Do you know the basis for your tax bill as a delivery driver with gig companies like Instacart, Grubhub, Doordash, Uber Eats and others?
Want to know one of the biggest mistakes that you can make as a business owner?
Thinking that the money you are paid for your work is your income.
It is a great way to get in trouble. You think you have all this money coming in, so you spend it. But the thing is, when you are running a business, THAT'S NOT YOUR MONEY TO SPEND.
Not yet. Not if you're taking good care of you.
Say you received $10,000 each from Instacart, Grubhub, Doordash and Uber Eats. That adds up to $40,000. But it's not $40,000 income. It's revenue. They aren't the same when you're running a business.
And from a tax perspective, you ARE running a business, like it or not.
The money you have left after your expenses is your income. In other words, it's your business profit that is your income.
Why this is important to understand.
If you don't understand this, you'll have two problems.
One, you'll pay too much in taxes. As in way way way way too much.
Two, you won't be able to take care of the expenses that are part of running your business. And there ARE expenses – maybe a lot more than you realize.
If you treat your business revenue as money you can just spend, you won't have money to pay your taxes. You also won't have the money when you need it when (not if) your car or parts of it wear out.
Your tax basis is your PROFIT from Grubhub, Doordash, Instacart, Uber Eats, etc, not your revenue.
There's a big misconception among a lot of contractors. They look at their business expenses as tax deductions.
They are not.
Business expenses are just that: business expenses. They are not tax deductions. They are not related in any way to either your standard or itemized tax deductions.
Your expenses are….. expenses. They act like deductions in that they deduct from your earnings, but it's done in a different way than deductions.
This is important because your basis for your taxes as an independent contractor for Grubhub, Doordash, Uber Eats, Instacart and others is your profit.
Let me put it another way: Your income for your business is actually your profit, not the money coming in. It's what's left over after expenses. It's that profit that you are taxed on.
Schedule C and the difference between business expenses and income tax deductions
I repeat myself on this a lot:
Your income is your profit. Not the money coming in from the delivery companies.
Your profit is the basis of your taxes as a contractor with Instacart, Doordash, Uber Eats and others.
I repeat it a lot because it's important to understand. If you know this, you save yourself a lot of money come tax time.
Tax deductions verses Business Expenses.
On a normal tax form, you put all your income in the income side of your 1040. Then you either choose the Standard deduction or you itemize your deductions and subtract those from your income.
A lot of people get mixed up about our business expenses. They make the mistake of thinking you can't claim your business expenses if you itemize.
But remember what I'm repeating so often? Business income is your profit.
When you do your taxes as a self employed person, it's your profit that you include in the INCOME part of your taxes.
Which means that you add up your income, then subtract your expenses. All of that is done in a totally different place than from your tax deductions.
And this means, you can claim your business expenses AND take the standard deduction.
Your Schedule C is the closest thing you have to a W-2.
We think it's the 1099. It's not.
That's because the Schedule C is the basis of your taxes as a contractor, not your 1099.
Why? Your profits are your actual income, not your 1099 information.
(If you're new to all this, the 1099 is the form that Doordash, Grubhub, Instacart, Postmates and others will send to say how much money they sent to you).
Schedule C is called profit and loss for businesses.
Here's what you do on the Schedule C: You add up all your income from 1099's and other income for your business and put that in the income section. You then add up all the expenses and put those in the expense section.
Subtract your expenses from your income, and that's where you get your profit.
It's your profit that you move over to your income section on your 1040.
And this is why I say that the Schedule C is more like a W2 than your 1099's are.
On a W2, you move the income on that over to your income on your 1040. You don't do that with your 1099's. Instead, your profit from your Schedule C is what gets moved over.
This is important for a few reasons.
One, as I mentioned earlier, it keeps your expenses separate from your tax deductions. You are allowed to claim those expenses even with a standard deduction.
It also makes a big difference on your Self Employment taxes. We'll spend plenty of time on Self Employment tax soon enough. In a nutshell, self employment tax is the independent contractor's version of Social Security and Medicare tax. And it's expensive.
The basis for your self employment tax is strictly on your Schedule C profit. You pay 15.3% on every dollar of profit.
Your itemized and standard deductions do not reduce self employment tax. But your business expenses do when put in the Schedule C.
All of this is good, especially because even if you itemized you couldn't claim most of your business expenses there anyway.
Profit (or Loss) is what matters.
Not the money that Doordash or Grubhub or the others pay you.
Have I said that before?
That's going to mean keeping records. It means paying attention to the expenses. And tracking your miles if you drive. It means doing some bookkeeping as well. You can check out this article on seven things you can do to make bookkeeping easier.
It's worth it. The amount of time you spend keeping track of your income and your expenses will mean you pay thousands less in taxes (if you earn thousands, of course).
It could mean not paying taxes at all, depending on a lot of things.
Think profit. Keep records. Track expenses.
Pay less in taxes.
When you really begin to understand taxes, you get a good feel for how you're really doing as a delivery driver with gig companies like Instacart, Grubhub, Doordash, Uber Eats, and Postmates.
In the upcoming articles, we'll get a better understanding of what that money is that's coming in. How is the money reported? What if it's reported incorrectly? How do you know if it's reported incorrectly?
And then we'll get into expenses. Once you have a handle on both of those, we can talk more about that dreaded Schedule C and even more dreaded 1040 form.
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?