You may notice a theme if you've paid much attention to tax content on this site. Most tax write-offs for delivery drivers are not deductions but business expenses. It's all about using Schedule C, subtracting expenses from business earnings, to determine your net profit. That profit becomes your taxable income.
However, some bonus tax deductions are available to self-employed gig economy workers. These deductions work like other tax deductions, taken out of your taxable income AFTER all of your sources of income have been added up during the income tax process.
And here's the beauty of these special gig worker deductions: You don't have to itemize to take them. They can be claimed whether you itemize or take the standard tax deduction.
There is one significant difference between business expenses and tax deductions. An expense reduces your income for both income and self-employment tax purposes. Deductions do not impact or reduce your self-employment taxes.
We'll look at the following special tax deductions for independent contractors for gigs like Doordash, Uber Eats, Grubhub, Instacart, Shipt, and others.
- Qualified Business Income deduction
- Self-Employment tax deduction
- Retirement savings for self-employed individuals
- Self-employed health insurance plans.
About this article
The purpose of this article is to discuss four special tax deductions for self-employed delivery drivers in the United States. We do not get into taxes for other countries. This is part of a series of articles on taxes for independent delivery professionals, and we'll link to other articles in the series where appropriate. You can also see a complete list at the end of this article.
We focus on how these taxes impact independent contractors in the gig economy. However, these deductions are available for most self-employed individuals who operate sole proprietorships, partnerships, and certain other business structures.
This is not tax advice and should not be taken as such. The purpose is to educate and inform about these deductions. You should seek guidance from a tax professional to determine how these deductions would work in your tax situation.
Qualified Business Income Deduction
The Qualified Business Income (QBI) deduction allows you to deduct 20% of your taxable business income. You claim it directly on your 1040 tax form (line 13 on the 2021 form).
20% is a pretty significant deduction.
The QBI was introduced in the Tax Cuts and Jobs Act of 2017. It was first available for the 2018 tax year and, as things stand right now, will remain open through the 2025 tax year.
QBI allows qualifying individuals to write off up to a fifth of their pass-through business income. Pass-through refers to business income that passes through to the business owner's tax return instead of the business being taxed directly.
Independent contractor earnings are pass-through. You calculate your profit on Schedule C, and that profit passes through to be taxed on your personal return. There might be exceptions if you incorporated or chose to be taxed as a corporation.
The Qualified Business Income deduction applies to profits earned by your business (line 31 of your Schedule C). They do not apply to investment income, earnings from companies located outside the United States, or personal income (such as interest and W2 wages).
The IRS provides more information about qualifying for the Qualified Business Income deduction.
How QBI works
There are some limitations.
- The deduction may be limited or unavailable after certain income thresholds. The starting threshold for the 2022 tax year is $170,050 for single filers.
- It is not available for owners who run “specified service trades or businesses (SSTBs), such as doctors, lawyers, and accountants.
The QBI deduction is calculated on IRS form 8995. On form 8995, you total up all qualified business income and multiply that by 20% (or divide by 5).
Along with your standard or itemized deductions, QBI is deducted from adjusted gross income (AGI) to determine your taxable income. It does not reduce your income for self-employment tax purposes.
Is gig work (Doordash, Uber Eats, Instacart, Lyft, Grubhub, etc.) an SSTB?
Independent contractor delivery and rideshare work is not a specified services trade or business. That's good news, as it means you're not disqualified from QBI income.
Is independent contractor work for rideshare or delivery eligible for QBI?
Gig economy delivery and rideshare work is a qualified business for QBI. Profits are generally eligible for the QBI deduction unless other restrictions (such as income) apply.
Why would my tax software say I didn't qualify for QBI?
This will usually happen in three situations:
- Your income is too high
- You didn't make a profit on your business (expenses were higher than income)
- Your taxable income is already at or below $0.00.
Remember that QBI is based on business profit, not the money received for your gig work before expenses. If you had zero profit, you would not receive a deduction.
QBI is not like a refundable tax credit. It only reduces your taxable income down to $0.00.
Self-Employment Tax Deduction
If you had a profit leading to self-employment tax, you can write off half of your self-employment tax.
Self-employment tax covers Social Security and Medicare taxes. If you are an employee, your employer has to pay half of those taxes, and you pay the other half. However, when you're self-employed, you pay both halves.
An employer can write off their share of those employment taxes. This deduction levels the playing field by letting you do the same thing.
How the self-employment tax deduction works for independent contractors in rideshare and delivery.
The process starts with Schedule SE. That form takes your business profit (line 31 of Schedule C) to calculate your self-employment tax. Once self-employment tax has been determined, line 13 of Schedule SE has you multiply that by 50%.
The next step takes place with IRS Schedule 1. Take the amount from Schedule SE line 13 and put that on line 15 of Schedule 1.
Finally, your self-employment deduction and other adjustments on Schedule E are subtracted from your total income on your 1040 to determine your adjusted gross income (AGI).
Notice that you will only have an adjustment if you owe self-employment tax. You wouldn't owe self-employment tax if your business expenses were greater than your income. Also, note that this adjustment won't lower your AGI below $0.00.
Qualified retirement savings plans for the self-employed
Self-employed individuals may qualify for special retirement savings plans. The tax deduction works the same way as an IRA deduction, except the two go on different lines on IRS form Schedule 1. These deductions, along with others on Schedule 1, are subtracted from total income on Form 1040 to determine Adjusted Gross Income (AGI).
The main advantage for the self-employed is that they may let you set aside more tax-free money than you can with an IRA. You can set aside up to $6,000 yearly in an Individual Retirement Account (or $7,000 if you're over 50).
Two self-employed options let you save more. A Simple IRA lets you invest up to $14,000 annually, while a SEP IRA allows up to $58,000. There are several rules and qualifications. IRS Publication 50 goes into more detail.
Self-Employed Health Insurance
You can deduct the premiums from your taxable income if you must get your own health insurance while self-employed.
This is an advantage over other health insurance write-offs because you can claim those premiums regardless of whether you itemize or take the standard tax deduction.
This deduction is taken on Schedule 1 and works the same as the self-employment tax and self-employment retirement deductions. Along with other adjustments, it's subtracted from total income on form 1040 to determine your adjustable gross income (AGI).
There are some limitations, including:
- The deduction can not exceed your business profit (line 31 of Schedule C).
- You cannot claim this if you are eligible to participate in an employer-subsidized health plan offered by either your employer or your spouse's employer.
The calculations and rules can be complex because it's month-by-month eligibility. You should seek guidance from your tax professional to determine how this works.
The Delivery Driver's Tax Series
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?