You might be past the ‘time to sigh' stage. Maybe it's more like ‘time to use strong language.' Whether you do gig work full time or it's a side job, taxes can be frustrating.
Why are taxes such a mystery? I mean, they must be. Everyone's telling you not to bother asking questions or trying to find out. Only a tax pro can figure it out, right?
To make it worse, have you seen all the bad advice floating around out there? Go check it out on Dasher Facebook and Reddit groups. Better yet, don't. Those are depressing places. Let's just say there are a lot of mixed up ideas.
What if I told you it doesn't have to be that bad?
I think we psych ourselves out. We dread tax season because it's such a mystery.
But that's the thing: Doordash taxes aren't that much of a mystery. The basics are much simpler to understand than you might think.
And once you understand them, knowledge is power. Those taxes you pay for Doordash aren't so intimidating any more. Once you know how it works, you can be prepared.
Let's break down how Doordash and independent contractors work. In plain English!
Here it is in a nutshell:
When ever you make money, Uncle Sam wants a piece of it.
How Uncle Sam decides how much to collect, and how it's collected, that's where there's a bit more detail.
Here's why I'm writing this the way I am. I see a lot of articles out there that try to explain taxes. Everything I find is just an overview with just general information.
Okay, this is an overview too. Guilty as charged.
That's because it's important to start with a basic understanding. But once you understand how it works, it's hard to find the details.
That's where I want to offer a bit more. Let's talk about how it works here. Once you understand how it works, the details become less intimidating. So from here, I want to give you more details.
I've put together several FAQ pages on how your taxes work. I have a tax guide that covers a lot of the same questions but in a more explanatory manner. All of this so you can get the overview, then drill down into the details. You'll find links to articles with more detail on a topic as we go along.
Here's what we'll talk about in this overview.
- No taxes are taken out of your Doordash paycheck.
- You will file your own taxes on Doordash (and other independent contractor work) income as a business owner.
- You're taxed based on profit, not on the money you get from Doordash.
- Understanding the different taxes you pay
- Understanding how the tax return process works and how your Doordash income fits into it
- The best ways to use this knowledge and prepare for taxes.
But first: a disclaimer:
I'm not a tax pro.
This is NOT tax advice.
I really, really, really recommend you get someone to help you with your taxes. Find someone who understands self employment. Get a CPA or accountant, someone who does this for a living.
Get a tax professional, not a tax preparer. That's the only piece of advice I'm offering here.
The rest of this is about education. The purpose here is to explain how it works, not to give you tax advice. If you need specific advice for your taxes, seek out your own advice from a tax professional.
Is this a contradiction? I say it's not as mysterious. Then I say get a tax pro.
No, I don't think it is.
Your tax pro knows the details. They know the more complicated parts of it all. But if you understand how it works, you are able to do more yourself. You make it easier. That keeps your costs down.
I mention Doordash a lot when talking about taxes here. That's simply because Doordash has become so dominant in gig economy delivery. This stuff applies just as much for Instacart, Uber Eats, Grubhub, Postmates. The basics are pretty much the same for Uber and Lyft and other forms of self-employment.
Now that that's all out of the way, let's get started.
No taxes are taken out of your Doordash paycheck.
In fact, you don't get a paycheck.
I know it feels like a paycheck. For most of us it's direct deposited the same as a paycheck. But all it is is payment. That's something very different.
There's no paystub. And no taxes are taken out of what you receive. They aren't sending in your Social Security and Medicare. They don't take money out for your state or Federal income tax.
This is because you are an independent contractor. You're doing this as a business, not as an employee. The delivery fees and tips from Doordash (and others) deliveries is business revenue. It's really no different than the money you pay a store, or that you give your mechanic for fixing your car.
As a customer for other businesses, you don't take money out of what you pay them for tax withholding. In the same way, neither Doordash, Uber Eats, Instacart, Grubhub or any other gig company take money out of what they pay you. They're paying you as though they are your customers.
Not your employers.
Personally, I think this is good news. You get to take control.
I kind of prefer it this way. It makes me super aware of how much of my money goes to taxes. When your boss just takes it out before you even get the money, that tax liability doesn't hit you quite the same way.
You will file taxes on your Doordash (and other independent contractor work) income as a business owner.
You may not be aware that you're running a business.
There's a good chance you don't think you're running a business.
Ready or not, the moment you signed that independent contractor agreement, you became a business owner. A lot of us in the gig economy are what you could call accidental business owners.
When you contract with Doordash (or any other company) as an independent contractor, you're agreeing to provide a service as a business. It's actually a business to business relationship.
