Doordash drivers, as independent contractors, should set aside enough to cover self-employment tax (15.3% of profit), income tax (10% or higher) and whatever local state taxes apply.
There are a lot of moving pieces, so it's more involved than that. We'll look at five steps you can take to stay out of tax trouble by saving up now for your taxes.
What happens if you don't save? If you've been particularly profitable with your Doordash and other delivery work, you could be in for a rude awakening come tax time. You're on your own for taking out your own taxes, and Doordash doesn't take them out for you.
Doordash pays weekly if you don't take it all out along the way through instant cashout or using the Dasherdirect card.. The best rule of thumb is to set aside money at least once a week for tax savings. Don't touch it for anything else.
Here are the five things you can do to make sure you saved enough for taxes.
After discussing those steps, I'll walk through my weekly routine for setting aside taxes for my earnings with Doordash and other delivery gigs.
About this article
This article focuses on saving for 1099 federal taxes as a Doordash delivery driver. This will also apply to delivery for other food delivery services like Uber Eats, Instacart, Grubhub, Shipt and a list of others that's too long to fit into this article.
This is not tax advice. The purpose of this article is for educational and informational purposes only. We want to help you understand how things work so you can make informed decisions. For specific tax advice related to your own financial situation and needs you should seek out your own tax professional.
Finally, this is written about setting aside money for Doordash taxes as it relates to tax laws in the United States. Tax laws are different in different countries. Keep in mind, it's impossible to get into all the different state and local taxes while keeping the length of this post somewhat reasonable. You should understand your state taxes and what additional you should save for them.
Step 1: Understand what your taxes are based on.
It would be really easy to dive down a rabbit hole when talking about gig economy taxes. There are so many things involved. If I tried to cover it all, either it would be an incredibly huge article and you'd get lost in it, or it wouldn't cover the important details where you need them.
That's why I put together a guide, breaking it all down into individual articles that go into precise detail. This is part of our article series on Doordash taxes.
The first place to begin is to get an idea of the basics of how taxes work. If you have time, this sketch board video walks through the basics of independent contractor taxes.
As an independent contractor for Doordash, you're a self-employed individual. Technically you're filing taxes as a sole proprietorship (unless you've incorporated).
Here's how it works is in three simple statements. Each statement is linked to a different article that goes into more detail than we have room to cover here.
- Your taxes are based on profits, not on what you are paid by gig companies
- You'll pay income tax on your profits – these can vary a lot.
- Included in your taxes is a 15.3% self-employment tax, charged on every dollar of profit.
Once you have a grasp on that, it's easier to get an idea what to save. You can go into more depth with the video and other articles, but even a basic overview will help.
a. Independent contractor taxes are based on profit, not earnings.
If you received $20,000 from your 1099 delivery work this year, you aren't taxed on the total earnings of $20,000. Unless of course you fail to keep track of your expenses.
You will fill out a Schedule C on your taxes to show your earnings for your self employment business. On that, you will list your earnings and your expenses and come up with your net profit.
Then you subtract the expenses from the income. The money left over is the basis for your taxes. If you had $20,000 in earnings, and $10,000 in expenses, your profit is $10,000. The $10,000 is the taxable income, not the whole $20,000
This is why you MUST track your miles driven, and your expenses. To help with that, you may want to look at some of the tracking apps available. Two free ones are Hurdlr and Stride. We reviewed the Hurdlr app here and then reviewed the Stride Tax app here.
Unfortunately, it seems that a lot of people who write about saving for Door dash taxes don't fully understand all the pieces of delivering in the gig economy. They recommend you save a percentage of your total income. That advice ignores the fact that mileage expenses for Doordash can be significant.
For a lot of Dashers, it's possible to save too much. What I mean by that is, it costs a lot to operate your car. If you're taking too much out for taxes on top of that cost, that really doesn't leave as much for you to live on. While the good news is you'll have a lot left after tax season, for a lot of Dashers, we need that money sooner rather than later.
b. Income tax starts at 10% of your profits.
There are too many moving pieces to get into here. In reality, income tax doesn't start until your taxable income (your Doordash profits plus whatever other income you or your partner made) exceeds your personal tax deductions.
