If you are a 1099 contractor, you might want to track miles for taxes. After all, you could get a significant tax write-off. Before you do, then there are a few things that you need to keep in mind.
When filing your tax return, all of your business-related mileage needs to be categorized according to what type of activity generated those miles. You want to record all of the information so that it can be used later on when you file your taxes. We will go through some of the steps that will make tracking easier for you as well as let you in on an easy way to avoid paying taxes on self-employment income.
Note: If you would like to use an automatic expense tracker to organize your tax deductions, try Bonsai Tax. Our users typically save $5,600 off their tax bill by using our software. Start today and claim your 14 day free trial here.
What Exactly Counts As Business Mileage?
There's a common misconception out there among self-employed workers and claiming mileage for taxes. Let's clear that up first. What counts as business mileage? Well, a commute or miles from home to work or office, coffee shop, or other location where you do business does NOT count as deductible business mileage.
That's because that is considered a commute and not an activity that generates a revenue stream for your company. Driving to your office is simply a personal commute to work.
Instead, business mileage is for trips while doing business. Driving accrued while doing business means you use a car solely for business. This includes activities like driving to clients for lunch or meetings, going to a conference, running errands (i.e. buying office supplies) related to your work, and more.
How To Track Mileage For Taxes
The IRS requires you to keep track of your driving records, but it does not tell you how you should do it. What this means is that you can use a simple spreadsheet, mileage tracking apps like Expensify or MileIQ, and tax software to keep logs of your miles for the IRS.
Keep A Detailed Mileage Log
The first option to track miles for taxes is with a mileage log template.
The IRS is very direct about this and doesn't care for estimates.
The IRS defines appropriate records as to keep track of the following:
- Each business trip's miles
- Total mileage for the year
- The time (a date will suffice), place (your goal), and purpose
For example, a self-employed worker must record the odometer reading at the start of business trips, as well as the purpose, beginning location, finishing location, and date of the trip.
The final odometer reading must be recorded at the end of the trip and then subtracted from the initial reading to determine the overall number of miles driven.
If you drive for a gig platform as a Uber 1099 contractor or a Lyft driver, you'll almost certainly have meticulous records and documentation for the miles driven for business purposes. So, you won't exactly need to track mileage you've driven for every trip. The apps will automatically do the tracking for you.
A business owner can purchase a GPS device that automatically records the driver's location, who they were visiting, and how long it took them to get there.
This information could then be downloaded into an Excel spreadsheet for future use in tax season.
Actual Expenses Vs Recording A Mileage Log/Using A Mileage Tracker
This is a question many self-employed freelancers ask for claiming vehicle tax deductions. Remember, you can only select one tax deduction method. Whether or not you should use the actual expenses method, keep a mileage log, or use a mile tracking app to track and deduct vehicle expenses depends on you. After you calculate your freelancer taxes, figure out all the deductions to see which one can give you a greater tax break amount.
If your car is used only for business, you can fully deduct all your car expenses and costs you receive to maintain and use your car. If you use your car for business AND personal reasons/purposes, you would only take a percentage of those expenses or miles to be deducted.
We recommend you use software or apps that keep detailed records of trips for business so you can easily calculate how much mileage deductions you claim to take in comparison to the tax deduction total from the actual expenses method.
Let's break down if the mileage deduction vs actual expenses method would lower your tax liability more.
Keeping Receipts For The Actual Expenses Method
Instead of keeping a mileage log, you can claim vehicle expenses or receipts throughout the year for a write-off. Keeping detailed records of all your costs and documentation can feel longer and more tedious than tracking mileage, but it can lead to a higher tax deduction.
You'll be able to write-off or deduct car expenses like:
- A gasoline tax deduction
- Oil
- Repairs or maintenance
- Insurance
- Vehicle rentals
- Depreciation
- Parking fees & Tolls (you can still deduct this if you claim the Standard Mileage tax deduction method)
Note: If you want software to discover tax deductions and maximize write-offs for you, try our 1099 expense tracker. Our software connects with your online bank and credit card records to automatically organize and log your business expenses. You can sign up for free and see if this method would lead to a higher deduction. Claim your 7-day free trial here.
In fact, here's a list of deductible business expenses contractors can take advantage of.
Claiming The Standard Mileage Deduction
If you decide to go with the Standard Mileage Deduction over the Actual Expense Method, all you have to do is track your qualifying miles and multiply it by the cents per mile deduction for the year (standard mileage rate). Remember, only the number of miles traveled for business purposes is deductible.
The IRS' standard mileage rate in 2021 is 56 cents per mile.
This method was introduced so small business owners did not have to track a mileage log or keep all their vehicle expense receipts (for three years). It's as easy as that. Multiply your total miles by the deduction rate and compare it to maintaining the actual expenses for write-offs.
IRS Mileage Tracking Requirements
According to the IRS, you may not claim the standard mileage deduction and deduct mileage under these circumstances.
- You must not operate five or more cars at the same time, as in a fleet operation,
- You must not have claimed a depreciation deduction for the car using any method other than straight-line,
- You must not have claimed a Section 179 deduction on the car,
- You must not have claimed the special depreciation allowance on the car, and
- You must not have claimed actual expenses after 1997 for a car you lease.
Regardless of which method you select, the IRS only allows you to deduct the expenses for the percentage you use your vehicle for business. For example, let's say you drove your automobile 40% for business and 60% for personal reasons.
Then, after you total up your expenses or tax deduction total, you would multiply it by the percentage of use.
So, if your car's total mileage is 10,000 miles, you would times it by .60% (6,000) and then multiply it by the standard mileage rate or 56 cents per mile for 2021. Your total tax deduction would equal $3,360.
If you calculated your total actual expenses to be $12,000 for the year, then you would multiply that number by the percentage of business use or $12,000 x .60% = $7,200.
Record Your Business Expenses Automatically
Now that we have spoken about how business owners can deduct mileage from their taxes, it may be a better idea to avoid mileage tracking entirely.
Most self-employed folks save more money on their taxes at the end of the year by using a tax receipt organizer and recording their actual expenses rather than when they used a mileage tracker. Even high mileage drivers. The best way to find out is to determine your tax deduction amount by using the methods described above and seeing which one can save you more money.
Again, if you have any questions about what counts as business miles or if you should track mileage for your taxes, contact a tax professional for financial advice.
