How do you maximize your earnings as a Grubhub delivery driver?
One strategy is to understand all of your tax deductions and to capture the information for your tax return. When you take all of your allowed deductions, you’ll pay less in taxes, and keep more of your earnings.
But before we talk about deductions, it’s important to understand the differences between independent contractors and full-time employees.
Independent contractors vs full-time
Independent contractors are paid to complete a specific task for a company, and contractors have more work flexibility than employees. Full-time workers are more closely supervised than contractors.
The IRS determines if a worker is an independent contractor based on several factors.
If you have job flexibility, and your company doesn’t withhold taxes on your income, you’re an independent contractor. Full-time employees are more closely supervised, and companies withhold taxes for employees.
Independent contractors are also paid differently than full-time employees, and the payment process impacts your tax return.
Taxes for independent contractors
Independent contractors are issued a 1099 form to file taxes, and full-time employees receive a W-2 form for tax reporting. Tax withholdings and tax payments handled differently, depending on which form you receive.
Working with a 1099 form
Who gets a 1099?
Companies do not withhold any federal taxes from 1099 misc forms. In order to pay your tax liability and avoid tax penalties, you’ll make estimated tax payments to IRS during the year.
Fortunately, you can use tax software like Quickbooks and TurboTax Self-Employed to track your income and to calculate your estimated payments. When you file your tax return, you report the estimated tax payments to the IRS, which reduces your tax liability. Use software tools to manage your independent contractor taxes.
If you’re paid as a full-time employee, your company will withhold taxes for you.
Using a W-2 form
W-2 forms lists the federal tax withholding amounts for full-time employees.
Employees complete paperwork to determine the amount of taxes withheld from pay. When the worker files the tax return, he or she includes the W-2 form and reports the taxes withheld. The withholdings reduce tax liability.
If you have more than one source of income, however, your tax situation will be more complicated. Work with a CPA to ensure that you pay the correct amount of taxes.
Full-time employees and independent contractors also complete different tax forms.
How to file your taxes
Full-time workers include W-2 income with other income on the personal tax return (Form 1040). If you work as an independent contractor, your business expenses make the tax filing process more complicated.
Full-time workers include their W-2 income on Form 1040 and post-tax withholdings from the W-2 on the tax payments section on the 1040 form.
Most companies reimburse employees for delivery business expenses. Reimbursed amounts are not an expense on the driver’s personal tax return.
Independent contractors use a different process so that business expenses can be posted as tax write-offs and reduce your taxable income.
A contractor’s business expenses reduce tax liability, so it’s important to record the expenses in the right place.
Business expenses and income are posted to Schedule C on the 1040 tax return, and the totals are used to calculate your tax liability.
Your biggest expense as a Grubhub driver may be mileage, and you can use a mileage tracking app like QuickBooks Self-Employed to track your mileage for tax purposes. If you use your car for both business and personal use, only deduct the cost of business use.
The IRS provides two methods to calculate your mileage expenses: the standard mileage rate method or the actual expense method.
- Standard mileage rate method: Use this method by tracking your business mileage and multiply the total miles by the IRS rate per mile. For tax year 2019, the rate is 58 cents per mile.
- Actual expenses method: This method requires you to track the total cost required to operate your car, including gas, repairs, and registration fees. You then multiply the total cost by the percentage of total miles driven for business use.
Most delivery drivers use the mileage method because mileage tracking is easier than accounting for the actual costs of operating a vehicle.
- Car insurance
- Grubhub fees charged to you
- Supplies, such as hot bags, and silverware
Only the business portion of these expenses is posted to your independent contractor tax return.
Independent contractors also pay for Social Security and Medicare through self-employment taxes.
Employees pay their share of Social Security and Medicare taxes through payroll withholdings, and the dollar amounts are reported on the W-2 form. The employer also pays a portion of the tax, and the employer deducts the taxes paid as a business expense.
For 2019, the employer and the worker each pay a 7.65% tax rate.
If you’re an independent contractor, you pay both the employer and employee portion of the liability using the self-employment tax, and then deduct the employer portion as an expense on Form 1040.
Work with a CPA to understand this complex topic.
Keep your business on track
Managing your business expenses and taxes can seem overwhelming, but software can make the process much easier.
Use QuickBooks Self-Employed to track your expenses, calculate your tax withholdings, and to file an accurate tax return. The software can track your mileage expenses for you, and you can scan business receipts into the software using a mobile device.
Take charge of your business expenses, so you can spend more time focusing on your customers, and increasing your income.