Tax Rules for Ridesharing Drivers
Drive for Uber, Lyft, or Sidecar? You May Be an Independent Contractor
With ride sharing, you can 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, remember to take tax issues into consideration. If you earn income by giving someone a ride in your car, you'll pay income on those earnings. You can also deduct work-related expenses.
Independent Contractor or an Employee?
The IRS wants to know whether you are an independent contractor or an employee since your work status affects how you calculate and pay your taxes.
When you work for a ride-sharing company you are most likely, but not always, an independent contractor. The IRS looks at several factors when deciding on your work status:
- Behavioral: Does the company control or have the right to control what the worker does and how the worker does her job?
- Financial: Does the payer control the business aspects of the job?
- Type of relationship: Are there written contracts or employee benefits—for example, 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 doesn't provide any training or supervision, then you are likely an independent contractor. If you have any questions about your status, check with a tax professional.
The Tax Impact
As an independent contractor, you'll pay income tax plus 15.3 percent self-employment taxes: 12.4 percent for Social Security and 2.9 percent for Medicare. Unlike a traditional job where the employer withholds taxes, as an independent contractor for a ride sharing service, you are also responsible for sending quarterly estimated taxes to the IRS.
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 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|
Specific Tax Tips
As an independent contractor, you are eligible for certain 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 deduct. To keep track of mileage, download a mobile app.
- Records of work-related expenses, including car repairs, gas, maps, supplies, and so forth.
You can deduct the standard mileage rate of 54.5 cents per mile (as of 2018). You can deduct tolls and parking separately from the mileage deduction. The IRS does periodically adjust the mileage rate, so you'll want to track actual dates and miles driven in your log.
Include miles driving people around, plus other business-related driving, such as a trip to the bank to make a business-related deposit or to get supplies. Remember that without a mileage log, the IRS can make you forgo the deduction.
Other work-related expenses such as drinks and snacks you buy for riders are also deductible. If your cell phone bill usage increased due to driving or you needed to buy a higher-cost plan to accommodate the higher data usage, a portion of your phone bill can be considered a business expense.
For car repairs, car washes, new tires, and other car-related expenses, you can choose to deduct the standard mileage rate or the actual expenses, so keep track of your actual car-related expenses in order to compare which method produces more savings.
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, in late January to report your earnings for the year. Use these forms to complete Schedule C.
You'll only receive a Form 1099-MISC if you were paid more than $600 for the year, but no matter how little you earn, the IRS still expects you to report it on your tax return.
Paying Estimated Taxes
Since you don't have an employer to withhold income taxes, as an independent contractor you'll pay taxes directly to the IRS. The IRS requires independent contractors to pay quarterly estimated tax payments. You'll need to calculate the amount of each payment based on earnings for that quarterly time period.