Tax Breakdown for Ridesharing Drivers
Financial Breakdown for Those Driving for Uber, Lyft or Sidecar
Nowadays, it's possible to make some extra money just by driving your car. If you are working (or thinking of working) through Uber, Lyft, Sidecar, or similar ride-sharing networks, there are a number of tax issues for you to take into consideration. What these (and similar Web sites) have in common is that they make it easy for people share a ride in a car.
These services are part of the sharing economy: a way to share goods and services, made possible through technology that connects consumers with service providers.
Even though you might be sharing a ride or giving someone a lift in your car, the income you earn by providing a ride-sharing service is taxable, and you can deduct your work-related expenses.
Independent Contractor or an Employee
This is the key question for anyone working in the shared economy. After talking to several people who work in the shared economy, Derek Davis, a certified public accountant in southern California, found that people "didn't even know what is going on" with their employment status. Here's what you need to figure out:
Are you an independent contractor? Most likely the answer is yes. Look at the contract to which you agreed when you signed up with the Web site.
Generally speaking, we look to three broad aspects of the relationship between you and the business you work for. The IRS outlines it this way:
- "Behavioral: Does the company control or have the right to control what the worker does and how the worker does his or her job?
- "Financial: Are the business aspects of the worker’s job controlled by the payer? (these include things like how worker is paid, whether expenses are reimbursed, who provides tools/supplies, etc.)
- "Type of Relationship: Are there written contracts or employee type benefits (i.e. pension plan, insurance, vacation pay, etc.)? Will the relationship continue and is the work performed a key aspect of the business?" – from IRS.gov.
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, vehicles, etc., and doesn't provide any training or supervision, then you are likely an independent contractor.
Tax professionals are trained to help clients analyze their situation to figure out if they are employees or independent contractors. Be sure to ask your accountant to go over any concerns you have.
The Tax Impact
Let's assume for now that you are working as an independent contractor. And that directly correlates to how income from driving around will be taxed. Ridesharing drivers "may understand they are not an employee," says Iain Howe, a certified public accountant in Austin, Texas. "I don't know if they really understand what that means from a tax standpoint. [There's the] income tax but also the 15.3 percent [charge] for self-employment taxes."
Unlike a traditional job where the employer withholds taxes, an independent contractor is responsible for sending in tax payments themselves, a process called paying estimated taxes.
When figuring how much-estimated tax to pay, it's important to realize that independent contractors pay both halves of Social Security and Medicare taxes, whereas employees only pay half of these taxes and the employer picks up the other half.
"The tax hit can be 30-40 percent of income received," notes Howe. "The tax hit of 30-40% is a combination of the 15.3% self-employment tax on top of an income tax at a tax bracket of 15% to 25% (or higher)," Howe explained in a follow-up conversation by email. Essentially, the "money going into (your) bank account is not all yours," Howe says, "set some aside for taxes."
Here's a brief rundown of how self-employment income is taxed differently than regular wages:
|How income is taxed:||Gross wages, minus pre-tax 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||yes|
|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 7||Form 1040, Schedule C|
|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||As employee business expenses on Schedule A||As business deductions on Schedule C|
Now let's talk about deductions and documentation
Specific Tax Tips
- Keep a detailed mileage log. (There are apps for that.)
- The mileage log is needed so you can come up with a percentage of miles driven for work purposes.
- You'll need this percentage to figure out how much of your car expenses can be deducted.
- You'll need to keep records of work-related expenses. Not just car repairs and gas receipts, but also maps, supplies, and so forth.
- You'll need to make estimated payments.
The Importance of Mileage Logs
“What the IRS says [is to] keep contemporaneous documentation, all that means [is] writing down miles every time they take a trip, every day," says Howe.
You can find apps in the App Store or Google Play to help you track your mileage. But Howe came up with his own solution. He created an Excel spreadsheet on his desktop. And in the notes app on his phone, he created a new note for Uber miles. Every trip he would make a note of the beginning and ending mileage. Then at end of the week, he transfers the mileage from his notes app to his spreadsheet.
Keeping Track of Your Miles Pays off in Three Ways at Tax Time.
- You have an accurate count of your miles, so you can calculate your deductible expenses using the standard mileage rate, "which is huge, 56 cents for 2014, up to 57.5 for 2015," says Howe.
- If the IRS changes the mileage rate in the middle of the year, you'll be able to calculate your mileage deduction accurately. "I suspect what [the] IRS will do, may decrease the standard mileage rate effective for second half of the year. That’s why it’s important to keep track of mileage daily, so you have [a] breakdown," Howe said. What's the reason for this suspicion? "Falling gas prices," Howe explained by email, "Since a portion of the standard mileage rate is to account for gas (as well as repairs, maintenance, insurance, etc.), with gas prices down, IRS may adjust the standard mileage rate down effective July 1st through December 31st as they have done in prior years."
- You'll have "contemporaneous" documentation. Here's how the IRS describes the ideal situation, "You should record the elements of an expense or of a business use at or near the time of the expense or use and support it with sufficient documentary evidence. A timely-kept record has more value than a statement prepared later when generally there is a lack of accurate recall. You do not need to write down the elements of every expense on the day of the expense. If you maintain a log on a weekly basis that accounts for use during the week, the log is considered a timely-kept record."
What to Include in Your Mileage Log
Miles spent driving people around, plus other business-related driving, such as a trip to the bank or to get supplies. As an employee, "driving to the office is commut[ing] and nondeductible," says Howe. But for a ride-sharing driver, "since [your] car is your office, your commute is the walk to the car. As soon as you turn on the app, you're off and running. If you were to have the app in your car and not turned on, and you decided to pick up a coffee, that's not deductible, because technically you’re not working. But, driving to bank or Office Max, because those miles are related to business, those are considered deductible," Howe said.
