How does California’s Prop 22 affect taxes for drivers?

With the passage of California’s Prop 22 bill in November 2020, independent contractors will see a few changes to their taxes, starting with the information reported on their 2020 returns.

In this post, we explain how Prop 22 affects your taxes and answer a few common questions. Specifically, if you’re an independent contractor covered by Prop 22, we outline how the healthcare stipend or per-mile payment affects your tax liability.

What does Prop 22 mean for drivers?

California’s Prop 22 requires some gig platform companies to provide a minimum earnings guarantee for their drivers. The minimum guarantee works similar to a tipped minimum for restaurant workers, where the company tops-up pay for drivers who earn less than the minimum through the app’s regular compensation model.

When calculating the minimum earnings guarantee, participating (covered) gig companies will start with 120 percent of the pick-up city’s minimum wage plus $.30 multiplied by the number of miles driven while on “active time.” The definition of “active time” only includes the period of time beginning when you accept a delivery and ends when delivery is complete.

Is the mileage reimbursement taxable? Prop 22 for driver’s explained:

Yes, if the gig company tops-up your income, the portion of the top-up attributable to the $.30 per mile payment is taxable as business income. Note that drivers who earn at least the guaranteed minimum through the regular compensation model will not be paid a per-mile payment (also known as a mileage reimbursement).

No matter how your compensation was ultimately affected by Prop 22, your total compensation reported in Box 1 of your Form 1099-NEC is taxable business income, which you will report on Schedule C of your 1040 tax return (1120-S if you are incorporated and you elected to be taxed as an S-corporation).

How does this affect the standard mileage deduction?

It doesn’t. The good news is your business miles are fully deductible at the federal rate, whether a portion of your pay is attributable to the per-mile payment or not. In 2022, the rate climbed to 58.5 cents per mile January 1 – June 30 and then increased again to 62.5 cents per mile July 1 – December 31.

This is different tax treatment than if you were a W-2 employee who was reimbursed for your business miles by your employer. That’s because employers often reimburse employees under what’s called an “accountable plan.” The tax code allows employers to reimburse employees tax-free as long as the employer establishes an accountable plan and reimburses in accordance with that plan.

However, the per-mile payment under Prop 22 is not a tax-free reimbursement under an accountable plan. That means the payment is taxable, but your standard mileage deduction does not have to be reduced by the amount of the payment.

Let’s review an example to see how that works.

Max earned $400 over a 2-week period by delivering groceries as an independent contractor. The platform that scheduled and facilitated Max’s deliveries calculated a minimum income guarantee of $500 for the same 2-week period, taking into account the local minimum wage and $.30 per-mile payment.

For that 2-week period, Max will receive total compensation of $500 ($400 from regular compensation and a $100 top-up as required by Prop 22). 

The total compensation for the year will be reported in Box 1 of Form 1099-NEC, regardless of how much compensation was allocable to regular compensation or the minimum income guarantee.

How does the Prop 22 healthcare stipend affect my taxes?

Similar to the per-mile payment, a healthcare stipend you receive as an independent contractor from a gig company is taxable business income. However, the healthcare stipend does not reduce your self-employed health insurance deduction (SEHID) or itemized medical expense deduction in any way.

If you received a healthcare stipend from a gig company covered by Prop 22, the amount of the healthcare stipend is expected to be reported in Box 1 of your 1099-NEC.

Have additional tax questions? We’re here to help!

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