While Doordash and other delivery gigs are a great way to bring in some extra cash, at some point reality hits.
It's not enough that taxes are even more complicated when you're a self employed independent contractor. You realize that you're on your own. No one's withholding taxes for you.
To top it all off, you can't just ask “how much will I owe?” Well, you could, but since everyone's situation is different, you'll never get a good answer (but you will get a lot of terrible answers if you ask on Facebook or Reddit, etc.)
So what to do you do?
It's true. Taxes are tricky, to put it mildly. It's impossible for me or anyone to put together a single article to help you know exactly what to expect. However, I did put together a calculator to help you get an idea what to expect that your Doordash taxes (as well as from earnings for gig apps like Uber Eats, Instacart, Grubhub, Uber, Lyft, and the list goes on) will impact your overall tax bill.
I can't tell you how much you'll owe, or what your refund will be this or next tax season. That involves too many moving pieces, with other income, tax credits and adjustments. What this calculator will do is give the Tax Impact from your Doordash (and others) earnings.
This is not tax advice!
Understand that this is not professional or legal or any kind of tax advice. You should seek out your own tax professional if you need advice directly related to your individual situation.
In fact, if I were to give out any advice at all here, it's exactly that: Get a tax pro. If you're not real sure how things work with your taxes, it's so easy to miss so many things. Find a good tax person who understands how it works for a 1099 contract worker and for the self-employed. You'll find it's worth the extra money.
I'll repeat myself: this is not to provide tax advice. It's to educate and inform. This is part of my series of articles on Doordash taxes. The purpose here is to provide the information to help you understand how taxes work. It is designed to give you an idea what to expect, and why things are like they are.
If you're armed with knowledge, you're better prepared for what comes at the end of the year. You have an idea whether you need to save each quarter.
Going forward, we'll talk about the Doordash tax calculator. We'll explain why we're doing things this way and what this calculator will provide. The calculator won't tell you what you will owe or if you'll get a refund as a contractor for Doordash, Uber Eats, Grubhub, Instacart or others. But it will help you get a feel for how your income from those apps will affect your final tax bill.
Here's what you'll find in this article:
- Why does this Doordash tax calculator measure tax impact (and what does that mean)?
- Three important things to understand about your tax impact
- How am I calculating tax impact?
- How can you use the tax impact to get an idea what you'll owe (or get for a refund)?
- The Doordash tax impact calculator
Why does this Doordash tax calculator measure tax impact (and what does that mean)?
The bottom line is, your tax situation is unique. It's probably different than it was last year.
I'll give you my own example. My wife and I each brought five kids into our marriage. EACH. Insane, right? At the time, nine were still living with us (imagine that with only two bathrooms). They've all grown up now, but you can imagine what we were thinking when the new $3,000 child tax credit was passed. That sure would have come in handy back in the day.
But that's the thing. Claiming that many kids is a lot different than not claiming any. Being single is a lot different than married with kids. Delivering for Doordash and others as a full time business is a lot different than doing this as a side hustle on top of a full time job.
There are so many factors that it's really not possible to try to measure all of those things without overcomplicating things. Many of those factors are related to personal deductions and tax credits.
Instead of getting into the weeds of all those credits, deductions, and adjustments, I decided to create something that asks a very simple question:
How will my Doordash (and other self-employed) earnings impact my tax liability?
What is the Tax Impact?
Here's what we're trying to determine:
How much will your taxable business income impact your tax bill come April 15? Or whatever date, lately the due dates keep getting extended, for 2021 it's May 15.
Remember that what you pay in or what you get as a refund is not the same thing as your tax bill. The tax process in a nutshell is:
- Figure out your tax bill
- Compare it to what you've already paid.
- If you paid more than your bill, you get a refund
- If you paid less than the bill, you owe money.
Of course Uncle Sam likes to throw a lot of wrenches into the works. Tax credits for example count as payments. Which brings us back to how crazy it is to try to provide a quick estimate of what you'll pay or get back.
What we can do is get a pretty good idea how your earnings will change the tax bill part of the equation. Here's an example: Say your tax bill based on other income would have been $2,000. That's before all the tax credits and withholding and all that are applied. But now your delivery business profits have added $1,000 to that bill.
That $1,000 is the tax impact. That's how much more you have on your tax bill.
Tax impact helps you know how much difference your business income will make on the front end, and how much it increases or decreases your payment or refund.
Three important things to understand about your tax impact
Here's the deal: You make more money, you owe more taxes because of those earnings.
The trick is, how do you know how much difference it makes?
We won't go into a lot of detail on all of these things. That could make this crazy long
That said, here are three basic things that help you understand how your Doordash earnings will impact your taxes (alongside, of course, any other earnings from other gigs).
1. Your tax impact is based on your profits, not overall earnings from delivery fees, service fees, incentives, tips, etc.
This is good news.
