Jul 18, 2020
Simple Tax Advice, Volume 2
I’m a tax professional working for a large multinational tax service. Every day I work with clients that have decided to supplement their income by being a delivery driver for one of the exceedingly popular food delivery services. I’m talking about Grubhub, DoorDash, Uber and Lyft for example. There are others but these are the ones I see the most. With the Covid 19 pandemic, many more consumers are using these services and opportunities for delivery drivers are numerous.
What my clients don’t understand is this; Working with one of these businesses makes them self-employed. A self-employed person must file a Schedule C and a Schedule SE when they file their income taxes. The cost of the tax return with a Schedule C with my employer is increased by at least $150.00. In addition, if you only list the amount of money the service reports you earned, you will pay SE tax (about 15%) on the total. Many of my clients come to me unprepared. They bring the statement issued by the service and nothing else.
The SE tax (Self-Employment) is the equivalent of the amount you and your employer combined would pay for your Medicare and Social Security Tax if you were an employee. The IRS gives you a deduction for 1/2 of the SE tax if you are self-employed but that only reduces your total taxable income, not your tax. In effect, you are paying SE tax plus income tax on your earnings. If you are in the lowest tax bracket of 10%, you are paying about 25% of your earnings. The positive aspect of this is your Social Security and Medicare accounts are still being funded even though you are not receiving a paycheck from an employer. To make sure you are calculating the correct amount of tax on your earnings, you need to limit the amount you are reporting as profit, thereby limiting the amount of SE tax you are paying as well as income tax.
We calculate the profit by reporting all the expenses of the self-employment activity. The service usually reports to you the number of miles you drove for them and the required fees. However, there are a lot more expenses involved in performing this business. I tell my clients to close their eyes and think about what expenses they must pay only because they are doing this job. Most people, at a minimum, will list their cell phones, auto expense, gas, tolls, maintenance, snacks, and drinks if they are a transportation service, and additional mileage that is not reported by the company. The IRS gives you the option of reporting all the auto expenses including depreciation on the automobile or just the mileage at the current mileage rate which is 57.5 cents per mile for 2020. We typically do the math both ways and use the best option for the return.
If you are working as a driver for one of these delivery or transportation companies, I always advise you to use a mileage tracker. There are quite a few out there that work with your cell phone. Also, use a separate cell phone for your business or take the time to analyze at least a few bills to determine how much of the usage is business and how much is personal. Set up a separate bank account for the business. You can put all income into that account and pay all expenses from it. This will help you to capture All of your expenses and, as your tax preparer, I can calculate your correct profit and legally limit your tax liability.
Lastly, if you have questions about what is deductible and what is not, see your tax preparer and ask. Don’t make assumptions and don’t plan to do this first return on your own. Leave this one to the professionals. After you learn the ins and outs of preparing a return (Schedule C) for your business, then you can try doing it yourself.
- (no comments)