Among the biggest challenges in operating your trucking business is understanding how you and your business is taxed. You can avoid any big surprises in April by using good planning and recordkeeping throughout the year.
As an owner-operator, you are responsible for paying taxes yourself. For anyone that was a company employee before, this represents a major change. While your taxes were once automatically withdrawn from your paycheck, now you must calculate and pay them to State and Federal agencies yourself.
You must make estimated tax payments at the end of each quarter, often in the range of 20-30% of the net income received over the quarter. Complying with this regulation not only avoids a tax penalty, it also eliminates any surprise tax bill as Tax Day (typically on April 15) approaches.
Special note: This article is for general purposes only and not a comprehensive guide for taxes and your owner-operator business. The best way to ensure you’re taking advantage of deductions and paying appropriate taxes is following the IRS.gov regulations and consulting with a tax professional.
Types of Taxes
- Self-Employment Taxes: These taxes are similar to the Social Security and Medicare taxes you paid as a company employee. According to IRS.gov, the self-employment tax rate is 15.3% (12.4% for social security and 2.9% for Medicare). View full details about self-employment taxes at IRS.gov.
- Federal Income Tax and State Income Tax: This is calculated on your tax return. As a company employee, income taxes were estimated and withheld from your check. As an owner-operator, you are responsible for its estimation and payment. You can see tax brackets across states at Tax-brackets.org.
Estimated Tax Payments
Those who expect to owe at least $1,000 in taxes after subtracting withholding and credits are required to make quarterly payments of self-employment and income taxes. Though the IRS allows estimates based on the prior year’s data, financial services providers such as ATBS use current data to compute your estimated taxes due.
For payment vouchers, addresses for where to send the IRS estimated payments, as well as other federal tax information, visit IRS.gov.
Each state that imposes income taxes has a website to obtain their payment vouchers and addresses.
Deductions and Recordkeeping
Owner-operators have to estimate the profit of their business so that they can make estimated tax payments. The profit is also used to calculate the taxes due at the end of the year when you file Form 1040. The profit equation you should use is:
GROSS PAY (as reported on 1099-MISC) – ALLOWABLE BUSINESS EXPENSES = NET PROFIT
If you fail to show deductions or file a tax return, the IRS will determine the taxes that are due, without considering any of your potential deductions. This amount will most certainly be much higher than you otherwise would have been required to pay.
Typical Deductions for Owner-Operators
The following is a list of deductions typically claimed by owner-operators; it should not be considered a comprehensive list.
- Interest paid on business loans
- Depreciable property
- Home office
- Insurance premiums
- Retirement plans
- Start-up costs
- Permits and license fees
- Truck lease
- Accounting services
- Communication equipment
- Truck repairs and accessories
The main criteria in determining whether something is deductible is whether or not you have a record of the expense, and if it is considered an ordinary and necessary business expense.
Other than honesty, the best protection from audits and penalties is being good at recordkeeping.
- Keep all records that support every deduction you claim on your tax return, beginning with the logging system you use for per diem deductions.
- Save and label expense receipts, maintain an expense log, and sort it all out at the end of every run. Don’t forget to collect receipts for lumber fees or any other expenses automatically charged to your credit card. (This includes things such as tolls, scales, and credit-card fees.) Many owner-operators maintain separate credit cards for business and personal use which could help simplify keeping track of your business expenses.
- Don’t overspend on supplies, equipment, and services in your zeal to accumulate deductions. Only a portion of those expenses will be recouped through your tax filing. For a complete explanation of business expenses, visit the “Deducting Business Expenses” page on the IRS website, and IRS Publication 535 discusses common business expenses explaining what is and isn’t deductible.
IRS Publication 583 contains several pages on keeping records that you might not have considered — things such as the kinds of records you need to keep and how long you need to keep them.
Per Diem Expenses
The per diem is the tax-deductible amount the IRS assumes you spend on meals, beverages, and tips when you’re away from home on an overnight business trip. For owner-operators, it’s deducted on IRS Schedule C and directly reduces the self-employment taxes and income taxes owed on the return. An over-the-road trucker who is away from home much of the year will save money by using the per diem allowed, rather than gathering meal receipts because few people consistently spend $60-70 a day on meals.
To claim the per diem on any trip, you must be away from home for the night. Even if you work an 18-hour day, you cannot claim per diem if you return home that night. It’s also important to realize that you can’t deduct your total per diem from your tax bill, dollar for dollar. The IRS allows you to take 80% of the per diem as a deduction on your taxes. These are amounts and laws that may change from year to year, so make sure you’re familiar with current IRS regulations. Reviewing Topic Number 511 – Business Travel Expenses may help.
