* 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.
Record keeping? Who signed up for that? As a gig driver, it’s part of what you need to do to keep your business running. Don’t worry. It’s not as complicated as you might have been led to believe. This post will show you what you need to keep track of and the best ways to gather and preserve your tax-related records. We will cover
- How record keeping can help reduce income tax for freelancers
- Taxes and freelance work: Record keeping requirements
- Mileage tracking: Motives and methods
- More deductions and records to keep
- Make tax time easier
How record keeping can reduce income tax for freelancers
Tax time is not “fun time” for rideshare and delivery drivers. It’s easy to get used to watching your earnings pile up and come to believe they are all yours. Unfortunately, that isn’t the case. Gig work taxes can be especially painful because no one takes them out of your earnings for you, until the tax authorities insist that you do it for yourself.
You will need to show the tax authorities your income records, and they will gladly tell you to send them what they determine to be their fair share. Think that’s not fair? You’re not alone, but that doesn’t mean you’re going to get out of paying gig work taxes.
But you can find ways to pay the smallest amount that is legal and possible. The best way to defend yourself against having to pay astronomical amounts when you file your return is to know what expenses you can deduct from your gross income. When you subtract deductible expenses from your gross income, there is less left over to be taxed. This reduces the amount they can hit you with gig worker taxes. and can make your tax bill substantially lower.
While you want to keep good records so as to be in compliance with taxation entities such as the IRS, you also want to ensure you have proof of every last deductible expense you have accrued during the year. There are other records you must keep as well. Let’s look at some of the considerations you have, realizing that you now need to know how to do taxes as a freelancer.
Taxes and freelance work: Record keeping requirements
So many gig drivers fail to understand the responsibilities they have as independent contractors. Those who work part time for very few hours may even believe they don’t have to report the income they get from their driving gig payments. That would be a big mistake!
The company or companies you work for report your income to the IRS and state tax authorities. If you fail to report that income, you will risk some rather painful penalties. The IRS taxing side hustles is as much of a thing as the IRS taxing income from any other job. Your best bet is to report what you’ve earned, honestly and completely, and comply with other record keeping requirements such as
- gross income
- deductions and credits
- purchases (items you purchase and resell, such as snacks or bottled water)
- a log of all your mileage (or vehicle expenses, if greater)
- a list of all expenses and assets, such as utilities and other expenses associated with having a home office and equipment
- machinery and furniture you own, including when it was acquired, how much it cost, whether you previously took deductions on it, and selling price, if applicable (this includes your vehicle)
More things to consider:
- Pay attention to the retention of your records. You’ll need to keep all tax-return-related items— including income, deductions, and any tax credits reported— until the period of limitations runs out (3 years from date you filed, or 2 years from when you paid tax. If you have employees, keep your records for at least 4 years.)
- If you want to avoid paying self-employed taxes, you may want to set up a corporation or Limited Liability Corporation (LLC) for your business. This allows you to separate all your gig driving earnings from personal income, and permits you to take advantage of the additional advantages of working through a corporation. This includes exemption from self-employment taxes. You can learn more about how to pay self-employment taxes, if you opt for that, in this post from Keeper.
- You should always keep a separate checking account for your business, for convenience as well as clarity. While this is not a legal requirement, it is a smart move if you want to have an easier time managing your business.
- You are required, as an independent contractor, to file your taxes quarterly. Check out this Gridwise blog post for more information about quarterly tax payments and other matters that make filing delivery, Lyft and Uber taxes easier.
Mileage tracking: Motives and methods
Why you need to be meticulous about mileage
Mileage deduction, or the costs of operating your vehicle, will be the most important item to account for when you consider how to file taxes as a freelancer. While mileage is an important deduction for all independent contractors, as you might imagine, it’s even more essential for rideshare and delivery drivers.
There are two ways of keeping track of your mileage deduction. One is to use the IRS’ standard mileage deduction, which for 2022 is 58.5 cents per mile. This number takes into account the costs of operating your vehicle, from fuel and maintenance to registration, insurance, and depreciation. Alternatively, you can calculate all your own vehicle operating costs, but only after your first year of using the vehicle. You may discover that this second option allows you to have more money deducted from your taxable income. Learn more about the options for deducting your mileage in this Gridwise post.
No matter which way you decide to calculate the deductions for your mileage, you need to know what mileage you can and cannot deduct.
You can deduct
- miles driven to and from home when you go out to drive or deliver
- miles you accrue during your trips
- miles you drive on any other trips you make that are necessary as part of your business.
Examples:
- driving to return a lost cell phone or to an Uber Hub or another physical location where your company might make driver support available
- driving to pick up supplies, to get gas, or to have your car cleaned, serviced, or detailed, etc.
