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How to Know Your Taxable Income as an Independent Contractor

As an independent contractor in the gig economy, your taxable income is your profit, not the money you receive from gig companies.

It's easy to confuse 1099 taxes with employee taxes. That confusion can lead to other mistakes, which can be very costly at tax time.

We'll explore the difference between gross income (the money paid to you as an independent contractor) and your profit (what's left over after expenses). We'll also look at why it matters.

Woman celebrating with money falling at her laptop because she can claim her business expenses even when taking the standard deduction.
Being able to claim both the standard deduction AND your business expenses is reason to celebrate for most delivery contractors

About this article

This is part of our series of articles on taxes for 1099 delivery contractors. Rather than giving you one article that barely touches on the details, we created several posts that go in-depth about different tax topics. At the end of the page, we'll provide a complete list of all articles in this series.

The Delivery Driver's Tax Information Series: The information contained in this information series is for educational and informational purposes only.  This information is not intended to be and should not be considered to be legal, tax, or any other  professional advice. Information is provided as a  best effort to research useful information on this topic but makes no representations as to the  accuracy or completeness of information provided.  Suggestions and ideas presented are based on my  experiences and opinions. You should seek your own professional assistance to help with your unique tax and financial situation and needs.

This is geared towards independent contractors in the on-demand delivery sector. However, these principles are not limited to delivery work or necessarily to the gig economy. Much of this may also apply to any type of freelance or sole proprietor business you may operate.

Any tax discussion here is related to United States independent contractor taxes. Many state and local governments and other nations may have their own tax regulations that may differ.

Finally, do not take the information found on this site as tax advice. The information provided here is for informational purposes only. You should seek a tax professional for specific guidance related to your personal tax situation.

How mistaking profit for gross income can be costly.

You first need to understand that you are running a business. When you signed your independent contractor agreement, you agreed you provide services as a business, not as an employee.

As a result, you're taxed as a business. This has some significant benefits for you. Having the wrong mindset here could be costly in the following ways:

  • You can overpay your taxes
  • You can be unprepared for taxes and expenses.

A common mistake for independent contractors is thinking they can't claim tax deductions unless they itemize them. That can lead to not tracking expenses or miles, assuming it doesn't matter.

Costs related to your business are business expenses, not tax deductions. That means they're written off in a different place on your tax return. Schedule C is where you record your independent contractor income and expenses. As a result, you can claim business expenses regardless of whether you take the standard tax deduction.

The other problem is that if you think of your pay like a paycheck, you could spend it all and be unprepared for future expenses or taxes. When you run a business, you are on your own regarding withholding taxes. Your best practice is to set aside tax money and save for future costs (such as your car wearing out).

Understanding gross profit and taxes

Make sure you understand what your profit is, that is more important to your business than the money that Doordash, Uber Eats, Postmates, Grubhub, Instacart and others are putting in your bank
Make sure you understand what your profit is, that is more important to your business than the money that Doordash, Uber Eats, Postmates, Grubhub, Instacart and others are putting in your bank

You receive customer tips and delivery fees for services for companies like Uber Eats, Doordash, and Instacart. That's not your pay.

The money you receive for your contractor work belongs to your business. It's known as gross income.

The problem is that operating a business often costs a lot of money. If you had to pay personal income tax on all the money coming in, you could pay more in taxes than what you have left after those costs.

Suppose you owned a widget store and sold $100,000 worth of widgets, but your cost for those widgets was $85,000. If you paid taxes on the gross income (the $100,000), you might pay $25,000 or more, meaning you paid more in taxes than what you had left over after expenses.

It's fairer to tax on profits. For that reason, the IRS lets a business write off the cost of materials and the cost of doing business.

As an independent contractor, you're known as a sole proprietor unless you've formally created another type of business entity. The IRS looks at your business as a pass-through entity, meaning that profits from your business pass through to your personal income tax.

In other words, your profits are added to your tax return as personal income. Unless you've created a corporation, you do not file a separate tax return for your business. Instead, it's all part of your personal taxes.

How profit impacts your taxable income

Many people think the 1099 forms you get from gig economy companies at the end of the year are your equivalent of a W2. This is incorrect, thanks to the difference between gross income for your business and personal income.

An employee's W2 income is added immediately to their tax return as income. A 1099-NEC reports income for your business, not for you personally. As a result, you take an extra step when filing your tax return.

Now, as a business owner, you add up your gross income and enter that into form Schedule C. Next, you add up your business costs. Those costs are listed in the expense section of Schedule C. Here you can also include either your business mileage or car expenses.

Schedule C is a form you will fill out, and it becomes the closest thing you have to a W-2 for self employed individuals
Schedule C is a form you will fill out, and it becomes the closest thing you have to a W-2 for self employed individuals

Subtract expenses from gross income to get your profit. This is the number that is added to other income on your 1040 tax return.

You do one more thing with that profit number that is not part of an employee tax process. Profit is also entered on form SE, where you calculate Self-Employment tax (your version of Social Security and Medicare taxes).

This whole process happens in the income portion of filing your tax return. Your ability to list expenses here means it doesn't matter whether you itemize or take the standard deduction on your tax return. You can claim your business expenses and miles either way.

Profit (or Loss) is what matters.

Profit and loss for delivery contractors depicted by two balls sitting on top of some $100 bills

When it comes to taxes, it's the big picture that counts. Money coming in belongs to your business. The money that's left over belongs to you.

The best takeaway for you in this is to keep good records. Bookkeeping can be intimidating, but we put together a guide to help make it easier.

The most critical thing you can do is track your business miles. If you use your personal vehicle for deliveries, this can be a huge write-off. Every business mile reduces your taxable income by 62.5 cents (second half of 2022). With many drivers putting hundreds or thousands of miles on their cars for delivery work, that's pretty significant.

We write more on what miles you can track for independent contractor work and separately about how to track those miles. You can keep a written log if that's easier for you or use a GPS tracking app like Hurdlr.

You may have never intended to open up a business when you started your delivery gig. Maybe that makes you an accidental business owner. The main thing here is the importance of thinking like a business owner, treating this like a business, and understanding your actual income.

The tax guide series for Uber Eats, Grubhub, Instacart, Doordash independent contractors

Independent Contractor Taxes

Taxes are particularly challenging for independent contractors for gig economy apps like Doordash, Instacart, Uber Eats, Grubhub and others. We have tax related articles listed under the following sub categories.

The Delivery Driver's Tax Information Series (Grubhub, Doordash, Postmates, Uber Eats, Instacart)

The Delivery Driver's Tax Information Series is a series of articles designed to help you understand how taxes work for you as an independent contractor with gig economy delivery apps like Doordash, Uber Eats, Grubhub, Instacart, and Postmates. Below are some of the articles

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?

Could this help someone else? Please share it.

Ron Walter of Entrecourier.com

About the Author

Ron Walter made the move from business manager at a non-profit to full time gig economy delivery in 2018 to take advantage of the flexibility of self-employment. He applied his thirty years experience managing and owning small businesses to treat his independent contractor role as the business it is.

Realizing his experience could help other drivers, he founded EntreCourier.com to encourage delivery drivers to be the boss of their own gig economy business.

Ron has been quoted in several national outlets including Business Insider, the New York Times, CNN and Market Watch.

You can read more about Ron's story,, background, and why he believes making the switch from a career as a business manager to delivering as an independent contractor was the best decision he could have made.

red button labeled read Ron's story.