Tax Myths — BUSTED!
|“In the year you start your business, you will owe no tax.”||This is absolutely not true, especially if you are leasing your truck.|
|“You can deduct deadhead mileage and days off because of illness.”||Because you deduct only your actual expenses while working and are taxed only on the profit you make, you are already getting a deduction for deadhead miles and time off. Don’t deduct these again.|
|“You can deduct the cost of your dog.”||In general, your dog is deductible as a security measure, as long as he/she is part of the trucking operation and is always with the truck.|
|“You should be incorporated.”||Not necessarily. Incorporation only makes sense when the tax savings are greater than the additional costs.|
|“You can negotiate a deal with the IRS to pay back taxes at a few cents on the dollar.”||Such deals, called “Offers in Compromise,” may be granted in extreme cases.|
Section 179 allows taxpayers to deduct certain property as an expense if that property is used in service; this applies to things like your truck(s). The IRS has published guidance on how you can deduct these expenses, but owner-operators should always consult a tax professional or business services provider before deciding how to leverage the deduction and use it when filing their taxes. See IRS.gov for more information about Section 179.
The standard depreciation for a new Class 8 truck, commonly called “straight-line” depreciation, is an evenly paced multi-year deduction that’s spread over several tax years. Also common is a variation of the multi-year formula known as accelerated depreciation which takes a percentage of the equipment’s value in the couple of years, and a lesser percentage for a period of time after that. The IRS has Publication 946: How to Depreciate Property to help with specifics regarding depreciation.
Lease vs. Purchase
If you are leasing your truck, you can deduct the entire amount of each month’s payment. Purchasers typically see higher deductions in the first two years, however, because of the depreciation schedule. By the fourth year, the purchaser will have very little depreciation left, and the driver who is leasing their truck will typically see the tax benefit. The net effect is a tax delay for the owner-operator that purchases a truck. The tax will be paid in later years, not eliminated by depreciation.
In general, if you like to trade-in your equipment every three years or less, leasing may be a better option from a tax standpoint. This is due to erosion of depreciation, where each frequent trade you make fails to give you full depreciation value, and you wind up after a few trades buying a piece of equipment with a large price tag but with a lot of depreciation to show for it. Make sure you talk to a tax professional or a business services provider for advice that fits your particular situation.
Minimizing Your Taxes
The following are tried and true tax reduction tips:
- Get help from a tax professional or a business services provider that specializes in owner-operator businesses. There are a lot of different tax professionals out there, so focusing on one that specifically works with carriers and owner-operators will help make sure you’re getting the right advice for your trucking business.
- Save money tax-free by contributing to an IRA, SEP, or 401(k) regularly. The number of dollars you contribute up to a certain amount is tax-exempt until you start drawing it out many years later.
- Track personal vehicle miles. While you can’t deduct mileage on your personal vehicle to get to and from work, you can deduct it if you make a business-related trip to the bank, a meeting, a truck show, supply store, or parts store.
- Consider employing your kids. If you put an adolescent child on the payroll and pay them approximately $4,000 for the year, they will pay no taxes on the income because they didn’t make enough to tax. You will pay no tax on it, either. Make sure the kids are doing age-appropriate work — things like filing, data entry, answering the phone, faxing, load tracking, etc. Keep good documentation of their employment and always make sure you file W-2s.
- If you’re paying tuition to a qualified educational institution, make sure you claim tuition tax credits either for yourself or your children.
The IRS says that 4% of tax returns filed by the self-employed with at least $100,000 in revenue get special attention. Claiming substantial expenses not common to a single-truck owner-operator might draw an audit.
The IRS usually has three years to challenge deductions or income stated on your return by requesting an audit, so you should keep your records for at least that long. Remember, the fact that the IRS is auditing your return does not necessarily mean that your CPA made a mistake. Some returns are randomly selected to determine compliance within its tax rules.
If you receive a notice that you are being audited, the first thing you should do is contact the person who prepared your return. Most IRS auditing of the self-employed boils down to verifying expenses.
Taxes don’t have to be a struggle. Maintaining good recordkeeping will be your best friend while running your owner-operator business. The IRS has a Trucking Tax Center area on their website that provides some very useful information, and reach out to the tax professionals when you have questions. Better safe than sorry!