So, Amos and Obadiah walk into a bar….
Wait, we're talking two profits, not prophets. Sorry.
We're into October already, Courier Nation. Can you believe that? Personally, I think this is the best of times. I love fall weather – there's just something about that crisper, cooler weather. And football season. Holy cow, I can't believe that we've already passed the halfway point in college football. It always goes too fast. It's world series time, basketball and hockey are starting to wind up. (I'm sure if you're not a sports fan at all you're looking at all this and thinking…. meh.)
And it's getting busier out there.
And then there's that elephant in the room
The goal is not to avoid paying taxes. The goal is to have the most money left over AFTER expenses and taxes
It's time to start thinking about taxes
Before I say another word… understand that I am not a tax professional. I am not giving any individual tax advice. If you don't understand taxes that well yourself, you absolutely MUST get with someone who does to help you out. Seriously, you will save far more on your taxes than what you pay them.
Okay, we both know that we should have been thinking about that all year. If you've been smart, you would have been. But it's easy to put that kind of thinking off, isn't it? But I'm seeing more and more people starting to ask about taxes now.
And I don't know if you're one of those who were thinking that I should start doing my quarterly payments. Maybe you started later in the year, or maybe you just didn't think about it til more recently. But maybe you were thinking every quarter on the 15th it's time to make that deposit, right? January 15 was the quarterly payment date for the last quarter of 2018, so you're thinking, February March APRIL, May June JULY, August September OCTOBER – oh crap, I should send something in. Only you come to find out that… it was SEPTEMBER. What's up with that? You come to find out it was actually April, June, September… that 2nd quarter only had March and April? And the final quarter is 4 months?
Which reminds me of one of my favorite named restuarants in my market, a place called Whiskey Tango Foxtrot.
But it's that kind of weirdness that just, I think, adds to the intimidation factor. So I thought it would be good to talk taxes this week.
Are Taxes all Bad?
First, let me talk about what we'll talk about here. We did go into a bit more depth in Episode 21 on understanding what your taxes are, and I don't want to entirely re-do that episode. Earlier in the year I posted a more in depth explanation of how taxes are figured, and there's a video that I have linked as well. I really think those will help you get a better feel for how taxes work for us as independent contractors.
So today, I want to do more of a high level overview. First, we'll explain how having to pay taxes can be a good thing. Okay, I don't know that actually paying them is a good thing, but that having to pay taxes also indicates we actually made money. We'll talk about how as an independent contractor, paying taxes is based on PROFIT, not earnings. And then we'll talk about what it means right now being the end of the year and how that can impact you. Is it panic time? We'll see.
About those two profits…
So here's where we get into whether taxes are all bad. I differ from a lot of people because I will tell you, if you have to pay taxes as an independent contractor, that's an indicator that you are making money. Because here's the thing…. too many drivers really aren't. Most aren't making as much as they think.
But here's the thing: Your taxes for Grubhub, Doordash, Instacart or other gig companies are not based on the money you get from them. Your taxes are based on your profits. It's based on what's left after expenses.
And here's where it can get kind of confusing. Because there's a difference between your actual profit and your taxable profit. That's your two profits: Actual and taxable. Actual is what you really have left over after real expenses. Taxable profit is the profit that you pay taxes on. We're in a unique situation where because of the amount of driving we do, we can make a high actual profit without actually having taxable profit.
Why is there a difference?
It comes down to using our cars as much as we do. The IRS lets you claim 58 cents a mile as expense in 2019. Our actual cost is usually far less than that. If you're driving a bit more than a mile and a half for every dollar you make, you could end up with zero taxable profit but since your car doesn't actually cost 58 cents a mile, your actual profit could be much higher. Say someone earns $50,000 and they drive 90,000 miles, their taxable profit is a loss. But if their actual car cost is 25 cents a mile, their actual profit is closer to $27,500. That's a huge advantage for a driving based business.
Does that mean I should drive more miles to avoid taxes?
NO! NO! Absolutely not!
I'm not sure how much stronger I can make it without throwing some expletives in there. This is a common mistake a lot of drivers make.
