Disclaimer: the article below is for informational purposes only. Make sure you talk to a tax professional for advice that fits your particular situation.
Tax season is a time that many of us dread, and it is upon us yet again. If this is your first year as an owner-operator, it may seem particularly overwhelming as you are looking at a major change from when you were a company employee. Instead of taxes being taken automatically from your paycheck, you now have the daunting task of calculating and paying taxes to both State and Federal agencies yourself. And if this isn’t your first rodeo, you may still not be looking forward to gathering the necessary information to prepare your 2020 taxes.
But never fear; we have prepared some quick tips for helping this process go smoothly for both new and veteran owner operators.
Understand the Different Types of Taxes
As an owner-operator, in addition to State and Federal income taxes, you need to pay self-employment taxes of 15.3%, which comprises a 12.4% tax for Social Security and a 2.9% tax for Medicare. These taxes are comparable to those that previous employers took out as paycheck deductions, you just need to calculate and make these payments on your own now.
Partner with the Right Tax Preparer
Finding someone you feel comfortable with is key to filing an accurate tax report. You need to be able to disclose a wide variety of information so this person can find the appropriate tax responsibilities and credits that may be available for your situation.
If you are on the hunt for a new tax preparer, it’s alway a good idea to ask your fellow owner-operators for references and meet with a few potential candidates before you settle on the right person for your business. In addition to the value of a personal reference, using a tax professional who is familiar with carriers and owner-operator businesses will help make sure you are receiving the right advice. Finding this person well ahead of tax season will ensure proper planning and less stress come April 15th (or May 17 in 2021).
For additional tips on finding the right tax professional, see our article on how to find the right tax preparer.
Keep Solid Records
The best way to avoid surprises and a lot of work in the spring is to plan ahead and keep good records throughout the year. It may take extra time at the end of each trip, but it will pay off over the long run with a smooth tax preparation.
Good rules of thumb for record keeping:
- Have separate credit cards for personal and business use. This will simplify the tracking of your owner-operator business expenses.
- Keep receipts for all deductions, starting with the logging system you use for per diems. You are not permitted to take deductions for expenses if you don’t have a record of them, so don’t let a lack of documentation result in an unnecessary tax, or a stressful audit.
- Maintain an expense log and keep receipts, including expenses that may be automatically charged to your credit card such as tolls and scales.
- Note any unique circumstances. For example, 2020 taxes need to show the Covid relief amount received. This is NOT taxable, but the IRS requires the amount to be reported.
Make Estimated Payments Quarterly
Another great way to eliminate an unplanned tax bill is to make estimated tax payments each quarter. These typically range between 20-30% of the net income received during the previous quarter. Not only is this smart planning, it is a tax regulation that needs to be followed. These quarterly profit estimates are also used when you file a Form 1040 at the end of the year.
The profit equation you should use is gross pay as reported on the 1099-MISC minus allowable business expenses equals net profit.
If you are having trouble calculating these numbers, your tax preparer can and should help you determine the correct amounts.
Know What You Can Deduct
Many ordinary and necessary business expenses can be deducted from your overall tax liability, as long as you have a record of them. While not a comprehensive list, some typical deductions claimed by owner-operators include:
- Truck lease, repairs, depreciation and accessories
- Per diem
- Permits and license fees
- Start-up costs
- Interest paid on business loans
- Accounting services
- Depreciable property
- Home office
- Insurance premiums
- Retirement plans
- Business travel
- Personal vehicle miles for business-related trips (such as the bank, a meeting, a truck show, etc.)
- Communication equipment
- Tuition tax credits either for yourself or your children
Often a source of confusion is the per diem deduction. The per diem is the tax-deductible amount the IRS assumes you spend when you’re away from home on an overnight business trip (including meals, beverages, tips, etc.) and it directly reduces the self-employment taxes and income taxes owed on the return.
There are two ways to deduct these expenses: you can either take your actual expenses or you can take the amount the federal government allows. Many owner-operators take the daily amount so they don’t have to keep all their receipts for seven years and only need to produce their log pages as proof of expense. The per diem is deducted on the Schedule C form.
For more information on the per diem changes that came into affect in 2018, read 2018 Per Diem Deductions Changed: Here Are the Details.
Invest in a Retirement Fund
Regularly investing in an IRA, SEP, or 401(k) is a smart way to minimize tax liabilities while planning for your future retirement. Many contributions are tax-free and remain tax-exempt (up to a certain amount) until you begin withdrawing them many years down the road.
Consider Leasing Newer Trucks
Generally, if you like to trade-in your equipment every three years (or less), leasing may be the most tax efficient way to go because you can deduct the entire amount of each month’s payment. Due to the depreciation schedule, by the fourth year the driver who leased their truck will typically see the tax benefit while the driver who purchased their truck will have little depreciation left. If you like to hold onto your truck for many years, purchasing your truck might be the best option. The very best thing you can do is discuss the ramifications of your truck depreciation schedule with your tax provider. They will be your best resource as the decision is often very individual.
For more information on depreciation see The 2018 Tax Law: What Does it Say About Depreciation.
Purchase Necessary Business Items End of Year
If recent conversations with your tax accountant have you concerned about your upcoming tax burden, you may want to consider making some purchases. It may seem counter-intuitive, but spending some money smartly on necessary business items at the right time can be a great way to both lower your tax bracket and prepare for the next tax year. Some options include prepaid tires, prepaid licensing or insurance, office staples, and day-to-day living items you keep in your cab.
For more information on this, see Which End of the Year Purchases Make the Most Sense for Your Trucking Business?
Be Prepared for an Audit
According to the IRS, 4% of tax returns filed by the self-employed with at least $100,000 in revenue get special attention. While these are not high odds, it never hurts to be prepared for an audit, especially because that preparation is essentially just a part of good record keeping. Two of the best ways to prepare are to store 7 years of tax information (including bank statements) and have a hard copy of your driver log book or per diem statements.
Make sure you are consistently downloading your logs and printing them so you have the data you need when the time comes. With most ELD software, logs fall off after 6 months, so download your logs each month as part of your record-keeping process.
Remember: if you are chosen for an audit, it does not mean you have done something wrong, you have just been flagged for further review. Stay calm, be honest, and remain kind. Auditors are just doing their jobs.
For more information on audit preparation see Four Owner Operator Tips for Preparing for An Audit.
With the right planning, record keeping, and tax professional to support you, taxes do not have to be an annual struggle for owner-operators.
Owner operator taxes is another reason why it is so important to surround yourself with helpful people and lease on to companies that understand and can guide you through new processes. If you're looking for a trucking home, we love taking on new owner operators! Contact us today to see if we are a fit!