What is Self-Employment tax and why are Dashers being charged an extra tax for being independent contractors?
At some point, you're wondering, “do you have to pay taxes for Doordash?” There might be a bit of a shock to find out, not only do you have income tax for Dashing, but there's this thing called Self-Employment tax.
That doesn't seem fair. What is this all about?
There's good news and bad news about self-employment tax.
- The good news is, it's not really an additional tax. It's just the self-employed version of employment taxes (more on that in a minute)
- The bad news is, self-employed people pay double the tax amount as employees. There's a reason for that, which we'll also get into.
We'll dive into all things self-employment tax for Dashers to help make sense of all this. In this article, we'll talk about:
- More about this article and why it focuses only on self-employment taxes
- What exactly IS self-employment tax?
- Why do Dashers need to file self-employment taxes when employees don't have to?
- Why are self-employment taxes double what employment taxes are?
- How self-employment tax differs from income tax, and why deductions don't work the same
- Doordash and Schedule SE: How self-employment tax works when you file taxes
- How to stay out of trouble with self-employment tax
- Why not to go overboard avoiding taxes
More about this article and why it focuses only on self-employment taxes
I noticed that when you look for information on Dasher self-employment taxes, most results are more general treatments of Doordash taxes. Unfortunately, they don't often give enough detail on self-employment taxes.
For that reason, I took a different approach. While I do have an overview article on Doordash taxes, I wanted to provide more answers for all the different sub-topics. That's why this is part of a larger series of articles. That way, we can give you more in-depth information to help you understand how it all fits together.
Keep in mind: this is NOT tax advice. The purpose is to educate and explain how it works. If you need tax advice, you should find a tax professional who can help you with your particular situation. This article is about the tax structure in the United States and does not cover information for local or state taxes or for taxes related to other countries.
You can go here to see a complete list of articles in the Doordash Tax series.
What exactly IS self-employment tax?
The term “self-employment tax” makes it look like it's a tax on being self-employed, doesn't it? Fortunately, that's not the case.
Self-employment tax is simply the way we pay our Social Security and Medicare taxes. Employees might recognize those taxes as FICA taxes. Self-employment tax is a 15.3% tax on your business profits to cover Medicare and Social Security.
I believe the IRS could have chosen a less confusing term, but I get how they came up with calling it “self-employment tax.” FICA taxes are referred to as employment taxes. It's a tax assessed on employed income (meaning we don't have to pay that tax on things like investment or interest income).
It's not really fair to employees if someone can avoid Social Security and Medicare just by becoming an independent contractor. The government needed a system for independent contractors to be covered. Since it's the self-employed version of employment tax, that's how they came up with the name self-employment tax.
Why do Dashers need to file self-employment taxes when employees don't have to?
A W2 employee simply has their FICA taxes taken out of their paycheck. There's no additional filing process. Because of that, we don't really think about it, other than noticing them on our paystubs.
That's why a lot of Dashers are thrown off guard when they see they have to deal with self-employment tax. As an employee, all that is out of sight, out of mind.
However, since Doordash doesn't withhold FICA taxes (or income tax for that matter), there has to be a way for Dashers to pay those taxes. One way that self-employment taxes are different from employment/FICA taxes is that FICA is based on one's paycheck amount. Self-employment tax is based on one's profits, or what's left over after expenses.
Since everyone's expenses are different, it's not very practical for Doordash or other gig companies to take taxes out. Therefore, it's entirely up to us. The best way to handle all of this is to submit your Medicare and Social Security taxes when you file your individual tax return. In that way, it just becomes an additional step during the income tax process.
Why are self-employment taxes double what employment taxes are?
Another major difference between employment taxes and self-employment taxes is that an employee gets 7.65% taken out of their check. An independent contractor has to pay 15.3%.
Why is that?
It's not that Uncle Sam is getting twice the money. The total that the government gets based on an employee's pay is actually 15.3%, the same percentage as an independent contractor.
The difference is that an employer is responsible for half of that tax. An employee pays 7.65% (6.2% for Social Security and 1.45% for Medicare) and the employer matches the amount. However, when you're self-employed, you have to pay both the employee's half AND the employer's half.
How self-employment tax is different from income tax and why deductions don't work the same.
Self-employment tax is very different from income tax in two major ways:
- Self-employment tax is a flat percentage compared to income tax's income-based tax brackets
- Self-employment tax is on every dollar earned, not reduced by personal tax deductions
We've become accustomed to tax brackets in the income tax world. The more you make, the higher your income tax rate becomes. However, Social Security and Medicare are flat percentages that don't increase with your income level.
In fact, in some ways, just the opposite happens. There is a cap on Social Security withholding, where the 12.4% (or 6.2% each for employers and employees) is only taken out on the first $160,200 earned in 2023. That cap will increase each year. The remaining 2.9% for Medicare has no limit.
With all that said, the part that really gets a lot of Dashers in trouble with Self-Employment tax is the fact that it's charged on every dollar of profit.
Too many people get a false sense of security. With income taxes, you don't owe until you've earned beyond the standard deduction limit, which for a married person in 2023 is $27.700. That makes us think we won't need to save until we've made a bit of money.
However, the self-employment tax is based on earned income, NOT on what's left over after deductions. By the time a married person has earned $27,700, they've already racked up a $4,238 self-employment tax bill. That will catch a lot of people off guard.
You can see how that works on smaller employee paychecks. While someone may not have earned enough to have income tax withheld, you'll notice that FICA taxes are still taken out. That's because those taxes start immediately when you make money.