What that means is you'll be paying taxes as a business owner, not as an employee. For the vast majority of independent contractors, we're sole proprietors. How that works is, we figure out what our business made, and then pay tax for those earnings on our individual taxes.
You'd be amazed at how many small businesses file their taxes the same way we have to. It's called pass through taxation. Your profits (and taxes) from your business pass through to your personal return.
You're one of those small businesses. Welcome to the club.
Your taxes are based on profit, not the money you get from Doordash and others.
I was going to make this a sub-point of the filing as a business. It just seems to flow.
But this is incredibly important to understand. It's worth its own point.
A business's income is not its revenue. It's the profit. Profit is the amount left over after expenses. This is the big difference between being taxed as a business and taxed as an employee.
As an employee, your taxes are based on that W-2 number.
In a bit I'll talk about what your version of a W-2 is. It's not your 1099. Your 1099 is only your business revenue. You could call it your sales. You sold a service.
As a business, you subtract the cost of doing business from your revenue. That gives you your profit. Profit is your income as a business owner.
Understanding the different taxes you pay when you deliver for Doordash
We usually think of just federal income taxes.
There's more than that. That's not just because you're an independent contractor. Even as an employee, you pay three different kinds of tax.
Okay, sometimes it's more, sometimes it's less. Some cities and counties have their own income taxes. Some states have no state income tax.
The taxes are generally the same whether employed or self-employed. It's just handled differently when you're on your own.
Federal Income tax
Your tax bill will include a percentage of your taxable income. That's your federal income tax.
Federal income tax starts with adding up all your forms of income together. We'll talk a bit more about this process later.
You'll add up all of your total earnings from your W-2's (and your partner's if filing a joint return). You'll include your profit from your business (or businesses). Any other forms of taxable income like interest or certain investments all get added up.
Then you take away certain deductions. This is where your standard or itemized deductions come in. There are some special deductions you can take out here when you're self employed.
If your deductions are more than your total income, you have no income tax bill. However, if you had money left over after your deductions, a percent of that money is used to figure out your income tax bill.
Income tax is based on a sliding scale. The more you earn, the higher the percent that you pay. Under the current tax structure, you pay 10% of the first several dollars of taxable income. Then you pay 12% of the next several dollars. The more you earn, the higher the percentages you pay.
Full time Dashers don't often go over the 12% tax bracket when delivery is their only income. If this is a side hustle or you're filing a joint return, you may move up into the 22% tax bracket or higher.
Social Security and Medicare for Dashers (Self-employment tax)
A lot of it is very much the same, and a lot is different.
Here's where it's the same for us as it is for employees:
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Social Security and Medicare are taxed on every dollar you earn. If you've ever had a small paycheck as an employee, you may have noticed that no federal income tax was withheld, but Social Security and Medicare taxes still came out of your check.
This is true as an independent contractor. All those tax deductions (standard or itemized)? They don't reduce your Social Security or Medicare taxes. You owe on the first dollar of taxes.
But here's where things are very different:
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One reason we don't think about Social Security and Medicare as employees is, we never have to file any tax forms. They just take it out. You get paid, and Uncle Sam just gets 7.65% of every dollar you earn. No deductions, no forms. It just comes out.
We're not employees. So there's no employer taking that out and sending it in. We actually have to calculate our income, then fill out a form to figure out our Social Security and Medicare. Then we pay that when we pay our income tax.
But here's the biggest difference: As independent contractors, we pay double.
It's not that Uncle Sam gets any more money. They get 15.3% of our income whether we're employees or we are self-employed.
The difference is that an employer pays half of that FICA. 7.65% comes out of your check and your boss has to match that. When you're self-employed, you pay both the employer's portion and the employee portion.
Since we have to pay the employer part as well, they call it self-employment tax.
State and local taxes
We're not going to get into detail on these because every locality is different. Some states just look at your Federal taxable income and you pay a percent. Then there are tax-free states. Other states may make you go through a whole complicated income and deduction process.
And then there's local taxes. Some local governments have their own income tax. We could spend forever talking about how all those work.
There may be exceptions to this: Generally, state or local tax are based on your business profits, not on the gross revenue you get from Doordash and others.
How income tax and self-employment tax are different for Dashers.
The important thing to remember when filing your federal taxes, you're filing BOTH income tax and self-employment tax at the same time. You will calculate both tax bills. Then, after counting credits and what you paid in, you'll either pay in or get a refund.
But there's some important differences to be aware of:
Income tax is based on the total of all of your income. Self-employment tax is only calculated from your business profits.
