In the previous article, we explored what your business profit is. As independent contractors, we pay taxes based on our business profit, not on what the gig companies are paying us.
When it comes time for taxes, you'll put together a Schedule C. It's called profit and loss for business. There are basically three things that are important on this form.
What you brought in. Your business revenue.
What you spent. Your business expenses.
What's left over. Your business profit.
There's a lot more to the picture than that. It's a little more involved. In this article, we'll look at what earnings you have to report. Then in later articles we'll talk about the expenses.
What to expect in this article:
We'll look at the kind of money that your schedule C is going to ask you for.
Then we'll get into how the gig companies report the money that you earn.
Finally we'll talk about whether you have to report earnings that ISN'T reported.
The income part of Schedule C asks several questions.
Which one applies to us as delivery contractors? Where do we put our Grubhub, Doordash, Uber Eats earnings? What about tips? Is there other money?
There's a joke out there that says our tax forms could be made much simpler by making it only 2 lines: 1. How much did you earn? 2. Send it to us.
Instead, we have 7 lines in the Income section. What do we do with all those? Where do we put our income?
For most of us it's going to be simpler than it looks.
Gross receipts or sales.
This is the main one.
It's kind of the equivelent of the line in the joke: How much did you make?
Here's where you add up all the income that your business earned.
For delivery, it's pretty straight forward. I add up the money I was paid for deliveries. If you have referrals you receive, those are added in. And then there are cash tips. Those are considered income and the IRS does actually require you to report them.
For other business types there can be a lot of different kinds of income. For my website, I have money from advertising, from selling things for other people, for selling things myself, and I could always do consulting or sell courses or all sorts of things.
Where do you find all that?
I'll say this up front: It's very important that you keep track of your income and expenses. You should know the totals whether or not you receive any reports from anyone that you get money from.
An example from my tax software.
I had my tax software ask me about these three items:
Gross receipts not from 1099-MISC or W-2. Was there any money that I earned that wasn't reported on a 1099 form or a W-2? (Note, W-2 is going to be rare with independent contractors – I don't know of any gig companies that provide one).
From Form 1099-MISC. Postmates, Grubhub, and Doordash along with most other gig platforms use the 1099-Misc form. Uber Eats uses a 1099-MISC as well as 1099-K. We'll get into that in a bit. My tax software would ask me to enter the amount from each of my 1099 forms and it would add it up for me.
From Form 1099-K. Usually, 1099-K is something you get when you sell a lot of stuff. It's a report that comes from payment processors. Uber, Lyft, and Uber Eats do use 1099-K forms for the bulk of their reporting. It's a long story why they do it differently, you can read more here.
You add up all the different types of earnings and enter them into the gross sales.
In a straight up delivery contracting business, that's pretty much it for your income.
Form 1040 doesn't ask for a breakdown of how much was 1099, how much was tips, or referrals or anything like that. In fact normally you don't even send in copies of your 1099. You just add up your business's earnings and away you go.
Do I need to bother with returns and allowances?
Line 2 has a place for returns and allowances.
This is an accounting thing that usually relates to a business that sells things. The accepted way of doing things is, once you sell something, you record it as income.
If you were the one selling the food instead of Doordash or whoever, you would report ALL your sales on the Gross receipts (even if you had to do a refund). Then you would add up all the refunds, and maybe any discounts you had to give because the customer was unhappy, and put that in returns and allowances.
Line 3 is where you subtract the returns and allowances from sales, and this gives the total sales amount.
We usually don't have to bother with this as delivery contractors. If you have other kinds of income, then you'll want to pay attention to that.
What is Cost of Goods Sold?
Cost of Goods Sold is related directly to things that are sold. If you buy stuff at garage sales and flip them on eBay, the amount you pay to buy them is your cost of goods sold. If you sell crafts on Etsy, the cost of your materials is your cost of goods sold.
Your expenses, mileage and such are NOT cost of goods sold. They are expenses, they come later.
Cost of goods sold gets subtracted from your total sales on Line 3, and that gives you what's called your Gross Profit.
What about other income on line 6?
