Rather than being a normal employee, gigworkers for ridesharing services like Uber and Lyft, and other types of gig jobs, are considered independent contractors. This classification has specific tax implications. Unlike traditional employment, where employers deduct taxes, drivers who work for rideshare are responsible for paying their own taxes.
Tax Requirements for Uber Drivers
Since drivers are essentially independent contractors running their own small businesses, they must pay taxes on the earnings from ridesharing services.
The tax responsibilities include:
- Self-employment taxes: These must be paid if your net income, which includes Social Security and Medicare contributions, exceeds $400. The rate for the 2022 tax year is 15.3% on up to 92.35% of your self-employment income after deductions for business expenses.
- Income Taxes: In addition to self-employment taxes, drivers also have to pay regular income taxes. The rate is influenced by total income, filing status, and eligibility for credits and deductions. We advise that you set aside between 25 and 30 percent of your net income to make sure you can cover these tax obligations.
How to Calculate Your Tax Return
Calculating your tax liability accurately is crucial for financial planning. Deducting “business-related” expenses can significantly reduce the amount owed. We recommend that you review how small business taxation is done because it can help you with managing taxes as an independent contractor, especially when you are figuring out which potential credits and deductions you might qualify for.
A Complete Guide to Filing Taxes for Uber Drivers (gig workers also!)
Drivers for Uber or Lyft have to follow specific protocols if they want to maximize their deductions and guarantee accurate reporting.
Here’s a step-by-step way to go about filing your taxes:
Step 1: File an Income Report for Ridesharing
When a driver engages in ridesharing, they often report their earnings on Schedule C, which is then attached to their personal tax return (Form 1040).
How to Compute Gross Income One of two kinds (1099) may be originally obtained by drivers:
- Use Form 1099-K for customer payments exceeding $600 in total.
- Please file Form 1099-NEC if your non-driving income exceeds $600. This includes bonuses and referral payments.
- Even in the absence of these forms, all income is required to be reported to the IRS. Go to your driver dashboard to see an overview of your annual income. These forms may show more money than was actually received since they include client payments made before service fees, which are deductible.
If relevant, add up all of the money you receive from Lyft and Uber and enter it on Schedule C’s Line 1, Part I.
Step 2: Deducting the Ridesharing Expense
You can lower your taxable income by writing off certain expenses as a Rideshare Driver.
The IRS lets you deduct miles driven for work-related purposes, which includes travel time for finding a ride, arriving at a ride, and actually traveling.
For the 2023 tax year, the standard mileage deduction is $0.655 per mile for all business miles driven. Alternatively, the real expense approach allows for deductions depending on the portion of vehicle expenses related to business use.
- Service Fees: By subtracting the service fees that Uber or Lyft charge from the payments that were received, you can ensure that you are not taxed on the amounts indicated on your 1099.
- Tolls and Parking: Subtract from the total any sum that clients fail to reimburse for parking and tolls.
- Cell Phone: If the phone is only used for ridesharing, you can deduct the entire cost of the device and plan. If it’s used for both business and personal usage, deduct the business use portion.
- Provisions and Add-ons: Deductible business expenses include things like passenger water bottles, phone mounts, and car chargers.
- Roadside Assistance: If used for business purposes, deduct an equivalent amount from your membership.
- Car repairs and upkeep: A part of the expenses you incur to maintain your car clean for passengers—like car washes—can be written off.
After you have calculated all of your costs, enter them in Schedule C’s Part II, lines 8–26. Part V is where items that don’t fit into one of the preset categories can be listed.
Last but not least, in order to offer a comprehensive record of your ridesharing business operations, Schedule C’s Part IV requires information on your car.
Step 3: Determine Your Rideshare Business’s Net Profit or Loss
Use Lines 28 through 31 on Schedule C to calculate your net profit or loss for the year. Line 3 of Schedule 1 on your tax return is where you should then put this sum. This step combines the earnings from all of your gigs to give you a clear picture of your taxable income.
Step 4: Determine Your Self-Employment Tax Liability
Now move onto Schedule SE once you have your net income from Step 3. This schedule is designed to help you calculate your tax liability on your self-employment income.
After determining your self-employment tax, enter this amount in Line 4 of Schedule 2. In addition, you can reduce your overall taxable income by using Line 14 of Schedule 1 to deduct half of your self-employment tax.
The K.I.S.S. Method for Filing Your Tax Returns
It can be stressful to prepare taxes, especially for independent contractors. Using the following resources can help you in streamlining the process:
- Using a reliable software program or a tax preparation expert can speed up the filing process. This will ensure that you are getting all of the deductions you qualify for and that all calculations are accurate.
- Signing up for bookkeeping services, like the ones we provide, will make it really easy for your financial record-keeping and tax filing to outside parties. You will be assigned a qualified bookkeeper to handle your complex bookkeeping and tax preparation, giving you more time to focus on making more money and spending time with your family.
Regardless of your choice, it’s very important that you maintain detailed records of your income and expenses. With this preparation, you’ll meet your tax requirements and claim all of the allowable deductions, making the filing process go more smoothly.
Avoid These Common Errors
- Not Focusing on the Little Things
Use an app to help you keep tabs on your spending and mileage. Make a habit of going over your records on a regular basis, to help you stay organized.
- Missing Out on Tax Advantages
Figure out all of the expenses you can write off. To be sure you’re in the clear, keep track of every dollar you spend on your gig and speak with a tax professional.
- Miscalculating Your Profit
Subtract all fees and charges from your gross income to find your real earnings, aka your net income. Your income statement is your go-to resource for this.
Smart Tax Tips for Uber Drivers
- Putting Away Cash for Tax Season
Set aside 25–30% of your income to a tax-specific savings account every time you get paid. Your future self will thank you for it.
- Keep Track of Every Mile
Whether you use accounting software or excel spreadsheets, be sure to keep an accurate record of the miles you drive each day.
- Keeping Records of Your Purchases
Keep records of every purchase in digital form, whether its taking a picture and saving it to your icloud or google drive or using an app like Shoeboxed, make sure to keep all of your receipts/invoices for any purchases you’ve made for your business in one place. When I say digital I mean use some type of cloud storage so that you don’t have to worry about losing any receipts, and trust me it will make your life (and tax season) a lot easier.
- Entire Year’s Tax Payment
Use IRS Form 1040-ES to compute and pay your taxes for each quarter, if you can, or at least do some financial housekeeping and make sure all your books are in order and set about 25% of your taxable income to help you stay ahead of the curve.
- Seeking Expert Advice
At least once a year, you should schedule a consultation with a tax advisor who is experienced with doing taxes for gig workers/independent contractors. It’ll be worth it just for the peace of mind and it’ll probably save you more money in the long-run.