You hear people talk a lot about tracking your miles and your expenses when you deliver as an independent contractor for third party delivery platforms.
But what if you don't deliver that much? What if this is a part time gig. What if your expenses don't add up to the $12,000 Standard Deduction?
Is it better to itemize or to use the standard deduction when you deliver as an independent contractor with Doordash, Instacart, Uber Eats, Grubhub or other platforms?
Track your expenses because it doesn't matter if you itemize or use the standard deduction. Your business expenses as an independent contractor work differently than your personal tax deductions.
Understand how expenses work on your taxes
Let me tell you right now: DO NOT, I repeat DO NOT ask for or listen to tax advice on Facebook or Reddit or any other forums.
I guarantee, you will be besieged with bad advice.
I can't get over how many people will tell you not to bother with your expenses. They'll tell you the standard deduction is better.
That one common mistake can cost you thousands of dollars in extra tax money. Please, Please find a tax expert. Do NOT follow that advice. Or any other that you receive, at least without confirming it with reputable sites or experts.
As an independent contractor, standard or itemized deductions have nothing to do with claiming your expenses.
I know, this part probably doesn't make sense, but when you do your taxes you actually claim your expenses in the INCOME section of your taxes.
Okay, taxes are confusing sometimes, but there's a method to the IRS's madness.
Introducing Schedule C
Most of us are used to putting our W2 information down on our tax forms. That's what goes into the income part of the form, right?
As independent contractors we think maybe we need to put our 1099 information in that area.
But here's the thing: If you're just moving your 1099 information from Doordash or Uber Eats or Instacart over to your tax form, you're doing it wrong. And you're costing yourself money.
This is because profit is what you should be taxed on, not the money that is paid to you by Uber Eats or Grubhub or any other apps that use you as an independent contractor. It's based on what's left over after your expenses.
To help you report this, the IRS created a form called schedule C.
We think of the 1099 as the independent contractor's version of the W2, but it's actually your Schedule C. The Schedule C is where you calculate the money that came in, and the money that went out.
And then your profits, that which is left over, is what goes onto your tax form as income.
I know, there's a lot of stuff on the form, but the concept is actually pretty simple. What did you make, and what were your expenses?
The whole idea of this form is to be a place where you enter both, and THEN you list the profit (money left over after deducting expenses from income) as income as you go back to filling your tax form.
What does the Schedule C have to do with whether you itemize or take the standard deduction as an independent contractor?
Your business expenses have nothing to do with EITHER the standard or itemized deduction.
You put your business expenses down on the Schedule C.
In other words it doesn't matter whether you itemize or do the standard deduction.
In other words, you can claim the standard deduction AND claim all of your business expenses. They go in two completely different places.
How does this save hundreds or thousands of dollars?
It all goes back to this thing that you pay based on profits.
Taxes are based on percentages of what you earn. You pay a lot more in taxes if your income is $1,000 than if it's $500.
As an independent contractor with Doordash, Uber Eats, Grubhub, Instacart or others, you also pay self employment tax at 15.3%. And then income taxes start at 10% and go higher.
Too many of us are paying taxes on the revenue coming in rather than the profits left over after expenses.
This is especially true when a lot of us use our cars for our independent contractor deliveries. When the IRS allows us to claim 56 cents per mile (for 2021, 58.5¢ in 2022), that can add up FAST.
A lot of drivers are putting in more than a mile for every dollar they bring in. Do the math here: That's more than half of their earnings they can write off.
Legally and ethically.
Let's look at a full time driver who earned $30,000 and drove 20,000 miles. We'll call him Clyde. Clyde is single, this was his only income.
Clyde is planning to take the standard deduction. He doesn't have any other deductions.
Clyde does the math real quick. 20,000 miles at 56¢ is $11,200. That's less than the $12,400 standard deduction, so he thinks he can't claim his miles.
Clyde just made about a $3,000 mistake.
Let's look at what Clyde owes:
- Self Employment Tax at 15.3% of $30,000 is $4,590.
- Clyde's federal taxable income is $17,600 ($30,000 minus $12,400).
- Clyde's Federal Income tax at 12% is $2,112.
- His TOTAL tax bill is $6,702.
SIXTY SEVEN HUNDRED DOLLARS.
That's a lot of money for only bringing in $30,000. And that's not even touching on whatever he might owe for state or local taxes.
Okay, so fortunately someone gets Clyde's attention and he files his schedule C now. Good thing he was tracking his miles.
So now Clyde fills out his Schedule C and puts his earnings on the income side. He puts his mileage expense down at $11,200. Unfortunately Clyde never thought he could claim expenses so he didn't track any of his other costs.
Now Clyde is paying taxes based on $18,800, not $30,000. Because remember, Clyde pays taxes on his PROFIT, not the money he got from the delivery companies.
- Self employment tax is now $2,876
- Income tax is based on $6,400 (18,800 minus 12,400)
- Federal income tax at 12% is $768.
- Total taxes = $3,644.
All because he put his expenses on his Schedule C instead of assuming he couldn't claim them, Clyde reduced his tax bill by $3,058.
The Lesson Here?
There are a few lessons here:
1. Do not listen to anyone who tells you that you cannot claim expenses if you take the standard deduction.
As an independent contractor for Uber Eats or Doordash, Instacart or Grubhub, you do not need to itemize, you can take the standard deduction and still claim your miles.
Here's another way to put it. Don't get your tax advice from Facebook or Reddit. There's just a lot of bad information out there.
2. Track. Every. Single. Mile.
If you drive your car for your independent contractor delivery work, you must track every mile you drive while delivering.
3. Track any other expenses.
Clyde probably cost himself some other money by not tracking is other expenses. You can learn more about what expenses you can track here.
4. Get a tax pro.
If you're asking questions about whether to itemize or take the standard deduction as an independent contractor, save yourself a lot of time and headache by getting someone to help you.
Think of it this way: How much time will you spend trying to figure all this out? What if you put that time into delivering more for Doordash, Uber Eats, Instacart or any others?
Getting someone who knows how to walk you through everything will help you save more than what you're spending. And there's peace of mind to go with it.
Clyde tracked his miles, and the $11,100 worth of miles kept over $3,000 in his pocket. You're literally paying yourself to track your miles and your expenses.
And you don't have to itemize to save that money.