Making some extra money just by driving your car can be a nice gig, but remember to consider tax issues if you're working with Uber, Lyft, Via, or any similar rideshare network. You'll pay income tax on the money simply by giving someone a ride in your car, but you can also deduct work-related expenses.
Independent Contractor or Employee?
Your work status affects how you calculate and pay your taxes, so the Internal Revenue Service (IRS) wants to know whether you're an independent contractor or an employee. You are most likely—but not always—an independent contractor when you work for a ridesharing company.
Check with a tax professional if you're unsure about your status, because making a mistake can be a big headache, particularly if you claim that you're an employee so you can skip paying estimated taxes, when you're actually an independent contractor. You can also find more information at the IRS Small Business and Self-Employed Tax Center.
The IRS looks at several factors when deciding on your work status. There are three factors in particular that can probably help you determine your status:
- Behavioral: You're probably an employee if the company controls or has the right to control what you do, how you do it, and when you work. For example, when a company tells you exactly when to drive, where to drive, and whom to pick up, then you're likely an employee.
- Financial: Employers control the business aspects of the job on behalf of their employees. If the company provides you with equipment (such as giving you a company car to drive), then you are likely an employee.
- Type of relationship: You're most likely an employee if you've entered into a written contract or receive employee benefits, such as a pension plan, insurance, or vacation pay.
In November 2020, California voters approved Proposition 22, which defines app-based drivers, such as those who work for Lyft and Uber, as independent contractors. So, if you drive for Lyft or Uber in that state, your status is clear.
The Tax Impact
As an independent contractor, you'll pay income tax plus 15.3%: 12.4% for Social Security and 2.9% for Medicare. You would only pay half of those Social Security and Medicare taxes if you were an employee—your employer would pay the other half.
You're also responsible for sending quarterly estimated taxes to the IRS as someone who makes their living through independent contract work. Again, that is something the employer would handle if you were an employee.
Here's a brief rundown of how self-employment income is taxed differently from regular wages:
|How income is taxed||Gross wages, minus pretax benefits. Subject to income tax, Social Security, and Medicare taxes.||Gross receipts, minus allowable business deductions. Subject to income tax and self-employment tax.|
|Federal income tax||Yes||Yes|
|Social Security tax||Yes (pay half)||Yes (pay entire tax)|
|Medicare tax||Yes (pay half)||Yes (pay entire tax)|
|State income tax||Yes (where applicable)||Yes (where applicable)|
|Tax documents received at the end of the year||Form W-2||Form 1099-MISC and/or Form 1099-K|
|Where reported on the tax return||Form 1040, Line 1||Form 1040, Schedule C and Schedule 1|
|Documents you fill out when starting to work||Forms I-9 and W-4||Form W-9|
|How taxes are paid||Through payroll withholding||Through estimated taxes|
|How work-related expenses are deducted||Not deductible||As business deductions on Schedule C|
Specific Tax Tips
As an independent contractor, you're eligible for certain expense deductions related to your rideshare business. Keep detailed records and documentation, including:
- A mileage log to calculate the percentage of miles driven for work purposes (you can download a mobile app to keep track of mileage)
- Records of work-related expenses, including car repairs, gas, maps, and supplies
You can deduct the standard mileage rate, which is 57.5 cents per mile for tax year 2020, or you can deduct a percentage of your actual expenses equal to the percentage of time you drive for income-earning purposes. The IRS periodically changes the mileage rate, and in the 2021 tax year it has decreased to 56 cents.
You can deduct the standard mileage rate or actual expenses, whichever method produces more savings to you, but you can't do both.
You can deduct tolls and parking separately from, and in addition to, the standard mileage rate deduction.
Include miles you log when driving people around, plus other business-related driving. This might include a trip to the bank to make a business-related deposit, or to a retail establishment to purchase supplies. The IRS can disallow the deduction if you don't keep a mileage log.
It's important to keep track of your personal driving in your vehicle, because those miles aren't eligible for a tax deduction. For example, if you drove 50,000 miles last year, and 40,000 of them were for work, then you can deduct 80% of your auto expenses. Likewise, you can only apply the standard mileage rate to those 40,000 miles.
Other work-related expenses, such as drinks and snacks you buy for riders, are also deductible. A portion of your phone bill can be considered a business expense if your cellphone bill usage increases due to driving or because you need to buy a higher-cost plan to accommodate the higher data usage.
Forms 1099-MISC and 1099-K
Uber, Lyft, and other ridesharing services will send you a Form 1099-MISC and/or a Form 1099-K after year's end. These are effectively the equivalent of Form W-2 for employees, although they won't show any withholdings, because as an independent contractor no taxes were withheld from your income.
You should receive these forms in late January so you can report your earnings for the year on your tax return. Use them to complete Schedule C, Profit or Loss From Business. All of your income and deductible expenses should be entered on this form.
You'll only receive a Form 1099-MISC if you were paid more than $600 for the year, but the IRS still expects you to report the income on your tax return if you earn less. Form 1099-L reports any income you earn while driving (e.g., when you have a paying passenger in the car), while Form 1099-MISC covers other types of payments you may receive.
Paying Estimated Taxes
You'll pay taxes directly to the IRS as an independent contractor, because you don't have an employer to withhold income taxes from these earnings. The IRS requires individuals (including partners, sole proprietors, and S corporation shareholders) to pay estimated tax payments if they expect to owe at least $1,000 throughout the tax year. Calculate the amount of each payment based on earnings for that quarterly time period.
You'll have to pay estimated taxes on your driving income, even if you also hold down a separate, regular job with an employer that withholds taxes from your pay and issues you a Form W-2. However, you would only pay estimated taxes on your independent contractor earnings.
Another option is to increase your withholdings from your regular job pay to cover both employment and independent contractor income. Check with a tax professional to find out whether that makes sense for you. It typically works better if you don't earn a great deal as an independent contractor.