Are you one of those people who believes chasing down tax deductions is more trouble than it’s worth? You might change your mind this tax season. With costs rising on just about everything—especially gas and other energy items—it has become more expensive than ever to run your gig driving business.
One way to counteract those rising costs is to cut your taxable income figure so you can reduce the amount of tax you need to pay. Surely you’ve heard of “tax loopholes” and other ways big corporations do this. Now is a smarter time than ever for you to take advantage of tax deductions that are available to gig drivers, legally and ethically. Let’s look at 8 smart strategies that show you how.
- Bunch expenses and take advantage of deductions in high-income years
Drivers don’t make the same amount of money each year. You know when you’re raking it in at a nice pace, and when you wish you were doing better. As a busy driver, it’s hard to focus on your work and think about how much you’re earning—and worry about Uber and tax matters at the same time. When you’re in the middle of a high earning year, though, you’ll need to consider what Uber taxes, Lyft tax, and delivery driver taxes are going to cost you.
Be sure to take advantage of deductions, especially retirement and health care investments. In leaner times, you’ll have less income to protect from taxation, so you can cut back on your contributions.
You can also use “bunching” to take advantage of deductions in high income years. For instance, if you plan to purchase deductible items you will need in the following year, purchasing them in a year where you’re making a lot will allow you to deduct the expense from your income. Read this article from Northwestern Mutual for more details about bunching. You can use bunching with items such as property tax and health care expenses. Paying these items in advance can substantially reduce your delivery and rideshare taxes.
In all cases, you’re going to want to see whether the amounts you can use as deductions exceed the standard deduction limits set by the IRS. That is one of the first steps you should take when you deal with your tax deduction strategy.
- Know what deductions drivers can use
You will probably be surprised at just how many deductions are available to gig drivers, above and beyond what’s available to those with non-gig jobs. Do you know about the delivery and rideshare mileage deduction and how to take advantage of it? Check out this post to see all the tax write-offs all gig drivers can take advantage of. In the meantime, we will list a few for you:
- vehicle expenses (or use the IRS standard mileage deduction)
- subscriptions, including satellite radio and music streaming platforms
- bottled water and snacks provided for customers
- sanitizing equipment, from hand cleaner to sneeze guards
- enhanced car sound systems
- home office expenses
- productivity apps such as navigation tools, parking assistants, GridwisePlus, and Keeper
- Make use of tax deductible investments
Because you’re an independent contractor, there is no benevolent, all-caring company to pay for your pension. You will need to set up investments such as an IRA or 401(k) for yourself if you expect to have money to live on when you retire.
Individual Retirement Arrangements (or accounts) and 401(k) plans are ways of setting aside retirement savings or money for health care costs. The contributions you make, most of the time, are tax deductible. Beyond the convenience of reducing tax for Lyft drivers and other gig workers, setting up retirement and health care funds are wise ways of taking care of your present and future needs. Here are some options you have as a freelance worker:
- SEP IRA: The Simplified Employee Pension Plan is an Individual Retirement Account that businesses can set up for their employees. And guess what? You can set one up too, as a self-employed individual. See more details about how this works from the IRS here.
- Solo 401(k): With this plan, the self-employed individual acts and contributes to the fund as both employer and employee. Does a 401(k) reduce taxable income? Yes, but what we think of as the 401(k) tax deduction is not exactly that. The money you put in is subtracted from your taxable income, but it isn’t counted technically as a tax deduction. The IRS says contributions can be made in both capacities, employer and employee, as you’ll see in this information page.
- SIMPLE IRA: They call this “Saving Incentive Match Plan for Employees” or SIMPLE because it’s very easy to establish. The fact that, according to the IRS, there are no start-up or operating costs involved makes it appealing as well. The SIMPLE IRA can be an excellent addition to your freelancer tax deductions.
- IRA: The standard Individual Retirement Account is managed by investment institutions. The IRS allows you to make contributions and deduct them from your taxable income. As long as you wait until you are 59.5 years of age, you can withdraw from the account and simply pay tax on it as you go. If you take distributions early, however, there will be substantial penalties.
While a well-endowed IRA is a nice thing to have waiting for you when retirement comes, it often has start-up costs associated with it. A few options are available that let you begin with a small or even no initial investment, but most investment institutions will want you to start your account with a contribution of $1,000 or more.
