As an owner-operator truck driver, your tax situation is unique. You file and pay taxes like a business owner while also being eligible for deductions that are specific to truck drivers.
If you’re looking for more information on how to file and pay taxes as an owner-operator truck driver, we’re here to help. Below is a brief overview of how to handle and manage owner-operator taxes.
Are you a self-employed truck driver that needs help with your taxes, accounting, or bookkeeping? Click here!
Estimated Tax Payments
As an independent contractor, the Internal Revenue Service (IRS) requires you to make quarterly estimated tax payments based on your business profits. Your quarterly estimated tax payments include:
Self-employment tax: The self-employment tax rate is 15.3%. It consists of Social Security (12.4%) and Medicare (2.9%) taxes.
Federal Income Tax and State Income Tax: This is calculated on your tax return.
Those who expect to owe at least $1,000 in taxes are required to make quarterly payments of self-employment and income taxes. When you are self-employed the payment of Social Security and Medicare taxes is your responsibility. This is unlike those individuals who are classified as an employee as these taxes would be withheld from a paycheck and paid by an employer.
How can you estimate your taxes owed each quarter? There are two common methods for estimating tax:
Safe harbor: Slightly simplified, this method is calculated by dividing your prior year's tax liability by four to arrive at the amount to pay for each quarterly tax estimate.
Actual estimate: This method is a far more useful method to calculate quarterly tax estimates for those with fluctuating income. This method uses the business’ current year profit each quarter to calculate the amount to pay during each quarter. This ensures that you are keeping current with tax payments during your business’ growth throughout the year and prevents any surprises during tax filing.
For new independent contractors, it is recommended to use the actual income method for estimating quarterly taxes.
Put time aside on your calendar each quarter to work through tax estimates. Do not wait until the last minute as penalties can apply.
Tax Deductions and Credits Lower Tax Liability
When it comes time to file your taxes, you can minimize your tax liability by claiming every legal tax deduction and credit available. Understanding and recording all the deductions and credits appropriately will help you avoid penalties, reduce the risk of an audit, and minimize the amount you have to pay in taxes.
Tax Deductions
A tax deduction occurs when you have a reduction of taxable income, like an expense. The reduction of your taxable income results in less tax due.
As an owner-operator truck driver, you have numerous tax deductions for your business including:
Your truck payment
Fuel
Accounting and bookkeeping fees
Office supplies
Maintenance fees
Uniforms
Licenses and permits
Communication Fees
Insurance
Any expense that you have record of and is “ordinary and necessary” for your business can be considered tax deductible. For our list of commonly missed owner-operator truck driver tax deductions, check out our Tax Deductions for Truck Drivers List.
Tax Credits
Tax credits work very differently than tax deductions. Tax credits will reduce your tax liability dollar-for-dollar while tax deductions reduce your taxable income.
This means if you owe $5,000 in taxes and receive a $4,000 tax credit, you will only be responsible for paying $1,000 in taxes.
A few common examples of tax credits are:
Child tax credit
Earned income credit
Child and dependent care tax credit
American opportunity credit
Reduce the Risk of Audit on Your Business
The IRS is tasked with selecting taxpayers for audit in two ways: The first is if they suspect dishonesty or practices that do not adhere to tax law; the second is a random selection of tax returns for audit to check tax compliance. To reduce the likelihood of a tax audit and reply to a random audit, it is important to claim tax deductions and tax credits for which you have documentation and support. Without supporting documents, the IRS may disallow the deductions or credits and charge interest and penalties.
Keep receipts, canceled checks, electronic log books, and other valid proofs of payment documentation for a minimum of three years.
Per Diem
Per Diem (per day) is one of your largest tax deductions as an owner-operator, but what is it exactly? In its simplest terms, the Per Diem deduction is a tax deduction that the IRS allows to substantiate ordinary and necessary business meal and incidental expenses paid or incurred while traveling away from home.
The IRS allows transportation workers, subject to the hours of service regulations that travel for business, to deduct their meal expenses from their income. The per diem rate is set by the IRS. The current rate (as of October 1, 2021) has been increased to $69 per day in the Continental US. You may hear the amount of the deduction quoted as $55.20. Prior to 2021, the IRS allowed an 80% deduction, however, temporarily for 2021 and 2022, the Taxpayer Certainty and Disaster Relief Act of 2020, allowed a 100% deduction on Per Diem.
If you are an owner-operator, the rule is simple, you get to claim the tax deduction for each day that you are away from your “tax home”. On the days that you depart and the days that you arrive at home, you must claim a partial day allowance instead of a full day allowance. That is ¾ of the standard allowance.
To learn more about Per Diem, click here.
Depreciation and Section 179
Section 179 doesn’t increase the total amount you can deduct, but it allows you to get your entire depreciation deduction in one year, rather than taking it a little at a time over the term of an asset’s useful life. This is called first-year expensing or Section 179 expensing. (Expensing is an accounting term that means currently deducting a long-term asset.)
You qualify for the Section 179 deduction only if you buy long-term, tangible personal property that you use in your business more than 50% of the time. Under Section 179, you can deduct the cost of tangible personal property (new or used) that you buy for your business.
There is a limit on the total amount of business property expenses that you can deduct each year under Section 179. The maximum was increased in 2023 to $1,160,000. The phase-out threshold was also increased to $2,890,000.
