This post may contain affiliate links which means I may receive a commission for purchases made through links. I will only recommend products that I have personally used! Learn more on my Disclaimer Page.
If you’re a gig worker or independent contractor, you’ve likely asked yourself: Should I calculate my total annual car expenses or use the standard mileage rate? Unfortunately, there’s little information out there about calculating your car expenses. It can be hard to get a good return on your taxable deductions, confusing to know how to calculate your costs, and challenging to keep track of your car expenses. Luckily, you’ve come to the right place. Today, I will teach you how to calculate all of your car expenses so that you can figure out which method gives you the greatest return! We’ll also go over the pros and cons of each one so that you know when it’s best to use one over the other. This way, you can stay more organized with your payments, get a greater return when you file taxes and have peace of mind knowing that you’re being proactive and saving the maximum amount of money.
And if you’re new here, welcome, I’m Shonnita! I make content about strategies, tools, and tips to help you amp up your side hustle game, become more productive, and pay off your student loans faster!
Calculating Your Annual Car Expenses
First, we have to calculate our annual car expenses. For the sake of consistency, I’m going to use my 2019 expenses in this entire example. We will start by calculating depreciation. You may be wondering: How do you calculate depreciation? I didn’t know the answer to this either until I did some digging and found this helpful calculator that you can use to follow along with me!
This calculator will ask for the asset cost of the car. This is how much you paid for the vehicle. This may require you to remind yourself of the specifics of your car, such as the condition when you purchased it. For example, I bought my car as a certified pre-owned vehicle that was two years old and had 38,000 miles. My total purchase came out to $10,086.48. Now, put your final number in the field of asset cost on the calculator.
Next, we are going to calculate salvage value. The salvage value, also known as residual value or scrap value, is the asset’s value at the end of its useful life. This might also mean a trade-in value so that when you are ready to sell the car for its parts or trade it in you’ll know what you can get back in return! To calculate salvage value, I’m going to use Kelley Blue Book. Here, you can get the estimated value of what your car might be worth if you were to trade it in. Simply answer the questions about your vehicle, and it will give you the trade-in value! Based on my answers to the questions, my salvage value was $4,389. Once you have this number, enter the useful life in the number of years. This is the expected amount of time the car will continue to be productive, based on what you use the car for. I primarily use my car to get to customers’ residences and restaurants since this is what I do for my gig work.
Next, in the “Placed in Service” section, select the month and year you started using the car. This will likely be the time in which you took the car off the lot for purchase. The following section is convention. Conventions suggest that you choose an entire month, mid-month, mid-year, or mid-quarter convention. If you’re not sure what to do, it suggests that you keep it at the common full month, which is what I’m going to do as well.. If you want to see all the different costs from year to year, you can click on the full schedule. Based on this calculator, the average depreciation expense of my vehicle is about $712.19.
The next item that we will calculate is monthly lease payments (if you leased the vehicle). Under the guidelines of calculating your annual car expenses, you cannot include your monthly payments in this section if they are lease payments. However, you are allowed to deduct the interest accrued on your car payments. So, I will include my car payments: $155.37. (I ended up paying this off early by being proactive and putting lots of my gig work earnings toward those payments!) Below are my other car expenses that we will calculate, and I’ll then share with you what my final annual number for each one came out to.
|Item to Calculate||My Annual Cost|
|Car Repair (Any Car Maintenance)||$701.15|
|Parking Fees, Toll Booths & Street Parking||$504|
|Gas (Keep all of your receipts!)||$1,440|
|Vehicle Registration Renewal (Including the state safety admissions test!)||$101.75|
* If your financing company only tells you the amount of money you paid ahead instead of how much of your monthly car payment is going towards interest, call them up and request that they send you a statement or explanation of your payments, how they were being allocated and how much interest you paid towards your car note at that time. This info is essential for when you file your taxes!
So, if we were to add up all of the expenses, the total costs that I would be able to deduct (instead of using the standard mileage rate) would come out to $7,621.02. However, when I used the Stride app, the final tax dedication came to $9,764.22. So, solely based on deductible mileage, I still ended up in a better place using the standard mileage rate. If you add in all supplies and other expenses, the total deduction would come to $11,743.17.
Standard Mileage Rate vs. Total Car Expenses
|Easiest option – mainly for gig workers who use their car frequently.||The standard mileage rate fluctuates every year and is totally out of your control.|
|There are many helpful apps to use so that you’re not working too hard to keep track of things! (Stride, QuickBooks, Everlance, etc.)||Sometimes, you may have a very high expense that you want to deduct but you can’t because it’s already factored into the standard mileage rate of depreciation – such as getting 4 new tires put on at once.|
|If you start off using the Standard Mileage Rate when filing your taxes This option allows you the flexibility to decided between using the standard mileage rate and the cost of your car expenses, year to year.|
Total Annual Car Expenses
|You can see your total in real-time! This will be encouraging since you can estimate how much money you’ll be able to get back!||If you started using your total expenses for tax deductions, you can’t then switch to using the standard mileage rate.|
|In some cases, you may be better off – you may get more money back if you aren’t running up a lot of miles.||This option requires more diligence on your part to keep track of all your expenses.|
When to Use Standard Mileage Rate vs. Total Car Expenses
So, to recap:
When is it best to use one over the other?
- The Standard Mileage Rate is a typically suitable deduction option for gig workers who perform some type of delivery service or transportation service.
- If you drive a luxury vehicle or even a vehicle whose parts are just more expensive to replace or maintain, it may be beneficial to use the total car expenses rather than the standard mileage rate.
- Keep in mind the standard mileage rate is based on the average car cost expenses for that given year – the keyword here is standard (standard means average).
- If you are someone who does run their own business and is not necessary a gig worker, it may not be necessary to use the standard mileage rate.
- The next thing is to assess how you financed the car, ask yourself the following questions:
- Did you lease the car? If you leased the car, there are some guidelines on how you should go about this.
- Did you buy the car and are making monthly payments on the car? (You can deduct the interest!)
- Do you own the car outright?
- Are you operating a car that is in someone else’s name?
Now, there are still many other expenses a business owner can assess when doing their taxes. And I’m not going to get into that since there are so many different types of businesses and gig work you can do to earn extra money these days!
However, if you don’t own a car or have never owned a car and are reading this blog because you want to purchase a car, perhaps to start a side hustle, check out this article from Nerd Wallet. I really enjoyed reading this– it will help you calculate the cost of owning a car by year!
If you’re interested in learning more about personal finance, productivity, and gig work, subscribe to my newsletter & be the first to hear about my new blog posts!