How do you know how to calculate what you should pay in quarterly in estimated tax payments when you deliver for Doordash, Grubhub, Uber Eats, or others? Do you have to pay quarterly? WHEN do you have to pay?
NORMALLY you would make your second quarterly payment on June 15. This year, the federal government has moved back the quarterly payment date for both the 1st and 2nd quarter to July 15 (as well as the deadline for 2019 taxes) thanks to the Covid-19 pandemic and the impact of the lockdown on the economy. I had planned this episode based around the old June 15 schedule, but thought I'd go forward with it anyway just so you are prepared.
Not that the payment times ever made much sense anyway. It makes sense to pay every 3 months. Three months is a quarter. So the month after the first quarter, the month after the second quarter, and so on and so on. Makes sense, right? Not to Uncle Sam. We have April, that makes sense. And then…. June? 2 months later. THEN September, 3 months, and then in January which is four months later.
Not that it matters, but here's the story on why it's so wonky.
If you're wondering why that is, what I understand is it goes back to a day when the government actually relied on real money, instead of just printing up whatever they wanted to use. They had this crazy idea that you actually had to HAVE money in hand in order to spend it.
So this goes back to something even far earlier – that the government figured out they couldn't wait until the end of the year to get all the money in from taxes. So they began requiring payments to come in every quarter. That way they could have the money they needed along the way. Payroll and individuals sent in their payments in April, July, October and January for the previous quarter. That makes sense, right?
Okay but then the time came when there was a problem. The government's budget year is October 1 through September 30. But they were running out of money before the end of October, since a whole fourth of their money wasn't coming in until AFTER the budget year ended. So this wasn't going to work, so they decided to change that third quarter so the payments come in in September, instead of October. And I guess it made sense to move the 2nd quarter back to June. But we don't want to change ALL FOUR quarters, that would make too much sense, wouldn't it? That leaves us with our wonky calendar.
Welcome to Uncle Sam Logic 101.
Why should couriers with Grubhub, Doordash, Uber Eats, Postmates and others even pay attention to quarterly tax estimates?
You maybe don't need to. Everyone is going to be different.
If you do this full time and are actually making money at it, you probably want to pay attention to it.
I don't want to go down the rabbit hole too much about taxes. We have a section of articles to help understand how taxes work and what is taxable and all of that. I recommend that you read through some of those to get a better idea of how taxes. You can also check out episode 21 which gets into an explanation of how taxes work.
But here's what it boils down to: No one is withholding any taxes for you as an independent contractor. Not Doordash, Postmates, Grubhub, Uber Eats, no one. And honestly, how could they? Our income is based on so many things and if one person has far more in expenses than income, they're not going to be happy if money is held out.
As an independent contractor, as a business owner, YOU are responsible for figuring out what your taxes will be. If it's going to be very much in taxes, Uncle Sam wants that money sooner rather than later. If you have more than a thousand dollars to pay in on your taxes, the IRS will charge penalties and interest for not having sent it in.
And here's another reason that's a bit more practical. I really advise you keep the money you save for taxes in a separate account, just to remove the temptation to spend it. If you pay it in quarterly, now you can't touch it and you won't run into problems on tax day.
Unless of course you're like the government and you can just print money whenever you want to spend some.
How do you send in your quarterly estimates?
Before I dig into how to calculate how much to send in for your quarterly tax estimates for Doordash, Uber Eats, Grubhub, Postmates, Lyft, or any other independent contractor gig, let's talk about HOW to send it in. Just because that part is easy.
The first time I did a quarterly payment, it intimidated the heck out of me.
If you've never looked at it, go check out the form you use. It's IRS 1040-ES. Start reading through the instructions.
Need a good stiff drink yet?
Seriously, I started going through the instructions and I really was ready to just pass. I'll take my chances on the penalties, thank you very much.
But here's the crazy thing: When you get to the form itself that you send in, this is the form in its entirety.
Here's what it boils down to:
Who are you, and how much are you sending in?
That's pretty much it in a nutshell. You enter your identifying information and in the box in the top right, enter how much you are sending in.
The IRS isn't asking for all those worksheets. Those are there to help you get a feel for how much to send in. But there's no requirement to USE the worksheets. Their main requirement is that you have to have sent in enough to pay for within $1,000 of your tax bill by the time you file your taxes.
In summary, this is what you do:
- Figure out how much to send it in.
- Tell the government how much you're sending in
- Send it in.
It's really that simple.
Okay, but how do I calculate how much to send in as a contractor with Grubhub, Doordash, Postmates, Uber Eats, Lyft, etc.?
There are a few different ways you can do it. I looked at three different methods. And honestly I think you could come up with your own method. I kind of thought that I had done that but I think when it's all said and done I more or less came up with my own version of someone else's plan. I'll get into that in a bit.
Here's what it boils down to:
Get a feel for how much you will have to pay in taxes at the end of the year, and send in enough to cover you for the current quarter.
Remember that there are two elements for your FEDERAL taxes as an independent contractor (and there's always state and local, I'm not even going to try to cover all those):
- Self Employment Tax: That's 15.3% of EVERY DOLLAR of profit (what's left over after your expenses). This does not get adjusted by deductions or exemptions and it doesn't scale based on income
- Federal Income Tax: This is the one that makes it so hard to know what you have to pay. It varies so much based on so many factors. You don't start paying taxes until you've earned so much money. You pay more as you make more. It's also based on the TOTAL of all your earnings (and your partner's if you are filing a joint return).