The graphic below illustrates how tax brackets work for the 2022 tax year. You can learn more with the 1040 instructions found here on the IRS website.
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The income tax brackets aren't exactly simple when you start making more money. Additional income, your filing status, dependents, tax credits, all that can make your head spin.
Which is why I say this often: you really should get a tax pro.
It's also going to matter whether your 1099 income is the bulk of your earnings, or is it just a side hustle on top of other income?
Don't forget the one thing we pointed out earlier: Your income tax is based on profits, not total money and tips received delivering for Doordash and others.
You want to make sure you're saving enough to cover whatever percentage of your profits equals your tax bracket.
Even more important, make sure you have a tax pro who can walk you through all this craziness.
c. The Self-Employment tax rate is 15.3% on every dollar of profit.
Income tax is goofy and varies pretty wildly.
Self-Employment taxes are comparatively easy. What did your business profit? Pay Uncle Sam 15.3% of that.
Think about Social Security and Medicare taxes – the FICA taxes on a paystub. Ever notice those are taken out of even the smallest paychecks? They're charged on every dollar earned.
That's what your self employment tax is. It's your version of Social Security and Medicare. We just never think about that because as a W-2 employee you never have to file those taxes.
The major difference is since the money's not withheld from our pay as contractors, we do have to pay it. You can't rely on deductions and exemptions here (other than your business expenses). You pay that on every dollar of profit.
Step 2: Figure out Your Profit Each Week
How much did your business earn?
What did you spend?
How much was left over? That's your profit, the total taxable income from your business.
It's a little more involved than that. Part of what you ‘spent' is the part that you can claim for your vehicle expenses. For the 2022 tax year, you can claim 58.5¢ of car expense for every mile you drive for business for January through June, and 62.5¢ per mile for the second half of the year..
Personally, I don't bother with trying to figure out all the other little things beyond mileage. I simply calculate my profit as total money in minus the mileage allowance.
Earnings minus 58.5 cents per mile (2022 tax year).
When I first wrote that, that was the rate for the year. Then, the IRS complicated the standard mileage allowance for 2022 by increasing the amount for the second half of the year. It's 58.5 cents per mile from January through June, and 62.5 cents per mile July through December.
While I have other expenses, they pale in comparison to the mileage deduction. For tax savings purposes, I only figure in the car expenses. If I made $500 and drove 400 miles, I take $500 minus (400 x 58.5¢). In other words, I multiply my miles times the mile rate. 400 miles at 58.5¢ each is $234.
$500 minus $234.
I pay taxes on $266.
Keep it simple. Otherwise you'll psych yourself out of doing anything at all.
Step 3: Figure out how much to save.
Once you know your taxable profit for the week (or month or quarter, depending on how you decide to do things) you can start figuring out what to save.
In the example I gave above, $500 earnings and 404 miles, that came out to $266 in taxable profit.
Now you can do one of two things:
- Calculate a percentage of that profit.
- Use the tax calculator on a third party app like Hurdlr or Quickbooks Self Employed to calculate your taxes for you (affiliate links).
Don't stress too much about this. You don't have to get it perfect. Your main goal here is to have enough money saved to be in the ballpark of your tax liability.
Personally, I do the first one. I calculate 25% of my profit for the week. 15% covers self-employment tax and the 10% covers income tax. While overall I earn above the 10% tax bracket, 1099 work is my primary source of income, so 10% works quite well for me. It's always left a surplus in my situation.
In the example above with $266 in profits, 25% of that is $66.50
If you have a lot of additional earnings, you might go 30% or higher. A good tax advisor can help you find your sweet spot.
I've been really impressed by how Hurdlr calculates taxes. You set up a tax profile, tell it about your filing status, whether you have other income, etc. It will take all of that and figure out the percent for you.
Again, go for simplicity. Don't overthink it. Don't make it so involved that you get overwhelmed. That's why I like the flat 25%.
Step 4: Save it.
Don't touch a penny until you've pulled money out for your taxes.
I like the DasherDirect card, but there's one thing I don't like about it. I'm not a fan of Instant Cash out because really, the money isn't mine yet. It's my business's.
Since getting the card, I've used it as a business banking account. I have pay from other gigs deposited into that account as well. Then each week, I transfer money for taxes to my tax account, keep money for expenses on my Dasher Direct card, and send the rest to my personal checking account as my paycheck.
