I have to confess, that's not a good title for this article.
That's because we're really not talking about tax deductions. This is about business expenses. I write the title the way I did because so many people think of them as deductions.
In some ways it works the same. Your business expenses are tax deductible, but they're not really tax deductions. It seems like semantics but there's an important distinction.
Your business expenses reduce the taxable part of your income as you work as a self-employed worker and food delivery driver for Doordash, Uber Eats, Grubhub, Instacart, DeliverThat, Bitesquad, and a list of others too long to put here. (And while we focus on delivery on this site, the same principle applies if you're a rideshare driver with Uber, Lyft or the others).
But here's where the difference becomes very important:
As business expenses, you don't have to worry about whether you should itemize or take the standard tax deduction. It doesn't matter, because you don't claim those as tax deductions. The good news here is that you can take the standard deduction AND still claim your business expenses.
Here's the confusing part: You claim those expenses on the income part of your tax forms. (I know, seems a little confusing, doesn't it?)
Here's how it works in a nutshell: As an independent contractor for a gig economy food delivery service or rideshare service, you report your income on form Schedule C. You add up all your income and put it on that form. You then add up all of your expenses and put those down there. Here's where you also add the business mileage if you claim the standard mileage rate.
The difference between the two is your profit. That profit gets moved to your income tax return as income.
Introducing business expenses
You won't find a list of all the expenses you can write off for your delivery business in this article. However, further down we'll point you to other articles that go into more detail about miles, claiming actual car expenses, and what non car expenses you can claim.
One thing you won't find in this article or in this guide: Tax advice. Do not take anything from this website as tax advice. If you need direct advice, you should seek your own tax professional. My purpose here is to explain how taxes work. If you understand the concepts, you'll be better about figuring this tax thing out.
This particular article is about explaining business expenses in general. We'll talk about:
- What is a business expense and how does the IRS determine if it's legitimate?
- Why you should track your business expenses
- What kind of expenses should you be tracking?
- How do business expenses go on your tax form?
When you understand how it works, it's easier for you to get an idea if you can claim the expense without having to dig through a list somewhere on the internet.
What are business expenses?
Remember that the IRS sees your independent contractor work as a business, not a normal delivery job. This is why Schedule C is called “Profit and Loss for Businesses.”
You'll hear me say this a lot in this series of articles: You're filing business taxes.
The whole point of a business is not how much money comes in. It's all about what's left over after deductible expenses. It's the money that's left over that determines how much you owe.
What we are doing here then is keeping track of what those business expenses are. If we spent money as part of operating our business, we SHOULD keep track of that so that we don't pay more in taxes than we should.
And here's the thing: It doesn't matter if this is a side hustle for you or a full time gig. Remember what we said earlier? You can claim those expenses without worrying about if you're taking the standard deduction.
The IRS has one simple rule about what expenses you can claim:
The expense must be reasonable and necessary for your business
If you're wondering if you can claim something, just ask yourself these questions:
The first question is, is it a reasonable expense for the type of business you do? Is there a business purpose to using that item? Does that expense do something to further your actual business?
The second question is, is the expense necessary for your business? What is it about the expense that you have to use it to operate your business?
If you need it to run your business, if it makes sense and helps you achieve a business purpose, it will probably qualify as a business expense.
But here's the important thing: It has to be something the IRS thinks is reasonable and necessary. It's real easy to justify the expense in your own mind. Can you convince an auditor?
Finally, don't mistake personal expenses for business expenses. Yes, we know you need to have energy to be able to complete your deliveries. But the way the IRS looks at it, you need that energy whether or not you're working. Because of that, things like refreshments or meals are personal expenses and cannot be claimed.
Why you MUST keep a record of your expenses
Uncle Sam will let you claim business expenses. However, you need to prove it was a legitimate expense.
This is true when you claim miles. It's true when you claim other expenses like part of your mobile phone, hot bags or other reasonable and necessary expenses.
If you don't have proof of the expense and an explanation of the business purpose, it's like it never happened.
Here's the other thing: every dollar you track reduces your tax bill. That's because it reduces your taxable income. If you had $1,000 of expenses, that's the same thing as being taxed on $1,000 less income.
But if you're not tracking it properly, there's a good chance you'll forget about it later. And if you forget about it, you can't claim it. If you don't claim it, you pay tax on money you're not required to pay tax on.
In his book “Income Tax Guide for Ride Share and Contract Delivery Drivers“* John White talks about his “Rule of Seven.” (Full disclosure on Amazon links: as an Amazon Associate I earn from qualifying purchases)
You will pay a dollar of self employment tax for every seven dollars you earn.
You will SAVE a dollar off your self employment tax for every seven dollars you record.