Most of the things that fall under this are things that, if you have them, you should be working with an accountant. I can't help you because it's generally more advanced or complicated stuff.
IRS instructions say it's money received from “finance reserve income, scrap sales, bad debt, interest, state gasoline or fuel tax refunds you received or credit for biofuel claimed.
Maybe, maybe you might have interest income. If you have a bank account or investments that are in the name of your business (such as if you incorporated), interest earned would go here. I don't see any likelihood of anything else that would apply to what we do in the delivery based gig economy.
How do the gig companies report our earnings?
Before I go further: It's YOUR job to track your earnings. It is not Grubhub's job or Doordash's or anyone else. They will report earnings, but it's not for our benefit as much as it's so they can document the expenses they are claiming.
It would be easy to say “okay, we spent $1 million on independent contractors” and use that to keep their taxes down. What happens then is, the IRS says, okay, so who did you send it to? Then they follow it up to see if that money is claimed as income.
This is where the reporting comes in. Doordash says “I paid Ron $12,500” and then Grubhub says “I paid Ron $17,000.” The IRS looks at that and then watches for my tax return to see if I've reported at least $19,500. If I didn't, either the gig companies are lying or I am.
When they report that they paid us money, that report comes in the form of 1099 forms. For those of us in gig delivery, it's usually one of two types. Some use the 1099-MISC and some use 1099-K. Sometimes one might use both.
Gig companies that use the 1099-MISC form will send you that form if they paid you $600 or more. If they didn't pay that much, they usually won't send you a report.
A 1099-MISC isn't like a W-2 with a lot of line items. It's usually one number – how much they paid you.
Here's a sample of a 1099-Misc form sent from Doordash:
There's just the one number here. It's very simple. It's listed two places, one for what they call nonemployee compensation and one in the state line. That's it.
There's no list of expenses. There's no break down of tips or anything else. One number. No mileage. And no tax withholding, because they don't keep taxes out for you. That's up to you.
If you deliver a lot with Uber Eats, or you do rideshare with Uber or Lyft, you may receive a 1099-K instead of a 1099-Misc, or you could receive both. There's a chance you could receive neither.
Why does Uber Eats use a 1099-K?
1099-K forms are actually sent out by banks or payment processing companies. This was set up because a lot of people who make their living selling stuff would just not report their income.
Perhaps they made their money selling things through eBay or Etsy or selling goods or services through their own website. With no employer, no W-2, and no 1099, they could make money under the table.
The government decided then that if anyone were receiving enough payments from sales and the payments came through their bank, Paypal, or credit card processor, then the banks were required to report that money. This report is called a 1099-K.
The reason that Uber, Uber Eats, Lyft and possibly some other gig companies use the 1099-K all has to do with misclassification and trying to keep independent contractors. They have to keep up the facade that we aren't being treated like employees.
Uber and Lyft structured it this way to create this impression that they're just connecting contractors directly to the customer. All they are doing is passing the payment along from the customer to us. They use the 1099-K then to make it look like they're just a payment processor and to make it look less like we're employees.
It would make more sense if what they paid us were really related to what the customer paid. But that's another rant for another time.
How is the 1099-K Different?
A payment processor is only required to send a 1099-K if there are at least 200 transactions and $20,000 in revenue.
That $20,000 minimum is a lot more than the $600 for a 1099-MISC. A lot of this goes back to our discussion earlier in this article about cost of goods sold. Someone who's sold $20,000 worth of items probably has a lot of costs, and profits are not going to be as high as someone who was paid outright for work performed.
Then to make it really confusing, you could receive BOTH a 1099-K AND a 1099-Misc from Uber, Uber Eats, and Lyft. Or you might receive none.
Remember that the 1099-K is structured to make it look like it's payments directly from a customer. That means that any tips and delivery fees or fares are added up and reported under a 1099-K. If you received more than $20,000 on those things, you'll get a 1099-K. If not, you won't get any.
Those companies do pay some things out of their own pockets. There are incentives like surges and quests and referral fees that can't be tied to a specific delivery and they can't create the smokescreen to say the customer paid it directly. In those instances, if you received $600 or more of incentives or referral fees, they'll send you a 1099-Misc.
