Understanding how you and your trucking business are taxed is one of the biggest challenges for any owner-operator and truck driver. Using good planning and record-keeping all year round, though, can help you avoid any headaches in April. This guide will shed some light on truck driver taxes, deductions, and more.
How Much Tax Does a Truck Driver Pay?
Being an owner-operator means that you need to pay taxes yourself. This can be a major hurdle for those that were company employees before as they are now called to calculate and pay taxes that were once automatically withdrawn from their paycheck and then pay them to Federal and State agencies themselves. This involves making quarterly estimated tax payments that often range between 20-30% of their net income (the one earned per quarter). Doing so enables you to minimize any tax bill surprises while also avoiding tax penalties before Tax Day (usually in mid-April). In a nutshell, truck drivers need to pay three major types of taxes:
The first two are calculated on your tax return. If you are an employee, these taxes are being withheld from your check. Owner-operators will have to estimate and pay these taxes themselves. You can refer to >Tax-brackets.org to check cross-state tax brackets.
Now, when it comes to estimated tax payments, you will need to make quarterly payments if you owe more than $1,000 in taxes. This sum is, of course, the final amount you get after subtracting withholding and credits.
Note that owner-operators can show deductions or even file a tax return at the end of the year. So, estimating your business profit will show you (1) the required estimated tax payments you need to make, and (2) the due taxes when you file Form 1040. Your net profit is calculated with this equation:
Net profit = Gross pay (what’s on your 1099-MISC) minus allowable business-related expenses.
If you don’t file a tax return or show deductions, the IRS will determine what you owe in taxes without taking into account any potential deductions. This instantly means that the required tax amount will be significantly higher than if you had shown deductions or filed a tax return.
What Expenses Can a Truck Driver Write Off?
Let’s begin with Per Diem expenses, which refers to the assumed tax-deductible sum you spend on beverages, meals, and tips when on an overnight (always business-related) trip away from home. This one is deductible on IRS Schedule C for owner-operators and lowers your income and self-employment taxes owed on the return directly. Per Diem expenses are used by the majority of over-the-road truckers that are away from their home base most of the time as it saves them more money than gathering meal receipts. The only prerequisite is that you spend the night away from home.
Note, though, that you won’t be able to deduct your total Per Diem dollar for dollar. So, ensure you are familiar with the IRS regulations, though, as the laws and amounts change almost annually. According to the current rules, you can take 80% of the Per Diem expenses as a tax deduction.
Other accepted deductions are those referred to as ordinary and necessary business expenses. In general, these include:
- Truck maintenance and supplies – You might be able to deduct these costs if you pay for them out of your own pocket (i.e., cleaning supplies, washer fluids, new tires, and oil changes). Note that if your employer reimburses you, you won’t be able to double-dip (hence, deduct these expenses).
- Sleeper berth – Many truck drivers are not aware that they can deduct items from using a sleeper berth. These include first aid supplies, mini refrigerator, alarm clock, cab curtains, and bedding.
- Electronic devices – You can deduct costs related to your cell phone from your tax return if you use it exclusively for work. CB radios and GPS units are also deductible costs.
- Travel expenses – Besides overnight stay-associated expenses (including per diem and hotel rooms), you may also consider the standard meal allowance. This may vary per location, but the amount is higher for truckers due to the Hours of Service regulations. For the current amounts, check out IRS Publication 1542.
- Professional association or union fees – Feel free to deduct fees you pay at a trucking industry organization or union from your taxable income.
- Uniforms – If you need to wear a uniform and it is not paid for by your employer, then you can deduct the related costs. These include goggles, protective gloves, boots, and other specialized work gear. Also, when away from home, you may deduct cleaning expenses for your clothing.
- Office supplies – These are deductible only if you use office supplies to keep track of your day or route and include from staples and maps to writing supplies, clipboards, and logbooks.
- Depreciation – You can deduct specific property as expense (i.e., your truck(s)) if you use that property in service, per Section 179. Always consult a tax professional before determining how to deduct these expenses if you are an owner-operator, though. Deciding how to use the leveraged deduction when filing your taxes can be challenging. The standard (aka straight-line) depreciation for a new Class 8 truck either uses the accelerated depreciation or the multi-year formula.
- Truck lease – The entire leasing amount of your monthly payments can be deducted. Note that you will probably see a higher deduction in the first 48 months due to depreciation. After three years or so, the truck purchaser will have little depreciation, which means that you will be able to see the reduced tax benefit. For the owner-operator who buys the truck, the tax delay is the net effect. In this case, the tax is not eliminated by depreciation – it is paid in the following years.
- Other costs – These include expenses such as DOT physical exams, drug testing fees, driver license renewal fees, and sleep apnea costs.