In other words, if you failed to record $7,000 worth of expenses, you will owe $1,000 more in self employment tax.
And oh, by the way, probably $700 or more in additional income tax if you're in the 10% tax bracket.
I don't know about you, but I have better things to do with that $1,700 than to send it in to Uncle Sam.
Now. Today. Don't wait until tax season. Go back through the earlier part of this calendar year and look for where you spent money for your business. Record it now while you're thinking about it.
But here's my main rule about tracking expenses: If you think you might be able to claim it, track it. You can always ask your tax pro later.
Use a tracking app and software. Keep your expenses by hand. Create a spreadsheet and track your expenses that way. Find whatever method works for you.
Tracking an expense is not the same as claiming it.
That's why I say track it now, ask your tax expert about it later.
If you track it and you find out you can actually claim it, you're in great shape. You've got a record of it.
If you don't document it and find out later that you could have claimed it, now you're in a spot. You might be able to go back and find documentation of the cost, but it could be tough.
It's easier to decide not to claim something that you tracked than it is to try to find documentation for something you didn't track.
Tracking it simply means you're keeping a record of it. It's when you include that expense in your Schedule C that you're actually claiming it. That's why it's not a bad thing to track it. If you're working with a good tax pro, they'll help you know when NOT to claim what you tracked.
What kind of expenses should you track?
At the end of this section I'll list the articles that go into detail about different types of expenses you can claim.
Your major expense, if you drive, is your car. In fact, we're going to have six different articles about the expense of using your own vehicle.
That might seem like overkill. However, most of us drive a ton of miles to get these deliveries completed. For many of us, that car expense can reduce your tax bill by thousands of dollars. The IRS lets you write off 56¢ for every mile you drive as part of your delivery business (for 2021). If you do nothing else, keep track of your mileage.
The thing is, there's a lot more to that. That's why we have several articles related to the car: tracking business miles, calculations for the actual expense method, what car expenses you can claim when claiming the standard mileage deduction.
Another example is your smart phone. Most of us get our orders on the food delivery app, and that app is a big part of our day while out on deliveries. That means it's reasonable and necessary to say that's an expense related to your business, thus the IRS lets you claim the business percent of your use of your phone and your phone and data plan.
Can I claim anything I want?
No. No. Absolutely No.
I will warn you. Don't go crazy. There's a recurring theme in this Tax Information Series: The IRS looks for patterns.
When you fill out your schedule C, you tell the IRS what kind of business you operate. They've got data on thousands of businesses like yours. That means they've got a good idea what kind of expenses are reasonable and necessary for a delivery business.
Be reasonable on the one hand.
On the other hand, be thorough. Capture every penny of expense you are allowed to capture. Capture every mile you drive for business.
Unless of course you just enjoy sending too much money to the government.
We'll talk more about car expenses, commonr expenses not related to your car, and special deductions in the following articles:
- An overview of claiming car expenses
- How to track miles when delivering.
- What miles can you track when delivering for your business?
- Can you recover miles that you forgot to track?
- Comparing claiming actual expenses vs standard mileage deduction
- Three special car related expenses you can take even when claiming miles
- How to claim expenses if you use your bike, e-bike, motorcycle or scooter
- Other common delivery expenses (beside your car)
- Can I claim meals eaten while out on delivery?
How do your expenses go on your tax return?
I spoiled this question earlier.
As I mentioned above, come tax time you fill out your expenses on an IRS form called “Schedule C: Profit or Loss for Business.” There's an income section where you add up any of your business income from Doordash, Uber Eats, Grubhub, Instacart, Uber or Lyft or any other gigs that you contract with.
Then there's an expense section. It has several different spending categories. You add up the total spent for each category and enter those totals on the form. You'll also add whatever information you need for your vehicle expenses.
You're not required to list every single expense line item on the form. It's only the total amounts.
Subtract expenses from income, and you have the income you received for your business. That income is used two ways. Income is added to any other income on your 1040 tax form for purposes of figuring out your federal income tax. And then your profit is also entered on Schedule SE to help you calculate your Self-Employment taxes(the self employed version of Social Security and Medicare taxes).
It's really as simple as that.
If you know and have tracked your expenses, it can make all the difference in the world between keeping your tax bill at bay and paying way too much on April 15.
More articles in the Delivery Driver's Tax Series
- Introducing the tax guide for Grubhub, Uber Eats, Doordash, Instacart and other gig economy contractors
- Independent contractor taxes 101: What you are taxed on.
- What your real income is for gig economy contractors
- Understanding business-related expenses for gig economy independent contractors
- Deducting your car expenses
- What non car expenses can gig economy independent contractors claim?
- How to file taxes for Uber Eats, Grubhub, Instacart, Doordash, Lyft etc.
- How to save for next year's taxes
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?