Mileage vs. Actual Expenses: Which Method Is Best for Me?
If you drive a car for your 1099 contracting or self-employed work, you can claim a big tax write-off on the associated business expenses.
There are two ways to write off car expenses. You can either track the miles you drove for work, or keep tabs on your actual car expenses and deduct a portion of them based on how much you drive for work.
Let's break down the difference between mileage vs. actual expenses and find out which one will save you more at tax time.
How the standard mileage method works
The mileage deduction method was originally introduced by the IRS to simplify car expense write-offs.
With this method, you don't have to keep track of all your car, maintenance, and gas expenses all year round. You also can't deduct depreciation — all of these costs are "built into" the standard mileage deduction.
Instead, throughout the year, you'll track the miles that you actually drive for work using a logbook or an app. At tax time, you can claim a standard mileage rate deduction for every mile you drove. This rate, set by the IRS, changes every year. For 2021, it's $0.56 per mile.
Keep in mind that the standard mileage rate method won't replace all of your driving-related expenses. Some actually stack on top of this deduction, including:
- 🅿️ Parking fees
- 🛂 Tolls
- 🧽 Car washes
- 📋 Registration fees
That's good news from a tax savings perspective, but it means you'll still have to track some of the expenses you end up paying over the course of your work-related driving. To make this easier, you can use Keeper Tax, an app that automatically scans your purchases for work-related expenses like these.
How the actual expenses method works
Using this method, you'll add up all the actual costs you spend on your car at the end of the year.
These are the costs you can write off using the actual expenses method:
- ⛽ Gas
- 🛡️ Insurance
- 🔧 Maintenance
- 🛢️ Oil changes
- 💰 Lease payments
- 🏷️ Depreciation deduction
Then, you'll multiply this by the percentage of time you drove your car for work (also known as your "business-use percentage").
The actual expenses method used to be pretty burdensome for self-employed taxpayers. These days, though, technology has made it far easier to track your actual vehicle expenses.
Apps like Keeper Tax, for example, can automatically scan your purchases for these expenses — meaning you don't have to do any manual recordkeeping in a spreadsheet.
Advances like this have made some self-employed people less likely to avoid this method just because they find tracking expenses a hassle.
Which method gets you the biggest tax deduction?
There’s no one right answer for everyone, but there's a right answer for you. And it depends on how you drive — as well as how much you spend on variable costs like gas and repair.
Let’s walk through this with two examples: one for someone who drives a typical amount for work, and one for someone who drives a lot.
As you'll see, the typical driver gets a larger deduction using the actual expenses method. But the heavy driver saves more by tracking mileage.
For typical drivers: Actual expenses saves more
Let’s say that, in 2018, you drove about 10,000 miles per year, with a business usage of 50%. On an average week, that’s about 200 miles of driving — about five to 10 hours in total.
In this case, we'll assume that your auto repair needs, your vehicle's fuel efficiency, and your gas prices were all average, meaning your deductible expenses weren't unusually heavy or light.
Here's how the math shakes out for the standard mileage method:
Now, let's look at how things would have looked with the actual expenses method.
Turns out, the actual car expense method would give you a far greater deduction. If you use the standard mileage method, you could have written off $2,725. But if you deducted your actual car expenses, that number goes all the way up to $3,380.
That's an extra $655 in tax write-offs from your car. Assuming you were taxed at a 30% effective tax rate, that would translate into an extra $200 in your pocket at tax time.
For heavy drivers: Tracking mileage saves more
Now, let's switch it up. Say you drove a lot for business purposes — maybe for a rideshare company like Uber or Lyft.
You racked up 20,000 miles that year, with 15,000's worth of business mileage.
Here's how your taxes would break down, using the standard rate from 2018:
Needless to say, that's a huge deduction.
Which method is best for me?
Here's the bottom line: If you drive a lot for work, it's a good idea to keep a mileage log. Otherwise, the actual expenses deduction will save you the most.
Switching between standard mileage and actual expenses
For most self-employed people looking to write off their auto expenses, tax savings are top of mind. But there's one other consideration to be aware of. That's the ability to switch between the two methods.
If you choose the actual expenses method the first year you start using your car for work, you're actually locked into that method for the rest of the vehicle's life. If you choose the standard mileage method that first year, you can switch freely between them in later years
This restriction is likely to be an issue only if you end up driving a lot more for work in the years after you get your car.
Here's a quick summary of each method's pros and cons.
Pros and cons of the standard mileage method
- You can switch between methods if you use this in your first year
- You'll get a bigger tax break if you drive a lot
- You'll get a smaller tax break if you drive a typical amount
- You'll have to track the number of miles you drive
Pros and cons of the actual expenses method
- You'll get a bigger tax break if you drive a typical amount
- You'll be able to deduct vehicle depreciation
- You're locked into this method if you use it in the first year
- You'll have to sum up all your car expenses
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