked for Doordash, I worked for Grubhub. So you check that off, and you've cost yourself hundreds of dollars.
Why? Because now there's nowhere for you to enter your expenses. You eliminated the opportunity to claim your miles. The only way you can do these things on the Credit Karma program is if you select “Worked for Myself” here.
Here's another you want to be aware of. If you sent in quarterly estimated tax payments, make sure you answer this one:
If you do not check this, you won't have the chance to claim this later. It won't recognize that you've paid in, and the program will tell you you have to pay that amount all over again.
And if you get these wrong, the only way I found to fix it is, delete it all and start all over again.
3. Fill out your Schedule C.
Here's the most important thing you need to know:
Your miles and your expenses go on your Schedule C. That means you have to do the Schedule C option in Credit Karma to claim those deductions and keep your taxes down where they need to be.
Once you've set up your account and entered your basic information, you'll get a screen showing all the places you need to fill out information.
If you had a traditional job, you'll obviously click on Start next to “W-2” so you can enter your information there.
Those of us who are independent contractors with gig economy apps will click the Start button next to Self-employed. That will bring you to this.
Here's where it's tempting to jump ahead and enter your 1099 form. You can do that but it will get tricky. And Credit Karma will screw up part of your taxes because it's poorly designed.
They don't give you very good guidance here. It's kind of confusing. Where do you start?
In fact, I would skip the 1099 forms altogether.
It's complicated. The best way I can put it without making it more confusing is, I ran through this program dozens of times. The simplest way and the least likely way for Credit Karma to screw things up is to enter everything about your self employment on just the Schedule C tab.
Why entering your 1099 information isn't important.
Your 1099 is not like your W2's.
We're used to sending in our W2's with our taxes. The 1099 doesn't work that way.
None of your 1099 information (like the company, their EIN, any of that) gets moved to your tax forms. None of it gets sent in. The IRS doesn't want you to send a copy of your 1099.
All these tax programs do with your 1099 forms that you enter is is add up the money you made and put it on your Schedule C.
I've got no problem entering 1099 info with other tax programs. They're more intuitive and it's less confusing. AND they add everything up right. There's a flaw in the way Credit Karma does it that I'll talk about later.
Thus, I found it works best to just skip the 1099's and take care of that step yourself.
Go right to your “Business income (Schedule C)” section.
You're going to see a series of questions and boxes to fill in. I won't go into detail on all those because this is already getting too long as it is. You can read this where it does go into more detail on filling out your Schedule C as an independent contractor for Doordash, Uber Eats, Instacart and other gig companies.
After you fill in information about your business you'll come to this:
Here's what you do:
Add up all your independent contractor income and enter it here.
Add up the “Non employee compensation” from your 1099 forms. If you had income from other gigs where you didn't receive a 1099, add that in. If you are choosing to report cash tips, add those in.
Add it all up.
That's exactly what the program does if you were to enter your 1099's individually. You're just doing it for them (and making sure it's done right).
Just make sure that if you do this, do NOT go in and enter your 1099 form afterwards. All that will do is double up your income.
Then continue through your Schedule C and this is where you enter your expense information. There's a section that will walk you through entering your miles. That stuff is pretty self explanatory. You can check out our Tax Guide for more information on what kind of expenses you can claim.
4. Now Double Check your QBI Deduction.
Your Qualified Business Income Deduction.
As self employed independent contractors, we qualify for a 20% tax deduction off our net profit. For example, if your profit is $20,000, you can reduce it by $4,000 for income tax purposes.
Your Qualified Business Income is your net profit from your Schedule C.
It's this QBI thing that Credit Karma has screwed up. When you add in the 1099 forms individually, for some reason Credit Karma isn't adding that all up. It often means that the program isn't giving you the credit or the deduction you should be getting and that can cost you hundreds in extra income tax (or reduced refunds).
Understand, your QBI deduction is only available if you had had taxable income above your deductions and certain credits. If your taxable income is already at zero, QBI won't really mean anything.
I found several instances where Credit Karma didn't put this information in correctly. It would often record your ‘Qualified Business Income' as less than what it really is.
Checking your QBI on Credit Karma
Notice the amount next to the arrow? That's where your net profit from your Schedule C would be. Pay attention to that number.
To make sure that Credit Karma is recording your QBI correctly, start by clicking the blue Start button next to Self Employment.
In this instance we get an indication already that we've got a problem. The QBI should be the same as the net profit was earlier.
If you click Start next to that, you'll come to a screen with a couple of options including a net loss carryover. Those won't usually apply to us so click continue and look for something like this.
Those two numbers (Net Income(loss) and Qualified Business Income(loss) should match one another. This screen shows a difference.
For some reason, Credit Karma added up the expenses but didn't include the income into that total. This is the glitch that I mentioned. If you're not lookign for it, you might not know you didn't receive that deduction.
Fortunately, Credit Karma allows you to correct that. If it's wrong, type in the correct amount in the box on the right and click continue.
5. Finally, double check your documents before submitting.
I haven't run into any problems that weren't already addressed above when it came to checking the documents. But it's good to look everything over all the same.
When you click on that you'll get recommendations and errors. Check those out if any show up, and the proceed by clicking on Review for Errors.
Before you submit, click on the button to download tax forms. That will give you a look at all the forms you would be filing.
Here are some things you can look for.
Do your own math on your income, expenses and your miles. Subtract expenses and miles and compare them to line 31 on your Schedule C. That will help you see if you got your expenses entered in correctly.
Check out Line 13 on your 1040. That's the QBI. Does that equal your net profit times .2?
Note that it may not match and you may still be okay. If it doesn't seem like what you think it should be but line 15 on your 1040 (taxable income) is at zero, then you're okay.
The two biggest dangers I see when people use Credit Karma is they didn't record their expenses, or they didn't get their QBI 20% deduction. This is a good way to check for both.
Obviously it's worth checking all the other stuff. But that gets into more general taxes, and that's not what this is about. But if Credit Karma messed up the QBI, they may have messed up something else.
And if the whole thing leaves you confused, it's better to stop and have someone check things out for you who understands this stuff than to submit your taxes when you're still not sure.
Final thoughts on Credit Karma's free tax program and how it works for us who deliver with Doordash, Uber Eats, Instacart, Grubhub and other gig apps.
I like that it's free. That helps.
But it's got its glitches.
I tried to make it as clear as possible how you can avoid some of the pitfalls but it took nearly 3,000 words to do it.
Some of that's because I'm too long winded.
But here's what it boils down to. If you're confused about this program, don't use it. Free is great but if free keeps you from getting the expenses and deductions you're entitled to, it's no longer free.
Get a tax pro. Seriously, it's worth it.
But if you do decide to use Credit Karma, make sure you know the things to look for so you don't lose out on the deductions you should get.
Tax Guide: Understanding Your Income
The following three articles help you understand what your real income is as an independent contractor.
Tax Guide: Understanding Your Expenses
The following eight articles help you understand the expenses you can claim on your Schedule C. Most of these are about your car, your biggest expense.
Filling Out Your Tax Forms
Once you understand your income and expenses, what do you do with them? Where does all this information go when you start filling out your taxes?