Look at the guy who earned 50k and drove 90,000 miles. He's got $27,500 left after his 25 cent a mile expenses. Say he drove 50,000 miles instead. Well now he's got only $29,000 in mileage he can claim and he's got $21,000 in taxable income. A single self employed person that takes standard deduction and has no other income or credits and has 21k in profit is going to pay 3500 to 4000 in taxes. That's HUGE – shouldn't he just drive more to not pay taxes?
Here's the most important thing: The goal is not to avoid paying taxes. The goal is to have the most money left over AFTER expenses and taxes. Because that driver with 50,000 miles has an actual cost of $12,500. So you take that and $4,000 in taxes, and he's got $33,500 left after taxes and expenses. The driver with 90,000 miles only has $27,500. So driver A with fewer miles does have to pay $4k in taxes, BUT he still has $6,000 more left over when it's all said and done.
Driving more miles is always going to cost you more than what those miles save you in taxes. You have to understand that your car costs more than just gas. It's rare to get actual costs LESS than 25 cents a mile. You can find out more about how to understand what your real car expenses are in epside 18. You can also read more on how more miles do NOT help your overall situation here. The bottom line is, your car is a freaking credit card on wheels. It's deceptive because we think the only expense is the gas money that comes out of our pocket. But each mile you drive gets you closer to more maintenance, and each mile takes a few cents off the value of your car. So it's like that mile is piling on some debt. Just understand, more miles is NOT better just because they reduce your taxes – the tax savings are NEVER more than actual cost.
But I probably won't owe that much in taxes, right?
The reason that taxes are a problem for a lot of independent contractors is they are used to having their employer take money out to cover taxes. So they end up paying very little or even getting a refund. But as a contractor, no one is withholding for you, that's all up to you.
And the other problem comes with self employment tax. Here's the bottom line of what taxes look like as an independent contractor. Now remember, it's only your taxable profit that is taxed – that's a huge help.
You will owe income tax. In 2019 it's 12% of every dollar earned beyond what your deductions are. If you take the $12,000 standard deduction as a single person, you don't owe any federal income tax until that 12,001st dollar. For a lot of us, because of that difference between actual and taxable profit, we have very little we pay in income tax.
But Self Employment tax is the killer here. It's 15.3 percent of EVERY. DOLLAR. OF. PROFIT. So if you're filing joint you could make $24,000 before you start owing income tax, but you owe self employment tax on every one of those $24,000.
It's not that you're being taxed different than an employee. That's your version of FICA and Medicare that are taken out on every dollar of a W2 paycheck. Okay, it is different because you pay double – on FICA and medicare your employer pays half your bill. You're self employed, meaning you get to pay the employer's half as well.
Bottom line, as a self employed person, taxes can be very significant. And it's up to you to withhold them for yourself, there's no withholding taken by Grubhub or Doordash or any of these contract companies.
Oh crap…. so we're near the end of the year, I haven't saved anything. Am I screwed?
No. But it's a good time to buckle down.
Here's the deal: You really need to get with a tax pro to determine your own situation.
If you're doing this very part time and you have other income, it's not going to hit you as hard. If you only recently started driving significantly, you're still probably in good shape. But if you drive full time and make decent money, you really want to start scraping money away. There are just so many factors – do you have other income, do you have withholdings with another job, if filing joint what is your partner's income, things like that? Do you have dependents, can you claim earned income credit or dependent credits?
Your income tax bill is going to adjust based on all these things. Your self employement tax won't be changed by other income, you will owe that. But the credits and withholding may be enough to offset what you haven't saved. But that's why a tax pro makes sense. Whatever you do, NEVER NEVER NEVER take advice from a facebook group. There are some real idiots out there when it comes to taxes and they can be vocal in spreading their idiocy.
What can you do to get ready for taxes?
1. Don't Panic
Here's the deal: Worst case scenario is, you have 6 months before you have to file. If you haven't been prepping for tax day, that's probably not so great but you have time to catch up.
2. Get a handle on your expenses
This is important: You don't have to itemize your deductions in order to claim your expenses. That's a common misconception. You take your business expenses in a different part of your taxes. Go back to episode 21 that I referenced to understand this a bit better. A lot of people don't bother with tracking their expenses, especially part timers, because they think they can't claim them any way because they take the standard deduction.