If You Don't Keep a Mileage Log
If the IRS challenges your car-related expenses on your tax return, "and there’s no documentation," Howe said, "they can strike the whole thing." In other words, the mileage log helps to support the car expense deduction reported on your tax return.
What You Can Write Off
Your Schedule C is the best reference for what expenses you can deduct that are related to your trade or business. Things like maps, a cell phone or tablet, mobile telephone and data services, and other tools and equipment you need to do your job. Howe gave one example: amount for affixing your phone to your car would be a deductible expense and is especially necessary for cities that have hands-free driving laws.
"Drinks and snacks purchased for riders are also deductible as a business expense, e.g. water, gum, mints, etc.," Howe explained by email.
"Another consideration is a portion of their cell phone bill." Howe went on to say in his email, "If their usage increased due to the time spent driving for Uber or if they were required to purchase a higher-cost plan to accommodate the higher data usage, a portion of the phone bill can be considered a business expense. Drivers should keep documentation supporting how they determined the personal-use portion from the business-use portion."
For car repairs, car washes, new tires, and other car-related expenses, you get to choose between the standard mileage rate or actual expenses for the year. So keep track of your actual car-related expenses, so you and your accountant can compare and see which method will produce a better result on your tax return. What goes into car-related expenses? Gasoline, repairs and maintenance, insurance, and the purchase cost of the car. Tolls and parking can be deducted separately, in addition to the standard mileage rate, so be sure to keep track of tolls. Be aware, "if you want to use the standard mileage rate for a car you own," the IRS says in Publication 463, "you must choose to use it in the first year the car is available for use in your business. Then, in later years, you can choose to use either the standard mileage rate or actual expenses."
Set up a record-keeping system to track your income and business-related expenses.
"Poor record keeping and expense tracking" are common problems, Davis says. He recommends that Uber drivers "keep good expense records. Saving the receipt (as of right now) is the best." It's important to keep records of "four things," Davis says, "date, time, amount, and business nature." These are the four things the IRS wants to see in your records if they audit your business expenses.
Howe recommends that clients keep "everything together in a spreadsheet." Keep track of all your expenses, "even expenses they think might be deductible but not sure," says Howe, "then [a] CPA can determine if [it’s] deductible or not. That way you don’t potentially miss a deduction."
Also, Howe says that having all the income and expenses numbers in one place makes it much more time-efficient to prepare the tax return. "Anything the client can do to reduce the amount of time it takes to prepare the return will generally reduce the overall fee."
What to Watch out for on Your 1099
Uber, Lyft, and other ridesharing services will send you either a Form 1099-MISC or a Form 1099-K, or both, to report your earnings for the year. These forms usually come out in January.
After reviewing the 1099 tax forms he received from Uber, Howe provides some tips on what to look for and how to handle these forms.
"The Form 1099-K will reflect fares income received (base fare + time + distance) plus the safe rides fee plus split fare fees and may contain other fees also," Howe said. He notes that "drivers should pay close attention to the breakout provided in the 2014 Tax Summary provided by Uber."
"For tax purposes on Schedule C, drivers should include the total amount reflected on Form 1099-K as well as the total amount reflected on Form 1099-MISC (these are entered in two separate areas in most tax software programs). It is important to note that even if a driver did not receive a Form 1099-MISC because additional income received may have been less than $600, that income is still reportable," Howe said.
"Drivers should then be sure to enter an expense for the amount of safe rides fees and split fares fees (and possibly others) on their tax return since these fees are not retained by the driver but are instead paid to Uber."
"Drivers should also be sure to enter an expense for the Uber commission fee (20%, 28%, etc.) that was paid to Uber," Howe said, "This amount is reflected on the Tax Summary that Uber provides."
Paying Your Estimates
As a self-employed person, no one will be withholding taxes from your income. You'll have to pay your taxes yourself. We do that by sending in estimated tax payments, "which means running the numbers," notes Davis. Estimated tax, at its simplest, means sending the IRS a check for this year's taxes. But because taxes are a big cost, it's important to make sure you're paying the right amount.
Paying too much leaves you without access to your cash until you file for a refund of your overpayment. Paying too little creates a cash crunch at tax time, as you pay last year's tax by April 15 and pay your first estimate for next year's tax, also due by April 15th. Our goal is to pay the right amount of tax at the right time, so things are smoothed out. These goals are easily accomplished with good recordkeeping and running a tax calculation every so often.
Be Aware of Your Risks
Talk to your attorney about the risks involved in driving for Uber and what steps you can take to minimize your risks of lawsuits. Since this is a legal issue, your tax accountant will not be able to provide any advice. An attorney might talk to you about forming a business entity such as a limited liability company or a corporation as a way to shield your personal assets from lawsuits.
Let's be clear, the tax impact will be more or less about the same whether you set up an entity or remain a Schedule C filer. An attorney can advise you more specifically on what will make sense for you. Also, review your auto insurance policy and any insurance coverage provided by Uber or Lyft. Understand what you will be on the hook for, and what will be covered.
Finally, let's talk about tax-related risks. What we're looking at is the risk that the IRS might disallow some of your deductions. "Recall that IRS has a 3-year statute of limitations to audit ," warns Howe, "so a 2014 tax return filed April 15th of 2015 can be audited all the way through April 15th of 2018. It is therefore very important to keep documentation for at least three years from the date the tax return is filed." In an audit , the IRS looks at your documentation. If it supports your deductions, you win. But if you don't have proof of purchase, the IRS can disallow a deduction for that expense.
Iain Howe is a certified public accountant in Austin, Texas. He can be reached on the Web at atchleycpas.com.