Taxes this document covers
This information will only pertain to US federal taxes for now. Other countries and states have different ways of calculating how much tax you owe. This document is not meant to serve as a source of truth for your tax filing purposes, but to inform you of information and different helpful tips you can use to save money. We do not take responsibility for any errors on your taxes; always be sure to verify with the proper authorities that you are correctly filing your taxes.
How you are taxed
In the US, a contractor's pay is taxed through two primary vehicles: income tax and self-employment tax. Most are aware of the former, as almost all jobs are taxed this way. The latter is what can bite you in this line of work. Income tax currently ranges from 10-37%. Self-employment tax sits around 15% and is the tax we pay to fund social security, medicare, and other benefits that people use when they retire.
When paying taxes, make sure to look at your previous year's tax return. If you use automated software to file your taxes—like TurboTax—then often they will list the quarterly, estimated taxes you may owe on the first pages of your tax filing with the dates and amounts they need to be filed by. These are based on your earnings from the previous year and can be paid online at the IRS's website. With these taxes, you are essentially spreading out the end of the year's total beforehand. It is important to pay these taxes, as you can face penalties for not paying them on time.
Finding out what you owe
Currently, DAT pays out exclusively to PayPal. If you received more than $600 and took more than 200 payouts, you will receive a tax form from PayPal called a 1099-misc. This document describes the raw amount you earned. If one or both of the previous conditions were not true, PayPal will not send you the form. Even though you did not receive a tax form for this income, you will still owe taxes on this money. You will have to manually add up the payouts you received over the previous year to calculate how much you owe.
Once you know the raw total amount of taxable income you owe, you can start looking at deductions and expenses. You can reduce the total amount of taxable income for your self-employment taxes by taking deductions. These deductions are special ways of considering necessary expenses that you made for your work. Computer equipment, office-related supplies, and even a portion of your rent can count in the home office deduction. This deduction is the most common one for people in this line of work, however all that are available to you may vary.
The home office deduction will be where the bulk of the savings will be if you work from home. If you don't work from home, or have an explicit area of your home that you work from, then counting your regular businesses expenses will most likely save you the most money. To count expenses, you need to have records of the purchases to show in the case of an audit.
Rules of thumb
- To be safe, it is recommended to save 30% of your payouts exclusively towards paying taxes.
- Keep a log of all the expenses you make to complete your job (ChatGPT subscription, office supplies, etc). Even writing them down on paper, like a ledger, can be useful if you are ever audited.
Resources
Coming soon