Prop 22 is going into effect and with it is a pay model that includes 30 cents per mile. How does that impact the ability to claim miles on your taxes?
Can you still claim miles on your taxes if you're getting paid 30 cents per mile in California?
You can claim 100% of your mileage allowance (or vehicle expense) as a gig economy contractor in California under Prop 22, even with the 30 cent per mile pay calculation. That's because the pay you receive is taxable pay, not a reimbursement.
Here's a simple rule for you: If your payment is reported as taxable income, it is not a reimbursement. That means you can claim your expenses in full on your Schedule C.
If your payment is reported as taxable income, it is not a reimbursement. That means you can claim your expenses in full on your Schedule C.
Understanding reimbursements and claiming expenses on taxes.
Why is this an issue?
Some people have the mistaken idea that since Prop 22 requires that your minimum pay be based on factors including $0.30 per mile driven, that constitutes a reimbursement, which means you cannot claim those miles on your taxes.
They are right in understanding that if you are reimbursed for an expense, you can't still claim that expense on your taxes as an independent contractor.
They are wrong in that the 30 cents per mile is NOT a reimbursement.
Defining a reimbursement
If you have certain expenses as an employee or as a contractor, you may be given funds to cover that expense. How it is handled determines whether those funds are considered a reimbursement or a payment.
It depends on who gets to claim that expense and whether you have to pay taxes on the payment.
If it's a reimbursement, you are given money to cover the cost. Basically it's like the contracting company or employer is paying directly for the expense. They get to claim the expense on their taxes.
If both of you claimed the same expenses, that's a problem with the IRS.
A reimbursement is not taxable money. You're being given the money to cover the expenses and that money is not included in your 1099 (as a contractor) or taxable income (as an employee).
You can't claim a reimbursed expense because that would mean that both you and the one that reimbursed you are claiming the same expense.
If the money that you receive is taxable income, that money is not a reimbursement. You are the only one claiming the particular expense so there's not the double dipping issue like when it's a reimbursement.
The way the 30¢ per mile is handled under Prop 22 helps determine if this is taxable.
Here's how the compensation section in Prop 22 begins:
A network company shall ensure that for each earnings period, an app based driver is compensated at not less than the net earnings floor as set forth in this section.Section 7453 Earnings Guarantee in California Proposition 22
Here are the key words: Earnings and Compensation.
What you are paid is not an hourly amount plus reimbursement if you are an app based worker in California. Those things only determine the minimum.
That's what they mean by earnings floor.
In other words, your MINIMUM earnings are determined by those things.
Here's how it works: You go about your deliveries. All of these apps have different pay models. Those pay models remain in play.
At the end of the week they add up your total hours of active time on the apps, and how many miles you drove while on deliveries (or rides if doing rideshare).
They multiply 120% of minimum wage times the active time. They multiple the miles by 30 cents. Then they add the tips. That determines the minimum you should be paid.
If you made more than that minimum, nothing happens. You just get paid according to the pay model. If you made less, then you get paid the minimum.
The important phrase here: “You get paid.”
All of your earnings, including the 30 cents per mile, are reported as earnings on your 1099-NEC.
What this means is, the miles are used to calculate your minimum pay.
The 30 cents per mile is NOT a reimbursement. It's a pay formula.
This isn't really any different than how miles are used to calculate pay for some of the apps already.
The bottom line is, since all of the money including the 30 cents per mile is taxable income, it's not a reimbursement.
That means you can claim those miles.
When would you NOT be able to claim miles?
If you were specifically reimbursed, then you could not claim those miles.
If that happened, the following would happen:
- You would be required to actually account for the expense. The IRS requires a person to provide a report to be reimbursed. Nothing like that is happening here.
- You would be advised that this payment is specifically a reimbursement.
- Your 1099-NEC would not reflect the mileage portion of your pay.
None of those are happening.
Even if that were to happen, you would still be able to claim the difference between what you were reimbursed and your expense. In 2020, that's 27.5 cents per mile.
What does that mean for contractors in California?
Track your miles.
Get the Hurdlr app if you don't have a method to track your miles. In our review of seven different mileage tracking apps Hurdlr rated the best overall.
And track your miles. Every mile you record is going to knock 9 cents at a minimum off your tax bill.
Nine cents doesn't seem like much. But multiply 9 cents times 10,000 miles and now we're talking some serious money.
You can claim those miles. It's legal. It's smart.
Because it's not a reimbursement.