How tax deductions are different with Self-Employment tax
For Dashers and other self-employed individuals, there are really two types of tax deductions. One isn't technically a tax deduction, even though we think of it as such.
First, you have your personal tax deductions. This includes things like your mortgage interest, healthcare costs, charitable donations, etc. The IRS lets you choose to itemize those deductions or take the standard tax deduction that we talked about earlier. There are also a number of adjustments you can take, such as for retirement savings, student loan interest, or the 20% qualified business income deductions that Dashers qualify for.
Those deductions reduce your taxable income for income tax purposes. They do NOT, however, reduce your income for Medicare or Social Security taxes.
The second type of deduction for Dashers does reduce your self-employment tax, though technically it isn't a tax deduction. Instead, they're your business expenses. These business write-offs for Doordash and other gigs are the costs of doing business as a Dasher.
For tax purposes, your taxable self-employment income is based on your profits. It's not on your 1099 from Doordash, which is your gross, but on what's left over after expenses. This means you can reduce your self-employment income by tracking Doordash miles and other expenses and writing off Doordash miles or actual expenses.
Doordash and Schedule SE: How self-employment tax works with your tax return
So how exactly do you file self-employment tax for your Doordash income?
There are two additional tax steps when Dashers file income taxes. First you determine your profit, then use that to determine your Self-employment tax bill.
You'll use Schedule C: Profit and Loss from Business to determine profit. On that form, you'll list your income, then list business expenses. We go into more detail in this article about how Dashers fill out Schedule C. Subtract expenses from income to get your profit, which will go two places:
- Add your profit to other personal income to determine your income tax
- Move your profit to IRS Form Schedule SE to determine self-employment tax.
Schedule SE is the form that calculates your Self-employment tax. On Schedule SE, there's one additional tax deduction that reduces your self-employment tax. On line 4 you deduct 7.65% of your Schedule C profit before calculating your self-employment tax.
This is not an unfair advantage for independent contractors over employees. Remember that you're paying the employer's half of your social security. An employer is allowed to write off the employment taxes that they pay, and this deduction is simply leveling the playing field and let you make the same deduction.
In the end, you'll pay 15.3% of that reduced amount, which is effectively 14.13% of your Schedule C profits. Self-employment tax is added to your income tax bill to get your total tax bill. Then you subtract any estimated quarterly tax payments for Dashing that you made as well as any other withholding, payments and credits to determine if you pay in or get a refund.
You can use our Doordash tax calculator to walk through how some of this works in your situation. Better yet, talk to a tax professional!
How to stay out of trouble with Self-Employment Tax
Let's go back to an earlier point. A married Dasher can have profit of $27,000 without owing income tax. Yet that same person would owe nearly $4,000 in self-employment tax.
Self-employment tax gets more independent contractors into tax trouble than income tax does. If you're not prepared, you can run into some serious issues come tax day.
Here are three suggestions to stay out of tax trouble:
- Track your miles and expenses. Remember that you're tax is based on profit, not gross pay. That means that your expenses reduce taxable income, both for income tax and self-employment tax purposes. At 65.5 cents per mile in 2023, car expenses are the huge one. Get a good tracking program, notebook or spreadsheet for recording your miles. You can learn more about how to track Doordash mileage here.
- Set money aside every week. The best way from being broadsided by your tax bill is to prepare for it. Think about how money is taken out of an employee paycheck for taxes before you can even touch it. Do the same thing for yourself. Every week, calculate your profit and set aside a portion of that into a separate bank account. You can learn more here about how to save for Doordash taxes.
- Make quarterly estimated tax payments. One problem with saving tax money is that the larger the balance in the savings account, the more tempting it gets. The IRS recommends making quarterly estimated payments. It's your own form of withholding. Read more about how estimated tax payments work for Dashers.
Why you shouldn't go overboard avoiding self-employment tax
If claiming expenses lowers your taxable income, doesn't it make sense to spend extra money, or perhaps drive a lot of extra miles? You could completely eliminate your taxes by doing so.
There are a couple of reasons that's a bad idea.
First of all, it never makes money to spend money to reduce taxes when that tax reduction is less than the money you spent. In other words, it's pretty dumb to spend $100 to save $25. Now you have $100 less in your pocket rather than the $25 you'd have paid in taxes.
How does that make sense?
The other thing to keep in mind is that when you retire, your Social Security benefits will be based on your lifetime income. The more money you made, the higher the Social Security payments you receive.
Does Doordash count towards Social Security?
Yes, taxable income with Doordash or any other type of self-employment counts the same as employee wages where Social Security benefits are concerned. It might feel great to not owe taxes on your Dashing income. However, if your business didn't make a profit, you didn't really make any money, and that is reflected in your future Social Security benefits.
I've run the numbers with the Social Security administration's calculators. I found that additional taxes from making more money were additionally made up for within fifteen years. Your numbers may vary.
I'm not saying to pay more taxes just to get more Social Security. What I'm saying is, you didn't get into Dashing, independent contractor work or self-employment just to not pay taxes. You're in it to make money, either to supplement your income or to make a living.
If you go overboard spending money to avoid taxes, you've also defeated the purpose of making the money in the first place.
Final thoughts on being self-employed
We love the freedom, being able to set our own hours, be our own boss. Personally, I'd have a hard time going back to being an employee anywhere.
But here's the thing about employment and self-employment. A lot of employment law builds in protections for employees. The employer is required to take care of the employee in a lot of ways.
When we choose to go out on our own, there's no one else looking out for us. Everything is on our shoulders now. That includes making sure that your retirement and taxes are taken care of.
If you really want to be on your own, be your own boss, and be self-employed, you really must take care of your employee (who happens to be you).