Here is the best tax advice that I can offer to independent contractors in the food delivery world in the gig economy:
Don't take tax advice from the internet. Not from blogs, not from podcasts, especially not Facebook.
Don't even take advice from this blog, because this isn't meant to be advice. The only place I recommend getting advice is from a tax pro. Be warned: I'm going to say that a lot.
This is not meant to be tax advice. Read this as a way to explain some of how taxes actually work for independent contractors.
The better you understand taxes, the better you can prepare yourself.
Taxes 101 for Delivery Contractors
Okay, I'm not sure that this is even 101 stuff. This is very basic level, but there are some fundamental differences between being taxed as an employee and as a business owner.
Do understand that this is about your federal taxes, not your state and local. There are so many difference there that I can't begin to cover them.
Taxes for Indepedent Contractors are Based on PROFIT and Not on What the Companies Pay You.
You have to understand this part first and foremost.
Do not make the mistake of paying the government based on whatever the gig apps deposit in your account. You are giving money away if you do that.
Episode 17 had this article about understanding profit for your business. If you haven't already, check it out. It's critical you understand profit, because that's the basis of your taxes.
We do not get a W2 as independent contractors. Instead, we receive a 1099 that tells us how much we were paid. There is no withholding, no deductions. The 1099 is only their report of what they paid you.
Then, you will fill out a schedule C with your tax forms. List your income and expenses on this form, known as a profit and loss statement. You then calculate the profit (how much more you made than your expenses) and it's that profit that you pay taxes on.
There are two different types of federal tax you have to be aware of.
You pay income tax and you pay self employment tax.
That's confusing if you came from an employee background. We only had to worry about income tax. Why are we being taxed for being self employed?
Self employment tax isn't really a new tax. It's the same thing as the FICA and Medicare that get deducted from a paycheck and that show up on your W2. You have to pay these taxes with your income tax since nothing is withheld from your self employment pay.
You pay your taxes or get refunds based on your tax bill and what you paid in for the year.
When it's time to file your taxes, you first figure out your income tax bill. Basically what you are doing is adding up all your different sources of income and deducting whatever deductions (not credits, those come later) you qualify for.
Subtract deductions from income to get your taxable income, and then use that taxable income to figure out your income tax bill.
Your self employment tax is calculated just on your self employment profit at 15.3%. That's 15.3% of all of your self employment profit. Add that to your income tax bill and that is the total amount of tax you owe.
Now you look at three things: Withholding, tax deposits and tax credits. If you sent in tax deposits as a self employed person, those go into this step. You add these three up and compare to the total tax you owe.
At that point it's simple – if all the money in and credits are more than your total tax owed, you get a refund. If not, you pay the difference.
Here are some of the differences between self employment tax and income tax:
Income tax is based on your taxable income, where self employment tax is based solely on your profits from self-employed work.
That means that if you have other income such as a W2 job or if you are filing jointly and your partner has income, that will impact your income tax. It does not impact your self employment tax.
There are no deductions for self employment tax
You subtract deductions from income to determine your taxable income. That means that deductions reduce your income tax. There are no deductions for self employment tax. You start paying self employment tax from the very first dollar of profit.
Income tax is a sliding scale tax that goes up with earnings. Self Employment tax is the same for every dollar you make.
Understand that self employment tax is not a sliding scale tax like income tax, it is a fixed 15.3% of your profit.
Self employment is the one tax that is higher when you are self employed.
We mentioned earlier that Self Employment tax is essentially the same as FICA (Social Security) and Medicare. You pay 15.3% in self employment tax instead of the 7.65% that is taken out of paychecks. That's double.
There's a misconception about this. This is not an additional tax. The government gets 15.3% of your pay for this even if you are an employee. The difference here is that your employer has to pay half of this tax.
You are your own employer. So guess who gets to pay that half? You. And guess who gets to pay the employee half? Your employee, who just so happens to be you.
What does this mean for us as gig economy contractors?
Here are a few important takeaways and things to think about with your taxes.
Get a tax pro.
Okay. I'm repeating myself here, aren't I? Unless you're really comfortable with how taxes work you really should get some help.
And here's the thing, a lot of CPA's still hire someone to do their taxes because someone removed from the situation will catch things they wouldn't have thought of themselves.
You don't need to itemize deductions to claim your business expenses.
As a business owner, your expenses aren't recorded in the deductions area. It's part of filling out a schedule C. You can take a standard deduction and claim your business expenses.
Record your expenses. All of them.
It's very important you record all of your expenses. Track your miles. Every mile you drive. In episode 18 we talk a lot about the actual expense of your car.
Because of the number of miles we drive, our actual cost will almost always be less than the 58 cents a mile that the IRS allows (2019 tax year). Track both just to be sure.
Keep a written record of your miles. I personally prefer to keep a spreadsheet based on odometer readings. There are a number of ways to track miles that will work.
We determined Hurdlr was the best overall app for tracking both miles AND expenses. The free version is pretty powerful and the paid version shines in the reports in provides
We determined that TripLog was the most accurate and full featured in tracking miles. The auto tracking on the paid version will automatically track miles when your delivery apps are in use, preventing lost records.
Don't claim more than you are allowed
There are things you cannot claim.
- You cannot claim food while driving.
- You cannot normally claim your clothes, as a particular uniform is not a required part of what you do.
- Do not claim more miles than you actually drive.
- Do not claim miles driven for personal use.
- You cannot claim a home office if a home office is not a significant part of what you do (or if that room is used for non business purposes).
Get with your tax pro, understand exactly what you can claim.
Because you are self employed and because you are able to write off a lot of income due to the miles you drive, you are already at a bit higher risk of an audit. If you overdo it on the expenses, you increase that risk.
If your expense deductions are so high that you show zero income, that's a good sign you really have zero income.
I know, that seems pretty obvious.
But I see this too often with people claiming their miles where they have so many miles it comes out to a zero profit. You have to understand that your car is costing you a lot closer to the 58 cents a mile than you think. I
f your taxes say you aren't making money, that's probably closer to the reality for you than you realize.
There are advantages and disadvantages to delivery work being part of a side hustle.
If you have other income, you may have enough being deducted from that where you don't have to set aside as much to cover your increased taxes from your self employment. Just understand you won't get as much of a refund as you might be used to.
If you have another job, however, you are more likely to have out-earned your deductions already. That means that you are more likely to pay income tax on every dollar of your profit.
There are some new income tax breaks for self employed individuals.
Last year's tax reform added a couple of tax breaks. Say it with me here: You will want to check with a tax pro to see if you qualify.
You can now claim a 20% income tax deduction for self employed income (your profit). This deduction does not reduce your self employment tax basis.
You can also claim a deduction equal to half of your self employment tax, which equalizes your taxable income with what it would be in an employment situation. This deduction does also reduce your self employment tax basis.
The good news on both of these deductions is that you can claim a standard deduction and still get these. These are not part of the itemized deduction process.
It is on you to withhold your employees taxes.
Remember who your employee is (since you are self employed).
We talked about saving for your taxes in Episode 20. Get with your tax pro, let them look at all of your income and have them help you understand how much you should save.
Then put that money somewhere that you won't touch it. Don't get in trouble here.
Make sure you understand the basics
(wait for it)
Get a tax pro.
Seriously, if you're not sure about a lot of this stuff, a good tax pro is going to either save you more money than you pay them, or keep you out of trouble. Or both.
It's worth it either way. Budget it into your business.
I did have a post with a video that goes into a bit more detail.
Do yourself a favor. Understand how taxes work. Don't let them slip up on you.
And….. well, you know. That tax pro thing.
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?