You drive for Uber and/or Lyft.
You’re good at driving. You help your customers get to where they are going, safely and affordably.
But navigating the tax system as a ride-sharing driver can be frustrating. It’s almost as if you’re stuck in a traffic jam and not really sure how to get to your destination.
Fortunately, Visor is here to help. For our customers who are ride-sharing drivers, the tax advisors at Visor have put their heads together to come up with a dozen tax rules of the road. We hope this helps you to prevent unpleasant tax surprises.
1. Ride-sharing drivers are independent contractors.
Taxes for independent contractors works a whole lot differently than taxes for employees. For one thing, being an independent contractor means you are a business for yourself. And that means you need to do everything — including managing your finances.
2. Get a business license, if needed.
Just like other businesses, independent ride-sharing drivers might need to register for a business license. Check with your city or county government for details about what is required.
3. Separate bank account for your ride-sharing business.
Open a separate bank account just for your ride-sharing income and expenses. Deposit all money from Uber and Lyft into that separate bank account. Similarly, use that account to pay for expenses related to your ride-sharing business.
Also, get a separate credit card account for your ride-sharing business.
Having all of your business income and expenses in one place makes it easier for you to keep track of your spending and to prepare for tax time.
4. Record income and expenses.
Independent contractors can deduct a wide range of expenses against their income. But how are we going to find out how much you spent on tax-deductible expenses?
We recommend that ride-sharing drivers record their income and expenses. That way, you will be able to tally up your deductions at tax time. And that will save you time, since you won’t have to wrack your brain trying to remember what you spent last year.
You can use a notebook to track your income and expenses. That’s what my dad does. Or you could use a spreadsheet or an application on your smartphone.
The important thing is to find a system that works for you.
5. Typical expenses ride-sharing drivers can deduct:
- Commissions and fees paid to Uber and Lyft;
- Cost of smartphone;
- Mobile telephone and data service;
- Cost to buy a car;
- The purchase price of the car is usually spread out over 5 years.
- Costs to operate and maintain a car, such as:
- Gasoline and fuel,
- Oil changes,
- Car repairs,
- Vehicle registration fees,
- Car insurance, and
- Parking and tolls;
- Bottled water and other incidentals provided to customers;
- Defensive driving training courses;
- Supplies (such as maps, notebooks, pens, pencils);
- Phone mounts so you can utilize your smartphone hands-free;
- Health insurance for yourself, your spouse, and your dependents;
- Contributions to a self-employed retirement plan; and
- Any other expense if it is directly related to conducting your business as a ride-sharing driver.
6. Income for ride-sharing drivers is taxed at least twice.
Your income from driving for Uber and Lyft is called self-employment income.
Self-employment income is handled like this for tax purposes:
- We add up all your self-employment income, and then subtract out deductions and expenses related to your ride-sharing activity.
- This net amount of income is subject to two federal taxes: the income tax and the self-employment tax.
The income tax has rates ranging from 10% on the low side to 39.6% on the high side.
The self-employment tax (15.3%) is how your money goes into the Social Security and Medicare programs. In other words, your ride-sharing income will become part of your Social Security earnings history, and will qualify you for benefits if you become disabled or retire.
Self-employment income is also subject to state-level taxes.
7. Set aside at least one-third of your income for taxes.
We’re not kidding. An Uber driver earning $50,000 a year with no other income or deductions might have a federal tax liability of about $12,010 in the year 2017, which works out to be just about 24% of their income. Factor in state taxes, and easily one-third or more of a driver’s income could go to taxes.
8. Send in tax payments throughout the year through a process called estimated taxes.
Estimated taxes are payments that go towards your eventual tax liability for the year. Employees have this tax withheld from their paychecks. But as an independent contractor, Uber and Lyft won’t send in these payments for you. You will need to do it yourself.
Ideally, you should send in estimated tax payments four times a year:
- April 15 (to pay for taxes on income earned from January to March);
- June 15 (to pay for taxes on income earned during April and May);
- September 15 (to pay for taxes on income earned from June, July, and August); and
- January 15 of the following year (to pay for taxes on income earned from September to December).
Any final tax payments should be made by April 15 of the following year (which is the same day that tax returns are due).
The IRS allows two ways to figure out how much estimated tax a ride-sharing driver needs to pay.
Some drivers use figures from their previously filed tax return to estimate their future tax payments. This method works well if your income and deductions are staying about the same this year as it was last year.
An alternative method is to run a calculation just before each payment due date based on the driver’s income and deductions for the year so far. This second method is a good choice for drivers who want to pay exactly the right amount of tax and who want to avoid a cash crunch in April.
9. Keep a log of your miles.
Every day, in any way, you must log your miles.
You can use a paper notebook. It’s cheap. Just keep the notebook in your car. Jot down the odometer readings at the beginning and each of each shift you work.
Or you can use an app on your smart-phone. One CPA uses the memo note-taking application on her smartphone to track miles, and then transfers that data to a spreadsheet at the end of the week to tally up her miles. There are also specialty apps that help you track your miles.
Here’s why a mileage log is important. Lyft and Uber drivers can deduct expenses for owning and operating a car. But they can only deduct the portion of their car expenses that is related to driving their car for business purposes. And the only way we can figure out the portion of business use is to add up all the miles driven for business purposes and divide that number by the total miles driven for any purpose during the year. And the only way to run that calculation is if we have a mileage log.
Remember, the miles that count toward business purposes include:
- Driving to pick up a passenger,
- Driving while waiting for passengers,
- “Dead miles” while you drive around waiting for someone to ping you, even if you are not earning a fare.
Uber and Lyft do provide drivers with a mileage report on the driver’s annual summary. However, these mileage reports might not reflect all the miles you drove.
If someone doesn’t have a mileage log, then the IRS has no way to know how much you drove your car for business. Not having a mileage log leaves your car deduction in danger of being eliminated if an an IRS agent audits your tax return. And we want your tax return to survive an audit. Think of it this way. You wear a seat belt to protect yourself in case you get in a car accident. Similarly, a mileage log protects your car deduction in case you get audited.
10. Keep proof of payment for all expenses.
This could be bank statements, credit card statements, or actual receipts.
There’s always a risk that the IRS could audit your tax return. While audits are no walk in the park, what the IRS is looking for is surprisingly easy to comprehend. In an audit situation, the IRS agent has two questions in mind: 1) What was the expense for (and is it tax deductible)? and 2) did you actually pay for these expenses?
Let’s look at an example. Last year, David deducted $300 for supplies as an Uber driver on his tax return. Upon being audited, the IRS wanted to know what that $300 of supplies consisted of. Here we pull out David’s receipts and found out that he bought a phone mount, maps, and a phone charger. The receipt is critical here, since the IRS auditor can clearly see that a phone mount, maps and phone charger is related to the business of driving a car for hire.
Bank statements and credit card statements answer the second question: did you actually pay for these expenses? The IRS learned a long time ago that sometimes people make up their deductions. So the IRS always asks for proof of payment.
11. Keep any Form 1099-MISC or Form 1099-K tax documents.
Lyft and Uber might send you Form 1099-MISC and/or Form 1099-K in January to report income earned during the previous calendar year.
Keep these 1099 forms in a safe place, and give copies to your accountant. These forms document your income stream.
12. Hire an accountant.
You’re good at driving. You help people get to where they are going safely. Likewise, a good accountant helps you get to where you’re going safely and affordably.
Accountants make sure that your paperwork is in good order, that you are paying the right amount of tax, and that you avoid costly mistakes.
Look for accountants who specialize in ride-sharing and who are willing to take the driver’s seat if the IRS starts asking questions.
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