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.
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.
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.
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:
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.
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.
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:
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 14-day free trial here.
In fact, here's a list of deductible business expenses contractors can take advantage of.
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.
According to the IRS, you may not claim the standard mileage deduction and deduct mileage under these circumstances.
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.
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.
A verbal contract (formally called an oral contract) refers to an agreement between two parties that's made —you guessed it— verbally.
Formal contracts, like those between an employee and an employer, are typically written down. However, some professional transactions take place based on verbally agreed terms.
Freelancers are a good example of this. Often, freelancers will take on projects having agreed on the terms and payment via the phone, or an email. Unfortunately, sometimes clients don't pull through on their agreements, and hardworking freelancers can find themselves out of pocket and wondering whether a legal battle is worth all the hassle.
The main differences between written and oral contracts are that the former is signed and documented, whereas the latter is solely attributed to verbal communication.
Verbal contracts are a bit of a gray area for most people unfamiliar with contract law —which is most of us, right?— due to the fact that there's no physical evidence to support the claims made by the implemented parties.
For any contract (written or verbal) to be binding, there are four major elements which need to be in place. The crucial elements of a contract are as follows:
Therefore, an oral agreement has legal validity if all of these elements are present. However, verbal contracts can be difficult to enforce in a court of law. In the next section, we take a look at how oral agreements hold up in court.
Most business professionals are wary of entering into contracts orally because they can difficult to enforce in the face of the law.
If an oral contract is brought in front of a court of law, there is increased risk of one party (or both!) lying about the initial terms of the agreement. This is problematic for the court, as there's no unbiased way to conclude the case; often, this will result in the case being disregarded. Moreover, it can be difficult to outline contract defects if it's not in writing.
That being said, there are plenty of situations where enforceable contracts do not need to be written or spoken, they're simply implied. For instance, when you buy milk from a store, you give something in exchange for something else and enter into an implied contract, in this case - money is exchanged for goods.
There are some types of contracts which must be in writing.
The Statute of Frauds is a legal statute which states that certain kinds of contracts must be executed in writing and signed by the parties involved. The Statute of Frauds has been adopted in almost all U.S states, and requires a written contract for the following purposes:
Typically, a court of law won't enforce an oral agreement in any of these circumstances under the statute. Instead, a written document is required to make the contract enforceable.
Contract law is generally doesn't favor contracts agreed upon verbally. A verbal agreement is difficult to prove, and can be used by those intent on committing fraud. For that reason, it's always best to put any agreements in writing and ensure all parties have fully understood and consented to signing.
Verbal agreements can be proven with actions in the absence of physical documentation. Any oral promise to provide the sale of goods or perform a service that you agreed to counts as a valid contract. So, when facing a court of law, what evidence can you provide to enforce a verbal agreement?
Unfortunately, without solid proof, it may be difficult to convince a court of the legality of an oral contract. Without witnesses to testify to the oral agreement taking place or other forms of evidence, oral contracts won't stand up in court. Instead, it becomes a matter of "he-said-she-said" - which legal professionals definitely don't have time for!
If you were to enter into a verbal contract, it's recommended to follow up with an email or a letter confirming the offer, the terms of the agreement , and payment conditions. The more you can document the elements of a contract, the better your chances of legally enforcing a oral contract.
Another option is to make a recording of the conversation where the agreement is verbalized. This can be used to support your claims in the absence of a written agreement. However, it's always best to gain the permission of the other involved parties before hitting record.
Fundamentally, most verbal agreements are legally valid as long as they meet all the requirements for a contract. However, if you were to go to court over one party not fulfilling the terms of the contract, proving that the interaction took place can be extremely taxing.
So, ultimately, the question is: written or verbal agreements?
Any good lawyer, contract law firm, or legal professional would advise you to make sure you formalize any professional agreement with a written agreement. Written contracts provide a secure testament to the conditions that were agreed and signed by the two parties involved. If it comes to it, a physical contract is much easier to eviden in legal circumstances.
Freelancers, in particular, should be aware of the extra security that digital contracts may provide. Many people choose to stick to executing contracts verbally because they're not sure how to write a contract, or they think writing out the contract terms is too complicated or requires expensive legal advice. However, this is no longer the case.
Today, we have a world of resources available at our fingertips. The internet is a treasure trove of invaluable information, platforms, and software that simplifies our lives. Creating, signing, and sending contracts has never been easier. What's more, you don't have to rely on a hiring a lawyer to explain all that legal jargon anymore.
There are plenty of tools available online for freelancers to use for guidance when drafting digital contracts. Tools like Bonsai provide a range of customizable, vetted contract templates for all kinds of freelance professionals. No matter what industry you're operating in, Bonsai has a professional template to offer.
A written contract makes the agreement much easier to prove the terms of the agreement in case something were to go awry. The two parties involved can rest assured that they're legal rights are protected, and the terms of the contract are sufficiently documented. Plus, it provides both parties with peace of mind to focus on the tasks at hand.
Bonsai's product suite for freelancers allows users to make contracts from scratch, or using professional templates, and sign them using an online signature maker.
With Bonsai, you can streamline and automate all of the boring back-office tasks that come with being a freelancer. From creating proposals that clients can't say no to, to sealing the deal with a professional contract - Bonsai will revolutionize the way you do business as a freelancer.
Why not secure your business today and sign up for a free trial?