If you made more than $20,000 in delivery fees plus tips, chances are you also had more than $600 in incentives and such. That would mean that you would receive both a 1099-K AND a 1099-MISC.
If you're not full time on any of these platforms, you probably won't get a 1099-K. That means most of your earnings aren't reported. Since the delivery fees and tips are a major part of what you earn, there's a possibility you didn't get the $600 in incentives, thus you don't get either 1099 form.
Sometimes it looks like Uber Eats reports more than what you actually earned.
If you earned enough to get a 1099-K, you might see that the earnings were a lot more than you received. That's because these companies structure it to look like you are paying a commission. They'll report $10 even though you only recived $6.50 and claim that you paid a $3.50 comission.
In this instance you'd actually report the full income they report (and not what you actually had deposited). Then you would report the commission as an expense. That's for another article.
Do you have to report money that wasn't reported?
Generally there's going to be two types of income that don't get reported.
Cash tips. Contrary to popular belief, cash tips are considered income and are taxable income. Whether you report them as income is something you have to decide.
You made money but not enough to get a 1099. If you earned less than $600 for most apps, you won't get a 1099. You could earn thousands from Uber Eats and not get a 1099 because of how they use the 1099-K.
But what if the IRS doesn't know about that money? Do you still have to report it?
There's a lot of controversy about that question.
Some are going to tell you that if the IRS doesn't know about it, you don't need to report it. That's especially the case with cash tips.
Is that true? The IRS states that “All cash and non-cash tips are income and are subject to Federal income taxes.” The bottom line is, any money you earn is money you are required to report. Because it hasn't been reported elsewhere does not mean that the IRS either won't find out about it or won't believe that you didn't make it.
Learn from the Auditing of tipped employees
The best warning that you can get is to pay attention to what often happens with wait staff. The IRS knows that cash tips are vastly under-reported, and they are known to target tipped employees.
They've been known to make estimates based on industry averages and to determine that you made a certain amount in cash tips, whether you did or not.
It's all about patterns. They look for things that are outside the norm within certain industries or occupations. When things are unusual, that can trip a flag that tells them to check into things.
In industries where cash tips are the norm, they're looking for that. Are cash tips high enough in our industry to put us at risk? I don't know – the vast majority is done through the app. That said, I don't know how they look at our industry.
Reporting Uber Eats income when you didn't get a 1099K
I've never received a 1099-K from Uber Eats. I just didn't deliver enough. In 2018, I received a 1099-MISC, and in 2019 I didn't.
The vast majority of earnings from them were unreported. It sure makes it tempting to not report it at all.
But this goes back to pattern recognition. There are so many people who work these platforms that the IRS knows how it works. They know the things to look for.
If you received a 1099-MISC from Uber Eats, it's a safe bet that the IRS knows full well that you made a lot more than was reported. That's how the pattern works, and if you only report the 1099-MISC income, their computers can figure out quickly that something's missing.
Uber and Lyft both keep tax reports that show the total amount that you earned. I don't believe those are submitted normally, but they can be accessible.
A lot of us can have that angel on one shoulder saying report it, and the devil on the other saying the IRS doesn't know about it so don't report it. Will the IRS figure it out? I don't know. Is it worth the risk? Which shoulder-dweller do you listen to? That's a decision you have to make.
The bottom line (or the top line) is you add up all your income.
There's a bit of an honor system here for self employed people. Or maybe it's a combination of honor and fear-based systems. What does the IRS know? How likely are they to come after you? Or do you play it safe and report everything?
Personally, I report my cash tips. I make so little in cash tips that it doesn't make much difference.
Is that an ethical decision? Maybe. Or maybe it's a combination of ethics and an insurance policy: my reported income is a bit higher than the total of my 1099's and that kind of thing might be less likely to set off a flag.
But that's the first part of your profit reporting: You figure out the money that came in to your business.
Next up: figuring out what went back out.
Kick back – this one could take awhile.
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?