If you use Instant CashOut or the DasherDirect card, make sure you're keeping enough in the account to take some out for taxes.
Then transfer that money to somewhere that you won't touch it. Get a tax saving account that isn't tied to your checking account. Make it hard to access for anything other than sending it in.
A lot of people are great at saving for taxes, but not so great at keeping it saved. If there's something you want to buy and that money's sitting there, it's tempting to take it out for other things.
Put that money where you won't touch it for anything other than taxes.
Step 5: Send it In.
How much money did you save? Each quarter, send it in to the IRS.
This is NOT quarterly taxes, though many call it that. All you're doing is pre-paying your taxes with quarterly payments from what you saved up.
Many online banks are starting to cater to small business owners and self-employed independent contractors. Some are setting up accounts that will automatically send the money in to the IRS for you.
In the end it's like you're withholding for your employee, who happens to be you.
This is the best way to protect yourself. One, it protects you from spending the money. Two, it protects you from penalties and interest.
If you have to pay in more than $1,000 on tax day, penalties and interest can be added. If you're sending in money along the way, you avoid that problem.
Check out the link I put in that first line in this section, which goes into detail. Overall, all you do is fill out a form 1040-ES which is very simple. It boils down to “who are you and how much are you sending us?”
Again, don't stress. Just send it in. Do that and you won't have any major surprises come April 15.
There's a worksheet that the IRS gives you. It'll make your head spin. You don't have to do the worksheet. All it is is something to help you figure out how much to send in.
This takes me back to what I said earlier. Don't stress. Don't worry about being exact. Exact isn't possible until you've figured out your taxes for the year.
And don't make it too complicated. Complicated will make it easier to just give up. Don't do that.
To sum things up, here's what I do:
I won't tell you what to save or how to save. I've offered up five steps based on how I've been able to avoid tax problems as a delivery driver for Doordash, Uber Eats, Grubhub, and a bunch of others.
This is not advice. It's just an example. If you want someone to tell you, either get a tax pro or at least use Hurdlr. But I do hope that the example of how I do it can at least give you some ideas.
I follow steps 2 through 4.
I do a quick profit calculation. Multiply my miles times 58.5 cents. Subtract that from my earnings.
One fourth of that is my profit. That's what I save.
All my payments from Doordash and others go to one account. It's separate from my personal checking and I don't touch any of that money personally.
Each week, I figure an amount to keep in that account for car expenses. I take out some for a paid time off fund. Then I take out that 25% of my profits and move that to a different bank account altogether.
Keeping it in that other bank account makes it less tempting.
Each Quarter for the first 3 quarters:
The due date for each quarter is April 15, June 15 and September 15 (no, those are not all 3 months from one another. It's just a weird IRS thing) I just send in everything that I've saved.
I fill out a 1040-ES where I tell them who I am and how much I'm sending in. And then I send it in.
On January 15:
This one is a bit different because is the last quarterly filing.
I open up a tax software program at the end of the year and do a quick run through to estimate what my total tax bill will be. I know it's not going to be exact because I haven't received any of my tax documents yet, but I know enough of what I made to be in the ballpark.
Then I compare that to what we've had taken out and what I've sent in through the year. Where does that leave me? Will I still have to pay in?
If I've already paid in more than I'll owe, I'll just sit on what I have. If it looks like I'll owe, I can take whatever that amount is and send it in as my fourth quarterly payment.
In the meantime, if anything's left in that tax savings account, I'll keep it there until I've completed my tax return. That way, I've still got the money if I miscalculated.
Then, once I've filed my taxes, anything left in tax savings can either be kept there for next year, or I can transfer it to my personal account as a self-generated ‘tax refund.'
I could just send it all in on January 15 and make things easier. I do it this way just because I'd rather have it in my own bank than to give Uncle Sam an interest free loan on money I'm getting back anyway.
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 and tax forms that you can try to figure out. You can always go by those, if you like to torture yourself.
The most important thing here is, save enough money so that when it's time for your annual tax return come tax season, you're not hit with penalties and interest for underpaying. And of course, so you don't have to scramble trying to figure out how you're going to pay off a big tax burden.
In the end, as a small business owner 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.