Other Truck Driver Tax Write-Offs That You May Qualify For:
- Lifetime Learning and American Opportunity tax credits – If you, your child, or spouse are attending college, you may qualify for partial reimbursement of the fees and tuition you pay for college provided that you have not received any scholarship or grant.
- Child tax credit – You may claim up to $1,000 for every offspring that is below 17 as long as the child lives with you (at least most of the time), and you cover at least 50% of their living expenses.
- Child & dependent care – You may receive compensation for some of the costs tied to dependent or child care if you have children below 13 years of age. In the case of disabled spouses and offspring, though, the age limit does not apply (eligible regardless of age).
- Earned income tax credit – This is a refundable credit that is based on your income and covers low- and middle-income individuals and families. You could get $6,000 or more in reduced tax credit with this one.
What Tax Forms Should Truck Drivers Use?
Filing a Form 1099-MISC (Miscellaneous Income) is the responsibility of self-employed truck drivers. You need to report that income, along with any expenses, on the IRS Schedule C (Profit and Loss from Business). You will also have to report your self-employment taxes and report them on your form 1040 if your net earnings are at least $400.
You should have received a Form W-2 for your job if you are a truck driver/employee and none of your job-related costs are deductible. In detail, the forms you will need to file your taxes are as follows:
- Schedule C form – For statutory and self-employed drivers. It determines your business profit and loss.
- W2 – For agents or commission drivers. Your Statutory Driver box in your W2 may have been checked. This form is also received by company truck drivers with a report of income and wages of the driver.
- Form 1099 – To report miscellaneous income and applies to truck drivers working as independent contractors for a company.
- Form 1040 or 1040A – This reports your individual income tax return. It is the standard federal income tax form.
- Other forms for reporting your income if you are owner-operator – It depends on your records.
Tips for Filing Truck Driver Taxes
Here are some more details and tips for filing your taxes:
- Don’t throw away your receipts. Hold on to them for at least five years.
- Know the specifics related to your truck driver-associated deductions. Ask a tax professional to review your accounts if you need extra help, so you don’t over-claim or miss out on these deductions.
- Be diligent about record-keeping to avoid penalties.
- You can visit the IRS Publication 583 page for information about record keeping and kinds of records that you may not have been aware of that you need to keep.
- You may also find useful information at the >IRS Trucking Tax Center.
- Try to minimize your taxes contributing to a SEP, IRA, or 401(k) frequently, tracking personal vehicle miles, and benefiting from the available credits and deductions. Of course, getting assistance from a tax professional with experience helping truck drivers will help relieve some of the headaches and burdens.
Having a Tax Home – A Key Requirement for Truck Drivers
Before you can claim a tax deduction, the IRS requires that you have a general area or city in which you work. This is referred to as a Tax Home and has nothing to do with where you reside. It is just the address you list on your tax returns and usually where all your mail goes to. This could be your personal residence, your business’ headquarters, or a dispatch center. The only prerequisite is that you contribute towards the selected tax home regularly while on the road, especially if you are an owner-operator using a residence as your tax home.
Why do you need a tax home? To be able to deduct travel and business expenses. In other words, without a tax home, the IRS won’t allow you to claim certain long-haul expenses. Note that failing to have a tax home or contributing financially to the registered tax home can end up with you facing substantial penalties for underpaid taxes.
Tax Moves to Make to Reduce the Due Sum of your Tax Return
Here are some things you could do to help minimize the amount you will owe after filing your tax return.
Take advantage of the new depreciation rules
Purchasing assets for your business (i.e., a new piece of equipment or new truck) could enable you to benefit from the new depreciation rules and eventually reduce your tax liability. According to the tax law, any qualified property bought between September 27, 2017, and December 31, 2022, can be fully depreciated of the property cost. Just ensure you place in service the purchased asset within that time frame to take the first-year deduction on the purchased asset immediately. If things remain as they are today, then the depreciation bonus goes down by an extra 205 annually, starting in 2023 (so, 80% depreciation in 2023, 60% in 2024, and so on). Your taxable income will drop considering that the cost of the depreciated asset will be recognized as an expense.
Important notice: Making big purchases should NOT be your first course of action to help get a deduction, especially if you are planning on buying assets that won’t bring you additional income. Also, remember that the higher the deduction today, the lower the deduction in the future (most likely). If your business slips into a higher tax bracket, this could be a problem. So, only make big purchases if you really need the asset to be bought.
