I can't tell you how much you will owe as a 1099 independent contractor delivering in the gig economy. This is because there are too many variables, such as how many miles you drove, other income, filing status, personal tax deductions, etc.
I can help you get an idea of how taxes work for self-employed independent contractors. There are some significant differences for independent contractors compared to employment taxes. If you can understand the basics of how this all works, you'll be better prepared for tax day.
To understand how taxes work for delivery gig workers, we'll talk about nine essential concepts you need to understand:
- We are taxed as small business owners
- We are on our own for your taxes.
- Delivery contractor taxes are based on profits
- Taxable gig work income can be reduced by claiming business expenses
- Tracking and claiming car expenses is the best way to slash your tax bill
- Schedule C is the form where it all happens
- We also have to file and pay self-employment tax (our version of FICA)
- Independent Contractor profits added to other income determine personal taxable income
- Total taxes (income + self-employment) minus payments and credits decide whether you pay in or get a refund.
Finally, we'll talk about the three most important things you can do to prepare for tax season.
About this article.
There are some important things we need to talk about before we get into these nine important delivery driver tax concepts.
This is a guide created for gig workers by a fellow independent contractor. I've been delivering in the gig economy for several years.
This article overviews the important tax concepts you need to know as a contractor. There is much more to be said about each of these concepts. Therefore, we've got many other articles that go into more detail about each topic. We'll link to those, and at the end, you'll find a list of other articles in the series.
This is not tax advice. This article aims to educate you on how taxes work, not to give you advice for your personal situation. For advice related to your individual tax situation, you should seek out a tax professional who can answer your specific questions and give you the individual guidance you need.
This is about contractor taxes in the United States. Tax laws in other nations may have similarities but also some major differences. Local and state taxes also vary. Speak to your tax professional to understand how taxes work in your area.
About gig economy delivery companies.
It's really easy to try to break this down into a discussion about Grubhub taxes, Shipt taxes, GoPuff taxes, and how taxes work for other gig companies like Roadie, Bitesquad, DeliverThat, Curri, Waitr, Favor, or the big guys like Doordash, Uber Eats, and Instacart and Amazon Flex.
The thing is, it all works the same. When you deliver for these companies, you provide delivery services as a business. These companies are your customers, not your employers.
Many of us deliver for multiple platforms. Ultimately, we're really diving into small business taxes, about what it is to be taxed as a sole proprietor. When you understand how it works for one, you can spread that knowledge to your work for others.
1. We are taxed as small businesses.
You may not be aware that you're running a business. When you saw the opportunity to deliver for one of these companies, you probably weren't thinking of how to become a business owner.
There's a good chance you don't think you're running a business.
You became a business owner the moment you signed or agreed to an independent contractor agreement. As an independent contractor, you provide services as a business, not as an employee. Whether you deliver full-time or this is a side hustle for just a few hours a week, you're running a business at the end of the day. You provide your own food delivery service when you deliver meals for Grubhub, or your own package delivery service delivering for Shipt.
That means you're self-employed and will pay taxes as a sole proprietor (unless you've created a formal business entity like an LLC). Your taxes will be like most small business owners, where it's known as pass-through taxation. Business profits become your personal income, and taxes for your business are paid on your personal tax return.
2. We are on our own for taxes.
Because we're not employees, these delivery companies take nothing out of our pay. In fact, we technically don't get a paycheck. The money you receive for your deliveries is just payment for services.
Think about it this way: You don't withhold social security taxes or income taxes for your mechanic or painter.
As a business owner, it's entirely up to you to set aside money to cover your tax bill. If you earn a substantial amount, you will want to send in quarterly payments. This is very different from the employee experience, where you often don't have to think about it. Failure to do so could leave you in a bind on April 15 if you owe a large tax bill but have no money to pay it.
3. 1099 taxes are based on profits
Your taxable income is not the money you receive. Instead, your tax basis as an independent contractor is your profit: what's left over after expenses.
This is where things become very different as a business than an employee. An employee's W2 reports taxable earnings from one job. For a self-employed individual, there's more to it.
The money you make from these delivery companies is your business's income. 1099 forms are not the same as W2s because it only reports the revenue your business received. If you delivered for several companies, you might have received several 1099 forms (particularly the 1099-NEC form), but it's all income for one business.
A business subtracts the cost of doing business from gross revenue. That sum is the profit and is added to your tax form as income.
Your business operates at a loss when expenses are higher than income. If you brought in more than your business expenses, only the difference (profit) is taxable income.
4. We reduce taxable delivery driver income by claiming business expenses
Because we file as a business, things are very different regarding claiming expenses.
A common mistake is to think you can't claim expenses unless you itemize your personal deductions. Too many contractors pay excess taxes because of this.
However, business expenses go on a different part of the tax return. The important thing here is that you can claim business expenses regardless of which personal tax deduction method you choose.
We'll discuss this more soon, but vehicle costs can be a huge write-off. The things you use for your delivery business can be claimed.
So what exactly qualifies as a legitimate business deduction? Here's what the IRS says:
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.IRS Publication 535: Business Expenses
In other words, it counts if it's something you need to operate your business and it's normal to use for your business. Examples for a food delivery driver would be hot bags, drink carriers, and the business portion of your cell phone equipment and bill.
The bottom line is if you need it for your business AND it's ordinary for a Doordash driver, it's a legitimate tax-deductible business expense.
5. Tracking and claiming car expenses is the best way to slash your tax bill
We can put a lot of miles on our cars while delivering. All those additional miles create wear and tear, higher maintenance and repair costs, and lower vehicle value (depreciation). The cost of driving is far more than just the gas we buy.
Because driving IS such a significant expense, writing off your car expenses can make a huge difference.
