Obviously, I’m not seeking professional tax advice here; I just need some pointers for how I can figure this stuff out.
So to finance my way through school, I’ve just started working a nighttime food delivery job. I’m an independent contractor: they pay me $4.50 for each delivery I make, and I keep tips. They deduct $0.50 from each delivery as “rental” for the use of their two-way radio and heating bag. Everything else is my responsibility.
Last night, on my first shift, I took home $64 cash. How do I handle this taxwise, and what kind of hit can I expect when taxes are due?
I want to handle it all legally, but obviously I’d like to minimize my taxes.
Basically, I’m a neophyte at any sort of complicated tax stuff; I’m not sure how best to track everything; and at $64 a night, I’m not going to be hiring an accountant anytime soon. Advice and leads would be great!
You should get an accountant or other professional to do your taxes, which will probably cost about $100. I’d wager that you save at least that much compared to filing your own taxes.
You’ll need to file an itemized return, as well as the self-employment forms, and you’ll need to set aside enough money to pay both your income tax and the 15.3% social security tax. Taking the right deductions can be complicated, and even knowing the right forms to use can be a challenge.
Also, you should be aware that as an independent contractor, you’re not eligible for unemployment insurance, worker’s compensation, or any other benefits.
I’d suggest that there are a other things you might consider. That 44.5 cents is probably about what it’s costing you to operate your car and you aren’t recouping that expense by taking it as a deduction. You liability insurance is very unlikely to cover commercial use of the vehicle, so if you have an accident you will propbably find your ins. company unwilling to pay. As to the “independant contractor” status, you are required to file quarterly returns, including taxes owed, and there’s a penalty for not doing so.
I’d estimate that, if you can’t make at least a buck a mile, you’d be further ahead to take a hourly job at min. wage. More profitable and a lot less headaches.
As previously noted, keep record of all you income and expenses. Be sure to think of every little thing that might count as a business expense.
For what you’re doing, the tax issues are really pretty straight forward. Next time you do your taxes, you’ll need to include a Schedule C with your 1040. On the Schedule C, you list your income and subtract off your expenses. The $0.445/mile is simply listed as an expense. Alteratively, you can choose calculate your actual driving expenses, but just using mileage is a lot easier. Your net income, after expenses, is then entered on a line on the 1040.
The other part, which may come as a surprise, is the “self employment” tax. Since you don’t have an employer paying half the social security tax, you get to pay the whole amount yourself – about 15%. There’s another form, “SE”, to calculate this tax.
You might want to download : Publication 334, “Tax Guide for Small Business” from the IRS.
Of course, IANACPA, and this is a somewhat simplified discussion, but it really isn’t all that complicated when you get down to it.
My Bro is a tax expert. For the kind of expenses you have, a “timely kep log” will likely do. Enter your expenses in one of those little pocket calenders- # of miles, tolls, etc. Also enter your tips.
Fo your “business”- you might well be able to file a “SCD C EZ”.
Note that my Bro sez you likely aren’t really an “independent contractor” and that your company would get in trouble if they were audited. Of course, he doesn’t know all the specifics of the contract, so YMMV.
If this is your first year as an Sch C filer, and you did not owe last year, you *might *be OK if you didn’t file Quarterlies and owed. You won’t owe a lot. But still, if you don’t put some aside for taxes (my Bro guesses 25%, assuming this is your primary source of income) you’ll have a BIG nasty suprise come 4-15.
So- stash 25% aside for Fed taxes, not counting State taxes.
The IRS doesn’t know how much you made in tips, but if you don’t claim some, you’ll get in trouble if you get audited. Your chance of being audited is small.
Free advice- Do the best you can in record keeping. Sure, you may forget a tip or two, but you’ll also forget an expense or two. Don’t cheat.
To elaborate on a point: If you’re deducting mileage for an auto that you also use for personal use, you have to keep a mileage log that documents the business use.
Also, the registration and inspection fees on your auto in some states (Texas is one) are not considered personal property taxes and are not deductable.
I work as an independent contractor. I just want to second the comments made above re record keeping, especially mileage. Office Depot has pocket size mileage log books that are very reasonably priced. Plus, keep receipts for all tolls, oil changes, repairs, tires, etc., etc. I plug everything into an Excel spread sheet at the end of each month; my accountant absolutely loves it.
One note about mileage: mileage from your home to your place of business is NOT deductable; it must be set aside as commute mileage----most drivers ignore this but if they are ever audited by the IRS, they will regret it. The same thing applies to personal mileage.
Someone mentioned that you are probably not a real independent contractor; it is fairly common for companies to try to pass off employees as independent contractors in order to avoid paying the various taxes that apply to employees. Plus, the companies save on liability insurance costs as well as benefits. There have been several lawsuits concerning the true status of drivers; most have been settled in favor of the driver—to avoid this, the people I am driving for are now insisting that all their drivers must be incorporated. The company can then issue checks made out to the driver’s corporation, to establish further separation between contractors and employees.
Another actual independent contractor chiming in to say that this sounds more like an employer/employee relationship than a true IC situation. Here’s a summary of the IRS rules.
Thanks for the feedback, everyone! While I agree that they’re definitely skirting the edge of the contractor relationship, I frankly don’t have the time or energy to make a stink about that. The business about car insurance, however, really scares me, and it’s motivating me to look for another job even faster than I’d otherwise anticipated. Problem is, my school schedule makes finding work nearly impossible; I’ve already been turned down at two places that would love to have me except for my schedule, and have not bothered to apply at several more for that reason. Curse you, bizarre school hours! :mad: