Tax Rules for Ridesharing Drivers
Uber and Lyft Taxes on Income: How and When to Pay
Making some extra money just by driving your car can be a nice gig, but remember to take tax issues into consideration if you're working with Uber, Lyft, Via, or any similar ridesharing 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 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.
The IRS looks at several factors when deciding on your work 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.
- Financial: Employers control the business aspects of the job.
- 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.
If the company can exercise control over your work, such as setting hours, supervising, and providing you with the tools and equipment you need to do your job, then you could be an employee.
If the company leaves it up to you to set your own hours, requires you to provide your own tools, equipment, and vehicles, and if it doesn't provide any training or supervision, then you are likely an independent contractor.
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 fail to pay estimated taxes, but you're actually an independent contractor. You can also find more information at the IRS Small Business and Self-Employed Tax Center.
The Tax Impact
You'll pay income tax plus 15.3% in self-employment taxes on your income as an independent contractor: 12.4% for Social Security and 2.9% for Medicare. You would only pay half Social Security and Medicare if you're an employee. Your employer would pay the other half.
You're also responsible for sending quarterly estimated taxes to the IRS as an independent contractor. Your employer would remit taxes withheld from your pay on your behalf if you work as an employee.
Here's a brief rundown of how self-employment income is taxed differently than 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 both halves)|
|Medicare tax||yes (pay half)||yes (pay both halves)|
|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 58 cents per mile as of 2019, 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 to adjust for inflation.
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 make you forgo the deduction if you don't keep a mileage log.
It's important to keep track of your personal driving in your vehicle because these miles aren't eligible for a tax deduction. For example, just 80% of your auto expenses are deductible if you drive 50,000 miles all year and 40,000 of them were attributable to your ridesharing enterprise. 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 either a Form 1099-MISC or a Form 1099-K, or both 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 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 income you earn driving, while Form 1099-MISC covers other types of payments.
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 independent contractors to pay estimated tax payments at least quarterly. 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 regular job and that employer does withhold taxes from your pay and issues you a Form W-2. But 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 if this makes sense for you. It typically works best if you don't earn a great deal as an independent contractor.
William Perez is an enrolled agent.