There are several deductions that will reduce your taxable income for income tax. Those deductions do not apply to self-employment tax. Just like an employee's FICA taxes, self-employment tax is charged on every dollar.
The income tax rate increases as your income increases. Self-employment tax is the same on every dollar you earn, up to a certain point ($137.700). At that point the Social Security part (12.4%) is removed but Medicare tax continues to be charged.
Some tax credits are applied only to income tax but will not reduce self-employment tax. Those are called non-refundable tax credits.
Understanding how the tax process works and how your Doordash income fits into it
Now that you know the two taxes involved in your Federal tax filing (Income and Self-Employment), let's look at how it all works as part of figuring out the tax bill.
There are four major steps to figuring out your income taxes:
- Add up all of your income from all sources.
- Reduce income (for income tax purposes) by applying deductions.
- Calculate your income tax and self-employment tax bill.
- Apply previous payments and credits to the tax bill and figure out if you pay in or get a refund.
There are a lot of nuanced details to this, but it pretty well describes what you're doing when you fill out your taxes.
1. Adding up your income.
Here's where you list all of your sources of income. What W-2 income did you have? How much did you profit from your business or businesses? Did you have other income that counts, like interest or investment income, some forms of retirement income, etc.?
You add that all up.
Sometimes you subtract. If your business had a loss, you subtract the loss from other income.
Your Doordash expenses are part of the INCOME process.
This is the part that throws a lot of people off. You might be expecting to put your expenses into the deductions part of the process.
Remember what we've been stressing so far: You are taxed on your profits. You are not taxed on the total money received from Doordash or any other gig companies.
To figure out your income, fill out a form called Schedule C: Profit and Loss from business. List the money you received for your business. Then list your expenses. Add the two up. If your income was more than expenses, you had a profit. It's that profit that gets moved to your tax form as income.
This is incredibly important to understand. Expenses go on Schedule C. Not on itemized deductions.
Your Schedule C is more like your version of a W2.
A lot of people think of 1099 forms as the independent contractor's version of a W-2. They're wrong.
There's one box on a W-2 box that displays income. It's very simple. You add that amount to your total income.
This is not true with a 1099. That 1099-Misc form you got from Doordash (or more recently 1099-NEC) is not added to other income. It gets moved to Schedule C. Line 31 on Schedule C, your total profit (or loss) is what gets added to other income.
It's your Schedule C that helps you determine what you are earning.
2. Reducing taxable income with tax deductions.
This is where your standard or itemized deductions come into play.
There's a long list of things that you can take as deductions. To claim them, you have to make a list and write totals for each item on the list. That's called itemizing.
What if you rent or don't have all those expenses? The US Government decided to simplify things. They decided that there would be a minimum amount you could claim. They also simplified things. This is called the standard deduction. Instead of adding all the other stuff up, you can just say I'll just take the easy number.
In 2017, the Tax Cuts and Jobs Act blew up the standard deduction to $12,000 for single filers and 24,000 for married (with it increasing slightly each year). That made it so far more people are claiming the standard deduction than ever before.
Which ever method you decide to use, this is the stage where you reduce your taxable income. Either your standard deduction or your total of itemized deductions are subtracted from your total income. This gives you your taxable income.
There are a few other deductions that can be taken off. In fact, as self-employed individuals, we get a handful of special deductions. You can read more about these four special deductions for independent contractors here.
3. Calculating your tax bill
You're actually going to calculate two different tax bills.
Remember that those deductions we just talked about don't reduce your self-employment tax. Notice how you don't get a refund on FICA when you apply your deductions? The same thing applies when you're self-employed.
So you start with your Schedule C profit. There's a form Schedule SE (SE=Self-Employed). With that, you multiply your business profit against the tax rate. That gives you your self-employment tax.
Then you go to your taxable income after deductions. That's the basis of your income tax. The easiest way to do it is look up your income on the IRS tax table. That table tells you your income tax bill.
Remember, there's two different taxes we're talking about. Self Employment tax and Income tax.
4. Paying the difference or getting a refund
Once your tax bill has been figured out, now figure out how much has been paid. If you paid more than you owe, you get a refund. If you owe more than you paid, you have to pay the difference.
It's as simple as that. Okay, we both know the IRS tax laws don't like simple. So, they threw in tax credits.
Don't confuse tax credits with tax deductions. Tax deductions (stage 2) only reduce taxable income. They're figured in before you figure out the tax bill.
Tax credits are treated like payments. A tax deduction only reduces taxable income. A Tax credit reduces the tax.
Refundable and non-refundable credits
The IRS makes it a bit more complicated. They created refundable and non-refundable tax credits. It's a bit tricky.