Technically, we are small business owners. The income we earn because of the Doordash app (or any other food delivery app) is treated like business income. The Internal Revenue Service looks at us like business owners. In the business world, our profit is our income.
It's not how much you were paid as a Doordash driver. That part is known as your gross income. This is not figured from your 1099's from them or from other gigs like Uber Eats, Grubhub, Instacart, Lyft or any other independent contractor gigs.
It's what's left over of that money after you take out your business expenses. This is known as your net profit.
For most of us delivery drivers with third party delivery services, a big part of that is all those miles we put on our cars. For the 2021 tax year that means 56 cents per mile gets taken off our earnings. (In 2022 the mileage allowance jumps to 58.5 cents per mile.
And then you remove other expenses such as your cell phone, hot bags, cell phone holders, or any other expenses that are necessary and ordinary for the operation of your business.
All of that will be figured out using a Schedule C on your tax forms. The Profit and Loss from Business form is used to add up all your income, and then add up all your expenses. The amount that's left over is what will make a difference in your tax bill.
And, this is why the first step in the calculator will be to estimate your business profit.
2. There are actually two different taxes that come into play.
We don't only have to worry about our Federal income taxes. We also have self-employment taxes.
Calculating the self-employment tax impact is actually pretty simple once you've figured out your profits. It's a straight 15.3% on every dollar you earn. There are no tax deductions or any of that to make it complicated. No tiers or tax brackets. The only real exception is that the Social Security part of your taxes stops once you earn more than $142,800 (2021 tax year).
Related: Understanding Top Dasher and its Requirements.
Income tax is, of course, a completely different story for delivery. Your tax impact here is dependent on a lot of outside things. What kind of deductions do you have? Do you or your partner have other income? And then, as you earn more, you go from 12% taxes to 22% to 24% to 32%.
The two taxes are figured individually from one another. Self Employment taxes are based only on your business profits. For income tax, your business profits are added to any other income like W2′, interest and investment income, etc., and then deductions and adjustments are applied to figure out the income tax.
3. These things impact your tax bill – the part BEFORE payments and credits are applied.
I think I'm repeating myself from earlier. But it's worth repeating.
The idea is, how much do these add to your tax bill. What do they do to the part that comes before all the payments and credits are applied?
How do you calculate tax impact?
There are five steps here:
- Estimate your business profit
- Calculate self-employment tax
- Add any other income to your business profits.
- Subtract any deductions and adjustments from that total income to get taxable income.
- Calculate your income tax impact.
- Add your self-employment tax to income tax impact to get total tax impact
I'll go into a little more detail below on what we'll do with this particular tax calculator.
1. Estimating your business profit.
The first thing is, you're going to do a quick calculation of how much money you made, and how much you spent.
Personally, when I'm estimating how much to save for Doordash taxes (and other gigs), I make it really quick and easy. I just subtract 56¢ per mile from my earnings (2021) There are other expenses, but they pale in comparison to the standard mileage deduction. That's what I use as a fast easy estimate of my taxable income.
This calculator will have you do this:
- Add up all your Doordash, Grubhub, Uber Eats, Instacart and other gig economy income.
- Subtract 56 cents per mile that you recorded on your mileage log (2021 tax year, 58.5¢ for 2022).
- Subtract other expenses.
One last step is to multiply that by .935. This accounts for an adjustment you get on both income tax and self-employment tax to cover half your self-employment tax.
Simple example: $10,000 independent contractor earnings, 10,000 miles and $1,000 other expenses. That's $5600 for the standard mileage rate, and a grand total $6600 expenses. That leaves $3400, which multiplied by .9235 = $3,139.90.
That's your taxable business profit.
One thing I want to point out: Notice how your business expenses go here? A lot of people make the mistake of thinking they have to itemize their tax deductions to claim their business expenses. That's an incredibly expensive mistake. Business expenses are factored in on your Schedule C, NOT in itemized deductions. What this means is you can claim all your business expenses AND take the standard tax deduction.
2. Calculate your self-employment tax.
This one's easy. Multiply that profit by 15.3%. In the example above it's $486.39. That's your self-employment tax.
There are two exceptions.
- If the taxable profit is less than $400, you don't owe self-employment tax.
- If the taxable profit is more than $142,800 (2021 tax year), anything earned more than that is only taxed at 2.9% (the Medicare portion of self-employment tax).
I gotta say, if you had enough profit to hit that cap working in the gig economy, my hat's off to you. You are killing it.
Notice this is on every dollar. Tax deductions don't change anything here. Outside your business expenses, the only thing that reduces your self-employment tax basis is you can take a 7.65% adjustment to compensate for you paying the employer's half of social security.
3. Add any other income to your business profits.
If you worked another job, you'll add your income from that job (or those jobs). Did you have other taxable income? Did you have a profit from another business? That all gets added in as well: Investments and income, certain benefits that are taxable, etc, add it all up.
Are you filing a joint return? You'll add in your partner's income as well.