If you aren't tracking every mile you drive for business, start doing it. Today. Track every mile you drive for delivery. Not just when you have food in your car. Not just when going to the restaurant. Every mile that you are logged in. I have an article that goes into more detail about tracking miles here. Every mile that you are logged into an app with the intent to deliver, you can count. It's pretty much from the moment you log in to the moment you drop off your last order.
Keep a good record. The IRS requires you keep a record. It has to be specific. It can NOT be an estimate. They can and will disallow all your miles if you aren't keeping a good enough record. Whether you do written, or use a GPS app, or a combination of the two like I do, you want to have a record that includes the following:
- The number of miles of your business trip
- The date of the business trip
- Where you went for the business trip
- The business purpose of your trip
Get to know your other expenses. Really, miles are just about everything, but there's your cell bill – you can take that in proportion to how much of your use is for business. If it's all business, you can claim the whole bill. If it's 25% business 75% personal, you can claim 25% of your cell bill. See where I'm going with that? Delivery bags, cell phone holders, whatever you buy that is directly related to your business. Keep the receipts. Your taxes are based on money in minus expenses out – if you're not tracking this stuff you're paying more in taxes.
But don't overdo it.
I'll warn you, don't go overboard. Here's the thing to keep in mind. The IRS knows the patterns of what kind of expenses are normal for different kinds of business, and something that is way outside a pattern can trigger a flag in their algorithm that says, hey, you might want to check this gal out, she's claiming some unusual stuff.
Don't claim too many miles, as in more than you actually drive. There's stuff that can catch that kind of pattern. Don't claim things like your meals – you are not doing out of town business trips (and driving around in the next town over as part of your regular routine does not count as one). Meal expenses don't fit this type of busineass, and that can set up a flag. Some will talk about a home office deduction – I'd be careful there because this kind of work doesn't really justify one, but if you're also doing other work that DOES, then you can look at it. The main thing is, if you claim the kind of deductions that aren't normal, that can stick out in their computers. Best to verify with a tax pro what you can and cannot claim.
3. Try to estimate your taxes already.
It's October as I write and record this. You have 10 months in the books. You have a good idea what you're making. You probably have a good idea what you'll make.
Maybe try to run the numbers now based on what you expect to make the next couple months, added to what you've already made. You won't have exact numbers but that's okay. It's not about being exact, it's about getting an idea. Do it based on all your income, and your partner's if doing joint. What do the taxes look like? How much does it look like you'll be paying in?
Have you saved it? You have six months to save up the difference. Get cracking! And honestly, you're better off saving it in by January 15 so you can make a quarterly payment then. If your total taxes you have to pay in in April will be more than $1,000 you can have extra penalties, so you want to get that money in to the IRS early if you expect that total to be high.
4. Get into a regular routine of saving.
Here's what I recommend: Create a separate account. Make it something you cannot get to easily. Every week, before you touch a penny of what you received, set aside tax money into that account.
Here's what I do. I calculate taxable profit each week. All the money that came in from all the sources minus 58 cents for every business mile I drove. Personally, I save 20% of that total. That works for me, it covers my 15.3% self employment tax and what portion I still have to pay in on income tax. So the person who makes $1,000 a week and drives a thousand miles? They would have $420 in taxable income – 20% of that is $84.
If you ran your numbers and are behind, you might double up on that amount. Drive extra if you have to so you can get by on what's left over.
The bottom line on the bottom line: It's all about what's left over.
Don't get psyched out about owing taxes. If you earned enough to owe some, that means you were actually earning. Too many people try to spend money or drive extra to keep taxes down. Don't be stupid, k? Seriously, say you're in the 12% bracket – every dollar you spend is only saving 27 cents in taxes. That's 15 for self employed and 12 for income. Maybe a few more for state? But think about it people: Does it make sense to spend a dollar to save 30 cents? This is basic math.
It's all about what you have left over. Keep your expenses down – even if it means paying taxes, because you still have more left over after the taxes than if you spent the extra money. Plan ahead so you don't have to panic. You have time. Just start getting to know about what you're making. Know the two profits – actual and taxable, know now what you are looking at in April so you can be ready, and get a head start on 2020.