There are some credits that will reduce your tax bill but aren't meant to give you a refund if they add up to more than you owe. Those are non-refundable. Other credits act completely like you made a payment, and you can get a refund even if you paid nothing in.
Here's how it works when figuring out taxes.
You start with your income tax bill. Subtract Non-refundable credits from that tax bill until you get to zero. Zero is the lowest total you can have here, it will never be a negative number.
Add your self employment tax to that total and that gives you the total tax.
Now you add up all of your payments. Payments include W2 withholding, estimated tax payments you made through the year, and refundable credits. If your total payments are greater than your total tax bill, you get the difference as a refund. If the total tax bill is higher, you pay the difference.
Taxes are based on your profits. That means that your business expenses reduce your taxable income.
You claim your business expenses on Schedule C, not on itemized deductions. This means that you can claim business expenses even if you are taking the standard deduction
Income tax and self-employment tax are calculated separately from one another. Income tax is based on all income added up together minus adjustments and deductions. Self-employment tax is based strictly on your self-employment income (profits).
Your total of income tax and self-employment tax, minus taxes and credits, will determine whether you get a refund or have to pay in.
The best ways to use this knowledge and prepare for your Doordash taxes.
Obviously we didn't get into all the details. You can go a lot deeper, such as what expenses you can claim, what miles can you track. That's where I go into more detail in different articles.
And I don't even try to touch on all the personal income tax issues. My role here is to explain as much as I can about how taxes work in relationship to being an independent contractor.
But I do hope that this has taken away a lot of the mystery about how taxes work. I feel like if you understand the basics, that makes it easier to dive into more detail in other articles.
More important, it gives you an idea of what you're looking at. If you know what to expect of your Doordash taxes, you're able to be better prepared.
There's a lot you could take away from all this information on Doordash taxes (or for any other food delivery service like Uber Eats, Grubhub, Instacart, Uber or Lyft). In my opinion, these two things are critically important:
Track your expenses
Remember, your tax is based on profit. Every dollar of expense that you record reduces your taxable income.
Look at it this way:
If you're in the 12% tax bracket, every $100 in expenses reduces your tax bill by $27.30. That's $12 for income tax and $15.30 in self-employment tax.
And $10,000 in expenses reduces taxes by $2,730.
If you drive your car for your deliveries, every mile is worth 56 cents off your taxable income (the standard mileage rate for the 2020 tax year).
But only if you have a record of it.
Get comfortable with basic bookkeeping. Track your miles. Record your expenses. If you're not sure where to start, a good idea is to get a tracking app like Hurdlr. Or learn how to create your own mileage log.
Start tracking expenses today. It's the best way to avoid headaches when tax day comes around.
Save for tax day
Doordash isn't holding taxes out for you. That means it's completely up to you to take care of your tax savings.
This seems intimidating. It's not that bad. Hurdlr has a tax calculator function that uses a tax profile. They add up your income and expenses and miles, then look at your filing status and other income, and estimate what you need to save.
Personally, I do it much more simply. Each week I deduct 56 cents per mile driven from my earnings. Then I save 1/4 of what's left over. You may want to save more, you might save less. Find a formula that works for you and save.
Put that money where you won't touch it. Stick it in a different bank account if you have to. Every quarter, send what you saved in to the IRS. Some call it quarterly taxes, though really all you're doing is sending in estimated payments.
It's pretty easy. But you gotta do it. Don't leave yourself scrambling at the last minute to come up with the extra money to cover that tax bill.
Want to learn more about how to do Doordash taxes?
We put together a series of FAQ's on different aspects of the tax process for independent contractors
- Frequently asked questions about 1099's and Doordash income
- FAQ's about tracking your miles or claiming actual car expenses
- Frequently asked questions about non-car business expense deductions
- Common questions about the Schedule C.
- FAQ's about the tax filing process.
Coming soon, I hope to have a tax calculator ready to go. It's not precise and it doesn't figure everything about income tax as a whole. The purpose will be to give you an idea of what taxes will look like as an independent contractor with Doordash or other 3rd party apps like Instacart, Uber Eats, Grubhub etc.
As I mentioned before, we focused on Doordash. However, the principles are the same for about any gig economy platform. We have a more comprehensive tax guide that dives into many different aspects of independent contractor taxes.
You don't need to become a tax expert. But the better you can understand how taxes work as a self-employed business owner, the better you can avoid the confusion and panic that seems to come around January 31st or so, right after the end of the year.
Prepare well and you can enjoy the new year with a lot less stress.