This information from the IRS provides further IRA-related details and also compares the standard IRA to the Roth IRA. Roth IRAs act as a source of retirement savings, but because Roth IRA contributions are taxed up front, they are not tax deductible.
- HSA: Contributions to a Health Savings Plan can be another way to deduct from your taxable income and protect you from excessive medical expenses. You must meet several requirements, as shown in this article from Investopedia, but if you already have a high deductible health insurance plan, you will probably benefit from an HSA, both as a savings plan and a tax deduction.
You don’t have to use your retirement plan to reduce your delivery driver or rideshare tax. What you ultimately decide to do about retirement savings will depend on factors such as your age, family situation, and whether you can afford to start an account and make contributions. The options suggested here will help you sort out what is best for you, as will the advice of a tax professional.
- Use Gridwise features that help drivers
Gridwise knows what drivers need. Why? Because Gridwise was developed and is supported by people who were (and in some cases still are) gig drivers. Gridwise alerts you to deals on automotive expenses and insurance, and offers tax help for DoorDash, Instacart, Lyft, Uber drivers, and more.
Here’s a quick rundown of what Gridwise offers drivers:
- mileage tracker: a hassle-free tool that counts up those miles up to help maximize your tax deduction
- earnings tracker: a seamless and smart way to track earnings, simply by syncing your gig apps with the Gridwise app
- expense tracker: an easy and paperless method of logging expenses and categorizing them
- tax report generator: an elegant and organized resource for reports such as itemized earnings, expenses, and mileage all in one place, presented in easy-to-read graphs
- CSV interface: a tax preparer’s dream—all your tax info put into CSV format so it can be easily submitted, by you or your tax professional
- Get 1099 tax help with Gridwise
Every driver knows how much time it can take to get ready for tax time, and how little extra time there is to spare. Now, Gridwise offers Gridwise Tax Help, in partnership with Keeper. Like Gridwise, Keeper’s tax filing app is tailored to the needs of gig drivers.
When you get the Keeper tax app through Gridwise, you automatically receive a 20% discount. If you’re a Gridwise Plus user, you get a 50% discount on the regular price, which means you don’t have to shell out $100s just to file taxes! Keeper’s app helps 1099 workers by giving them:
- write-off detection: Once connected to your bank, the Keeper tax app will search for deductions you can use to reduce your taxes.
- tax bill prediction: Because Keeper has a handle on your earnings, expenses, and deductions, it can predict your tax bill throughout the year. No one needs a surprise when it comes to paying more than you thought you’d have to!
- tax filing: You can file your taxes electronically, right from the Keeper app!
- professional tax help: Chat with a real, live tax professional any time to make sure you’re doing things legally, by taking advantage of every write-off you can.
- Consult a tax professional
A tax professional’s expertise will put you in the very best tax position possible, and better yet, if any questions from the IRS or your state department of revenue do come up, your tax accountant will help you work with them. How to avoid or deal with an audit is the kind of Lyft and Uber tax advice every rideshare and delivery driver needs.
Gridwise’s partnership with Keeper means you can get in touch with tax professionals for FREE! Normally you’d be charged a fee for that kind of tax advice.
Tax professionals can literally save you from the kind of trouble that tax return errors bring. If you’re in doubt, it’s worth consulting an expert. And through Gridwise Tax Help, you can do it for free. Win-win!
- Do your return in advance
The IRS sets a date each year before which they will not accept your return. However, if you file early, you can reap a few advantages:
- If you have one coming, your refund will arrive sooner.
- You’ll protect yourself from an identity thief filing your return (and getting your refund) before you do.
- You’ll have time to deal with any problems involving your return and be able to rectify them in time for the tax filing deadline.
- You’ll be able to see how much you will have to pay and save the cash you need.
- It’ll be obvious whether you’ll need professional help to file your return before the deadline.
- Stay savvy to any changes in tax laws that apply to gig workers
While it isn’t always appealing to learn about what’s going on in the world of taxes, Gridwise makes it easy. Our blog is filled with the information you need, and news items about taxes will often be covered.
You can also keep current by using Gridwise Tax Help and Keeper. The app will be right on top of any news about deductions for gig drivers, and you can always chat with a tax professional to ask about changes in the way the government taxes freelance work.
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* Gridwise does not provide tax, legal, or accounting advice. This material has been prepared for information purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before filing your return.