This is all for income tax purposes. Income tax and self employment tax gets calculated differently. As we noted, self-employment tax is only based on your business profit and it isn't adjusted by personal deductions. Income tax on the other hand is based on the combination of all forms of income.
4. Subtract deductions and adjustments.
As I noted at the end of Step 1: Your business expenses don't go here. You don't need to itemize to claim those business expenses. What we're talking about here are your personal tax deductions.
For the sake of simplicity, this calculator is going to do three things:
- Assume the standard deduction.
- We'll add in the 20% qualified business income deduction that you get as a self employed business owner.
- We'll give you a place to enter additional adjustments (extra deductions if you think you qualify or other adjustments (NOT credits) that you know of.
5. Calculate your income tax impact.
Remember, this isn't about figuring out what you'll owe or what refund you'll get. This is about figuring out how much your business earnings will increase your taxes (or decrease your refund).
The whole point of steps 3 and 4 are to get an idea of what your tax bracket will be and what part of your business profits are taxable. And at what percent.
One thing we do here: We assume that your self-employed income is an addition to other income. When we are figuring a tax impact, it's your self-employed income that's being taxed at the highest rates.
Here's what I mean: The first so many dollars of taxable income are taxed at 10%. In 2020, for single filers that was the first $9,875. The next several dollars are taxed at 12%, then up to 22%, then 24%.
Since we're looking at tax impact, we're assuming that if you get pushed into a higher tax bracket because of your extra self-employment income, it's because of that income being tacked on to other income. So the income that got taxed the highest is going to be from your self-employment, at least in our calculations.
I know, that seems a little complicated. Blame the US Tax Code.
6. Add your self-employment tax to income tax impact to get total tax impactact.
Adding your self-employment tax to your income tax impact number will tell you how much higher your tax bill is because of your business. It will also give you an idea of how much more you may pay in (or how much less your refund will be).
How can you use the tax impact to get an idea what you'll owe (or get for a refund)?
It gets trickier from here.
It depends on a lot of things that we just don't have the space here to try to cover.
Your tax bill is just a beginning. From there you subtract any payments you already made (either estimated payments or withholding). You'll also subtract tax credits. It gets confusing because there's a set order in how all this is done. But in the end, it's your tax bill minus payments and credits that determines what you'll owe (or if you get a refund).
We're not trying to calculate all that overall refund and paying in part here. There are just too many extra variables here. All we're doing is figuring out your tax impact.
The best way to use this information is to get a feel for how much extra you'll have to pay in tax because of your business. If you know your tax impact is $1,000, that tells you to be prepared to have $1,000 set aside to cover that.
You can fine tune all that, depending on how well you know your tax situation. For instance, if you have a pretty good feeling that without your business income, you'd get a certain refund, you can plan accordingly.
- If you think you'd get a $500 refund, and had a $1,000 tax impact, then you can expect that you'll be paying in around $500.
- If you think you'd normally get a $2,000 refund and had a $1,000 tax impact, now your refund will only be about $1,000 ($2,000 minus $1,000).
However, if you don't have a great idea what to expect, play it safe. It's better to expect to pay more than what you really have to pay in.
A better plan is to develop an idea throughout the year of what to set aside. Save money each week as though it's your own form of withholding, send in what you saved each quarter as an estimated tax payment.
The Doordash tax impact calculator
You can click here to access the calculator. You'll be prompted to enter how much you made, how much you think you'll owe, how you'll file, and some places to enter extra information.
Remember, this is not a guaranteed number. This is an estimate to get you an idea. It depends a lot on information you provide, and there are tons of factors that can make an impact in many different directions.
And finally, I'll repeat, this is about tax impact. How much higher is your tax bill going to be because of your self-employment? It's a tool to help you plan, but not a guaranteed number.
Additional Resources for Doordash (and other gig app) Taxes
You can always start direct from the horse's mouth. The IRS has a great resource with their Gig Economy Tax Center.
One of the reasons I put together articles like this was, most information that I could find about gig economy taxes were in a single article. They touched on just enough to give you some ideas but never went far enough. I'm sure that's because trying to put it all into one article would make your eyes glaze over, right?
I wanted to do more than that. You can get a big picture overview of how taxes work for delivery drivers here. However, I've tried to provide some more in depth resources. In the side bar (if you're on your mobile phone you might have to scroll down a little) I have a menu of links to articles from our Delivery Driver Tax Guide.
As I mentioned earlier, this is part of a series I put together that focuses on Doordash taxes. It's a series that applies to other apps like Grubhub, Uber Eats, Instacart, Postmates, and generally applies to other driving gigs like Uber and Lyft. The series involves several FAQ articles, including:
- Frequently asked questions about 1099's and Income
- Frequently asked questions about claiming your car and the standard mileage deduction
- FAQ's on other business expenses for delivery drivers
- Frequently asked questions about your Schedule C tax form
- FAQ's on the tax filing process for gig economy contractors