This isn't the place to try to walk through what that second piece is going to be. Maybe the articles in the tax guide can help you there.The money you'll owe is whatever is left over from these taxes after applying what you withheld from any W2 earnings, and whatever tax credits you might get (Earned Income Credit, Dependent care, education, energy savings, the list goes on and on).
Your job with the tax estimates:
You want to make sure that you are sending in enough each quarter that when tax day comes along, you don't get stuck with an oh-my-goodness tax bill.
Personally, I feel like you also want to make sure you haven't saved TOO much. While yes, it's awesome to get a great refund back, that refund means you just gave Uncle Sam an interest free loan. I'd rather use the money myself, but maybe that's just me.
Three methods to calculate your tax payment as an independent contractor with Uber Eats, Doordash, Lyft, Grubhub, etc.
There are more ways than just these, but I want to share three different approaches.
The Kind of Like Payroll Withholding Method.
Here's what I mean.
When you get paid as an employee, there's a whole formula for figuring out your withholding based on all sorts of factors. How often are you paid? How many dependents are you claiming? What is your status? It's all the stuff you enter on your I-9 form as an employee. You know how if you don't have a lot of deductions, they take more out of your check? Or if you didn't earn much it's a MUCH smaller percent of your earnings that's taken out?
That's kind of what this method is trying to do. It tries to take all of this into account. It might be the most accurate of all the methods. Quickbooks Self Employed (SE) probably does the best with this method. You enter in all your income and expenses and it will calculate your estimated tax based on your situation. You fill out a tax profile that includes any other income that you might have (as well as your partner's if applicable).
Quickbooks SE has a menu item where you click to see what you should pay in each quarter. That's simple. They calculate what it looks like you'll earn for the year based on what you've been earning, so they do a lot of the math for you. Then they look at your profile and estimate what your total taxes are. This allows them to project what you should pay in. For someone who likes a straight forward book keeping program that is set up already for independent contractors, this may be the best way to handle all that. Do note that my link above is an affiliate link, so I do get some compensation when someone signs up for the software.
The IRS Method: Guess your taxes and send in a fourth.
It's actually not a bad method. It looks more indimidating than it really is. This is probably a lot like what Quickbooks Self Employed does, but with one big difference at the end.
You fill out two worksheets. To fill these out, you have to try to project what your year end total will be. You can do that by adding what you've earned to what you expect. You can usually get an idea based on your averages.
The first worksheet takes what you project your profits to be (what's left after your miles and expenses) for the year. You use that to calculate your self employment tax.
The second work sheet is more involved. Here you enter other earnings you expect to have and what deductions you think you'll take. There you can estimate your tax bill, and then you can deduct tax credits and withholdings you think will happen, and that will give you an idea of what you will owe at the end of the year.
Quickbooks Self Employed seems to do this. But here's the difference.
The IRS form simply asks you to divide by 4. That's what you pay whether it's a 4 month quarter (4th quarter) or a 2 month quarter (2nd quarter). Quickbooks calculates based simply on what you earned for the quarter.
The nice thing about using the IRS form is, it lets you get a good feel for what you can expect, without having to pay for a software program to get you there. You do have to do a little more figuring on your own when it comes to estimating.
The percent of your profit method.
This is essentially what I do. I found out that Stride, a free program a lot of drivers like to use, does the same thing.
Ultimately here's how it works: You add up what you made for the quarter. You subtract your expenses and miles. You send in a set percent of that total.
How involved you want to get is up to you. With Stride, they have a place where you can enter in all your other expenses. Personally, I like to do it very simply – calculate my profit as revenue minus miles. That's just because miles are such a huge chunk of your deduction, all the other stuff doesn't really make a big dent.
I did not find a thing on Stride that would say how much to file for the quarter. All Stride does is calculate your profit and calculate your taxes on a week by week basis. There's no report for quarterly estimates, so you have to add up all the weeks in your quarter.
That's not a bad thing. If you're following their guideline and saving money each week, you already know the total amount anyway. What did you save? Put that number on the IRS form and send it in. That's pretty easy.
The biggest difference between what I do and what Stride recommends is the percentage. I save 20% of my profit, Stride calculates 30%. Frankly I think 30% is high for most gig workers. That's assuming a 15% federal income tax level, which is assuming total taxable earnings of over $80,000. I've found my 20% has actually been far more than enough (but remember, everyone's situation is different!!!).
What's the best method for you?
The best method for you is whatever is best for YOU.
There's not a right or wrong here.
If you like to be by the book, maybe go with the IRS method. You have to do some extra work to project your total income, and if you're decent with math that's not hard to do. If you don't like math maybe it's easier to let Quickbooks or Stride figure it out. I kinda like the 20% of a very simple profit calculation because it's fast but seems to be accurate.
I recommend walking through the IRS worksheets in 1040-ES, just to get a feel for how much you might have to pay in taxes for the year. It's a pain and it's a little cumbersome. But it's a good exercise because you have an idea what to expect. That's part of how I came up with my 20% number – if the total pay-in for the year would be $4800 and you expect $24,000, you're around 20%. Maybe 10% is better for you, maybe 30%.
Don't get freaked out by it. Remember, the form is easy. Who are you? How much are you giving us? That's it.
It's okay to calculate too little, you'll just pay more next quarter or on tax day. It's okay to calculate too much. Maybe then you don't have to pay much on the 4th quarter payment, or you get a refund. But if you're paying attention, I guarantee you won't be freaking out on tax day, because you've been following this.
That's the main thing I want you to take away on this whole thing: Avoid being blindsided. Pay attention now, you'll thank yourself.