You cannot deduct
- miles you drive for personal trips
- miles for any trips you take that do not directly affect your business
Note: If imagining yourself becoming the not-so-proud owner of a shoebox filled with paper receipts gives you nightmares, stop worrying. Electronic records of purchases will satisfy reporting requirements. If you use cash, you can scan copies of your receipts, in some cases, right into your recording software or app. Gridwise and Keeper give you a simple to use interface that keeps all your receipts recorded without the messy pile of paper.
Mileage tracking methods
By now, you’re probably convinced that tracking mileage is important, despite all the other things drivers have to do. Now, let’s look at your options for keeping accurate records.
- Manual tracking: You can keep a logbook where you list every trip you make, starting and ending mileage, the date, and purpose of the trip. While this would work, it’s certainly not convenient. Besides, if that logbook gets lost, your plans for having a nice, fat tax deduction will go by the wayside.
- Spreadsheet: This is a bit more convenient and sophisticated way of tracking your business mileage. You’d need to be meticulous about making your entries, though. Even if you keep a spreadsheet app on your phone, it could be time consuming and inconvenient to keep doing it with all the other things going on in a rideshare or delivery driver’s day to day life.
- GPS-based mileage tracking apps: There are a bunch of apps that track mileage based on your GPS location, and most of them are pretty accurate and far more convenient than taking constant readings of your odometer. Your driving apps, such as Uber, Lyft, DoorDash, or Instacart, may also track your mileage, but be careful here. They will only track the miles you drive while you’re on a trip or delivery. They don’t count the miles you drive going to pick up a customer or when you make your move toward a restaurant or store.
Gridwise, on the other hand, will track all the miles you clock while you’re on your shift. All you need to do is make sure you start tracking the minute you leave home, and every gig driving mile will be logged. - OBD-II mileage tracking systems: There are plug-in modules that assess your vehicle’s mechanical health and track your miles. However, many authorities question the ability of OBD-II mileage tracking systems to get get accurate odometer readings. Insurance companies don’t consider them to be accurate enough gauges of odometer readings.
While mileage is a crucial deduction when you’re preparing your Uber, Lyft, or DoorDash taxes, it isn’t the only expense you’ll want to record.
More deductions and records to keep
Expenses you can deduct
You’re entitled to include the cost of other expenses that are directly related to your driving business. These include
- vehicle expenses
- equipment for your car and home office
- extra services and subscriptions
- business tools, including apps and software
You can learn much more about gig driver expenses that are eligible for deduction in this Gridwise article.
Ways to track and preserve deductible expenses
- The manual method: Just like you can with mileage, it’s possible to use a manual method, but in addition to logging each expense into a ledger, you would also need to keep physical receipts.
- Spreadsheets: You can record your expenses on a spreadsheet. This is somewhat less awkward than manually logging mileage, but there still will be plenty of room for failing to remember the case of water you bought for your customers, or losing the receipt from the thermal bag you purchased.
- Accounting software: You can use software that helps you track your expenses. This method usually interfaces well with any tax preparation software you or your tax professional might use.
- Gridwise: There are other apps that help you track your expenses, but Gridwise is designed specifically for gig drivers. It automatically tracks earnings and mileage, and lets you record your expenses the minute they come up. Gridwise’s partnership with Keeper gives you the ability to scan receipts and access a tax professional. This is a seamless way to record your expenses and a big help in learning how to file Uber taxes. Gridwise even provides .csv output, so you can feed your Gridwise data directly into tax preparation software. Check out what Gridwise and Keeper will do to super-charge your tax filing powers.
Organizing and categorizing expenses
Before you even begin to record expenses, you’ll want to set up categories for them. You can start by reviewing the categories listed above and checking out the Gridwise post that lists possible deductions.
If you’d like to learn more about how to categorize expenses, there is additional information available. This article from Motley Fool lists all possible categories any freelancer might use and also gives tips on how to customize them for your driving business.
One last tip
Using Gridwise, particularly for tracking mileage, is the easiest way to be in compliance with the IRS’ rules for deductible mileage. Gridwise tracks all the miles you drive for your gig, beyond what your company’s app might record. At the same time, you can log on and off Gridwise when you start and end your shift, so personal miles won’t be recorded. This eliminates confusion while capturing every deductible mile.
Gridwise Tax Help, a partnership with Keeper, has been created specifically to serve gig drivers. It provides affordable and easy ways to record expenses, scan receipts, and find deductions by analyzing your expenditures. Read about free resources from Keeper you can use to be fully prepared for tax season, and get all your earnings and expenses on the record.
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