You don’t have to claim the full amount, it’s up to you to decide how much to deduct under Section 179. Whatever amount you don’t claim under Section 179 must be depreciated instead over the life of the asset.
The main advantage of Section 179 is it lets you take a higher deduction immediately. By receiving a higher depreciation deduction today, a business will reduce its current tax bill. This deduction is especially helpful for new businesses that may be having cash-flow troubles.
Two of the major disadvantages are as your income increases, it will move into a higher tax rate. By accelerating your business's deductions, you will have fewer options in the future to reduce your taxes when your business may be in a higher tax bracket.
Another disadvantage of the accelerated method is that it has a greater risk of recaptured depreciation. You may decide to sell a long-term asset before it is considered worthless according to its depreciation schedule.
Proper planning can help you make the best possible decision on depreciation.
Additional Taxes
Employee Tax
Do you have employees working for your business? If so, you must collect taxes on behalf of your employees including:
Social Security
Medicare
Federal and state income tax
The amount of taxes to withhold from each employee’s wages starts with a calculation that begins with the employee’s Form W-4. The Form W-4 is prepared by the employee and provided to the employer. The taxes calculated and withheld from an employee’s paycheck must be sent to the federal and state government based on their specific rules.
Excise Tax
Excise tax is considered an indirect form of taxation because the government does not directly apply the tax during the income tax filing process. An intermediary, either the producer or merchant, is charged and then must pay the tax to the government.
Excise tax can apply to businesses in a variety of ways based on your industry, the product or service you provide, and where you operate your business. A couple of common excise taxes that apply to trucking are:
Form 2290 Federal Highway Use Tax (FHUT)
Diesel Fuel
Tires
Purchases made on specific types of consumables or goods (such as fuel) and certain activities (such as a truck using a highway) are subject to excise taxes.
Franchise Tax
Franchise taxes are paid by certain entities (corporations, partnerships, and limited liability companies) that do business in certain states. These may be considered “privilege” taxes as it allows a business the right to operate in a certain state or locality.
Property Tax
Property taxes are due if you own property or real estate and it must be paid to the local government.
Gross Receipts Tax
Gross receipts taxes are imposed by some states on businesses instead of a state income tax. In these states, gross receipts (revenues) of the business are taxed.
Some states allow deductions for gross receipts tax and some states exempt certain types of businesses. ATBS can help you determine if you are responsible for this tax and if a deduction is applicable.
Common Tax Questions
Q: How much should I set aside for business taxes?
A: It is recommended to set aside 25-28% of your weekly net income for quarterly taxes.
Q: I cannot get my taxes done on time. What should I do?
A: If you can’t get your taxes done in time, file a one-time 6 month extension. However please keep in mind, It is an extension to file not an extension to pay.
Q: Will I receive a tax refund?
A: This is very dependent on your individual situation, however, it’s not likely if you are an owner-operator. You should work hard to being owed as little as possible. Remember, if you are getting a refund, you have given the government an interest free loan.
Q: Will my tax preparer send me my 1099-NEC form?
A: No, your carrier will send you your 1099-NEC form.
Q: I did not pay my quarterly tax estimates this year. What is going to happen?
A: The IRS will charge underpayment penalties and interest for the tax not paid.
For more common tax questions that we’ve answered, click here.
Lease vs. Purchase
If you’re leasing your truck, you can deduct each month’s payment from your taxes. This means if you purchased your truck, you’ll typically see a higher deduction in the first two years due to depreciation. However, because of the depreciation schedule, by the fourth year, you’ll have very little depreciation left. That means the driver who is leasing their truck will see a tax benefit compared to the driver who purchased. Additionally, the driver who purchased their truck will see a tax delay. This is because the tax will still have to be paid in later years, as it’s not eliminated by depreciation.
Preparing and Filing Taxes
Who is currently preparing and filing the taxes for your business?
A non-specialized provider?
A family member or yourself?
A local accountant?
If you are using any of the options above, you may be paying more tax than you need to. Continuously changing tax laws make it hard for any business owner to understand and accurately file and pay taxes. Filing accurately and maximizing deductions to reduce the tax burden starts with choosing a specialized business provider for your industry.
Using ATBS to prepare your federal, state, and local taxes can translate to an easy and seamless tax preparation process. With ATBS, there are just three easy steps to file your taxes:
Send ATBS all your business receipts
Complete our tax organizer
Be available for follow-up questions
ATBS will take this information and make sure you receive every tax deduction you deserve while remaining in compliance with the IRS. We give each return personalized attention, including an extensive review process by a tax professional, to make sure it’s done right.
Throughout the year, we’ll also provide you with your tax estimate amounts so you know how much to pay. Tax estimates are calculated on “actual profit” and can be accessed on a secure online portal anytime, anywhere.
At ATBS, we have helped more than 150,000 owner-operators over the past 20 years run a better business. We offer a variety of services including bookkeeping, accounting, and tax preparation, which will provide you with the best outcome when filing your tax return. We also offer unlimited business consulting for our RumbleStrip Professional clients. A dedicated business consultant will help you keep your business “between the lines” just like rumblestrips on the highway keep your truck between the lines. If you’d like to learn more about ATBS services or want to get started today, give us a call at 866-920-2827.