The IRS gives you a choice. You can claim the standard mileage deduction, which is a flat rate per business mile. Alternatively, you can claim a percentage of the actual costs of using your car.
For the 2022 tax year, the standard mileage allowance is 58.5 cents per mile for the first six months and 62.5 cents for the second half. The standard mileage rate of 62.5 cents may not seem like much, until you multiply that against thousands of miles.
To use the actual expense method, you must keep track of all expenses related to your car. You'll then need to determine what percentage of driving was business use and what was personal use. To get your deductible car expense, multiply the percentage of miles driven for business purposes against the total vehicle expenses.
The IRS requires you have documentation to claim expenses, including a compliant mileage log. To keep track of your mileage, you can keep a written log or use a GPS tracking app like Hurdlr.
6. Schedule C is where you report income and expenses for your business.
Here's how it works: In the income section, you add all your business income from all the gig companies. Then in the income section, you list total expenses for each expense category.
Next, subtract expenses from income to get taxable profits for your business. This taxable profit is used to determine self-employment tax and is added to other income for income tax purposes.
Schedule C is like our version of a W-2 form. This form's profit, not your 1099 income, is added as income on your Federal tax return.
The Schedule C article in this series details all the things that must be entered on the form.
7. We also have to file and pay self-employment tax (our version of FICA)
This is where a lot of independent contractors get in trouble. Employees don't think about these taxes because they don't have to file anything. It just comes out of the check. We never saw the money, so we never missed it.
For this reason, these taxes often catch us off guard as a self-employed worker. We're only thinking of income tax, and when we're on our own for taxes, the self-employment tax is the part we may be least ready for.
Self-Employment tax is not an extra tax for being self-employed. It's called this because it's the self-employed version of employment taxes.
Uncle Sam gets that money whether we are employed or on our own. Schedule C profits are moved to form Schedule SE, where self-employment taxes are calculated at 15.3%
FICA taxes are charged on every dollar of income. They're not reduced by filing status or tax deductions. In the same way, self-employment tax is assessed on every dollar of profit. For this reason, this is the one tax item that can get a lot of delivery drivers in trouble.
Here's where independent contractor taxes feel at a disadvantage: Employees only get 7.65% taken out of their checks. How is this fair?
Uncle Sam doesn't get more money. The difference is that employers pay half of the payroll taxes. When we're self-employed, we're responsible for both the employer AND the employee portion of these taxes.
8. Add your Independent Contractor profits to other income to determine your income tax bill.
Independent contractor total earnings impact our income taxes differently than they do self-employment taxes. Self-employment taxes are more straightforward at 15.3% of your profit.
Income tax is a different animal. Our profits are added to any W2 wages, interest, and other types of income to get our total income. Then you factor in things like personal tax deductions, credits, filing status, and dependents.
When it's all said and done, total income minus adjustments and deductions equal taxable income. From there, calculate your income tax bill as a percentage of your taxable income.
Even then, it's not that straightforward. As income increases, the tax percentage does as well as you move into higher tax brackets.
So many factors make it nearly impossible to answer the question about what your taxes will be for 1099 work.
You start with total income and subtract deductions and adjustments to get your taxable income. Use that to calculate your tax bill.
Your tax bill is not the part that determines whether you have to pay in or get a refund. Instead, that's just the part that Uncle Sam gets. This brings us to the next step.
9. Income plus self-employment tax, minus payments and credits, determines whether you get a refund.
Here's where we find out whether you have to pay in or if you get a refund.
Once your income and self-employment tax bills have been determined, add the two together. This is your total tax bill.
Next, how much money has already been paid? There are several ways that payments get applied to your tax bill, including:
- Federal income tax withholding that was taken out of paychecks
- Estimated payments you sent in during the year.
- Refundable and non-refundable tax credits.
It boils down to this: If your payments and credits are more than your tax bill, you get a refund. You have to pay in if they're less than the total tax bill.
The best ways to use this knowledge to help prepare for taxes
This would be an incredibly long article if we tried to cover every possible detail about gig delivery worker taxes. Therefore, we created an entire series of articles that go into more depth on different facets.
I hope this has removed some of the mystery surrounding delivery driver taxes. I feel as though understanding the basics makes it easier to dive into more detail in the rest of this series.
With all of this in mind, I think these are the three most important things you can do to prepare yourself for tax day:
- Know when you need help
- Track your miles and expenses
- Set aside money for tax time
Know when you need help.
Your best bet is to find a CPA or Accountant (not just a tax preparer) who understands gig economy taxes
If you feel overwhelmed by all of this, you should absolutely get a tax pro to help you out. If you don't know what to look for or what you can write off, two things could happen:
You claim write-offs that aren't allowed, setting you up for a possible audit
You don't claim expenses you're allowed to, costing you a significantly larger tax bill.
Track your expenses and your business mileage
With taxes based on profits, every recorded expense reduces your taxable income.
If you're in the 10% tax bracket, every $100 in expenses reduces your tax bill by $25.30. That's $10 in income tax and $15.30 in self-employment tax. $10,000 in tracked expenses reduces taxes by $2,530.
If you drive your car for your deliveries, every mile is a 62.5 cent reduction of taxable income. That reduces taxes by 15.8 cents (assuming the 10% tax bracket). While 15.8 cents isn't much, multiply that times the hundreds or thousands of miles you drive, and you can see how important this can be.
Tracking those miles and expenses now will make things much easier for you when filing your tax return.
Save for tax time
These gig economy delivery platforms aren't taking taxes out for you. That means it's entirely up to you to set aside money.
This seems intimidating, but it's not that bad. Hurdlr has a tax calculator function that considers your filing status and other income. They look at your income, business expenses, and miles and use that to estimate what you should set aside.
You can read more here about how to save for taxes as a 1099 contractor.
The Delivery Driver's Tax Information Series
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?