Keep a Per Diem Calendar
The IRS allows truck drivers to prove necessary and ordinary business expenses incurred when traveling away from the home base. This deduction is called Per Diem and involves incidental costs and your meals for the days you were on the road. This applies to travels that require you to rest or sleep away from home to deliver on your job duties. Although this particular deduction is no longer an option for company drivers (employees), the TCJA (Tax Cuts and Jobs Act) left it open for owner-operators (aka self-employed individuals).
The Per Diem rate is set at $66 for every day you are away from home for business and $49.50 per partial day (effective since October 2020). Take note, though, that the IRS only enables you to deduct 80% of the Per Diem rate. This means that you get a deduction of $39.60 for a partial day and $52.80 for a full day.
So, to claim your Per Diem deduction, you must know how many days you have spent on the road. This is why it is critical that you keep track of these days (i.e., you can keep a calendar and mark “/” for partial days and “X” for full days).
Important: Ensure you provide DOT ELD logs with locations, dates, and times to substantiate your per diem.
Set up your business as an LLC
Being an LLC and getting taxed as an S-corporation by filing form 2553 is something worth considering, provided you net more than $70,000 annually. You see, for a sole proprietorship, all income is subject to self-employment tax (approx. 15% of all earnings), both distributed and undistributed. This is not the case with an S-Corporation, where you can withdraw additional funds as distributions and pay yourself a reasonable salary to minimize your self-employment tax. The key term here, though, is reasonable. In any other case (you give yourself a huge salary), you may send the IRS a red flag and trigger an audit.
Here is an example to make this a bit clearer for you:
Let’s assume that your annual net income is $55,000 and pay yourself a salary of $35,000. The self-employment tax rate is 15%. So, 15% of $35,000 is $5,250. This means that instead of $8,250 self-employment tax (15% of $55,000), you are now paying $5,250.
Catch up with your tax payments
If you have fallen behind your quarterly estimated tax payments, it is a good idea to try to catch up before the end of the year. A great way to do that is by making a larger than normal quarter tax payment to help pay any due tax liability when you file your tax return. Remember that not paying enough taxes throughout the year will get you penalized. In general, taxpayers owing no more than $1,000 avoid a penalty for underpayment of the annual tax. The same applies to those that have paid more than 90% of the tax due for the current year. Nevertheless, we can’t stress enough the significance of paying your taxes every single quarter to skip additional penalties that could be quite high.
Tip: You could consider setting aside 25% of your net income (the weekly) for your quarterly estimated tax payments.
Key Steps to File Taxes Successfully and Save on Taxes
Staying organized is crucial if you want to give yourself a considerable payoff in your taxes. In doing so, make sure you keep a careful record of any job-related expenses you have because the money you spend while on the road for work can increase the sum you can get back from your taxes. That aside, here are three important steps every truck driver should take to get taxes done.
Step #1: Select the (Right) Form You Need to File
Company drivers must have already received a W-2 form, which reports their annual wages and income. The majority of truckers will need to use the details from the W-2 form to fill out either a 1040A or 1040 form for taxes.
You could also consider form 1040EZ, which is a simplified version of the 1040 form, provided you meet certain conditions. For example, you need to choose NOT to itemize deductions and make no more than $100,000 annually. Also, you must have a tax status of married filing jointly or single. Before opting for the 1040EZ solution, though, take into account the trucking deductions that could help you save money.
Owner-operators, on the other hand, may find it easier to report their income via a 1099 form that reports miscellaneous earned income. The 1099 form enables you to itemize work-related expenses and deduct them from your taxes.
Step #2: Claim Work-Associated Tax Deductions
Truck driver tax deductions can save you some serious money (you pay less in taxes) as they allow you to reduce your adjusted gross income. We have already provided you with a long list of truck driver deductions you could be eligible for. You only need to calculate your adjusted gross income and report it on your tax forms, which will be the only type of income that will be taxed. The lower your adjusted gross income, the less in taxes you pay.
Step #3: File Your Taxes on Time
That would be not after April 15. You can file your taxes either by traditional mail or electronically. So, by now, you must have finished all the required paperwork (more or less), added costs, and know whether you will be getting a refund or you need to send a check. Just make sure all this is done before the deadline.
Extra Tips for Filing Taxes for Truck Drivers:
- Mileage cannot be claimed at standard rates, though you can claim it as a deduction.
- Any expenses your employer reimburses are NOT considered tax deductions you could claim.
- Make sure you keep a properly updated record of your actual expenses.
- Know all the regulations related to filing taxes. Also, what deductions you can take. There are certain rules that apply to truck drivers who wish to claim deductions.
- Never over-claim deductions.
- Using tax software can help you file your taxes in a decent way. However, it can never match the job done by a tax professional.
- Have a tax professional review your accounts to stay on the safe side and avoid penalties, especially if your income tax bracket has gone up recently.