Your Complete Guide to Self-Employment Taxes in 2021
According to Benjamin Franklin, the only things certain in life are death and taxes. Since we’re not likely to die while doing a rideshare gig, this must be about taxes.
Then again, some would say driving in rush hour traffic may be taking your life into your own hands. But I digress.
We hear your questions, so we’ve put together a comprehensive guide to self-employment taxes that will give contractors a better idea of how to file their taxes. Let’s dive right in.
- What Are Self-Employment Taxes?
- Get Organized
- Tax Preparer or Software
- Starting Your Return
- Frustrated Yet?
- Quarterly Estimated Taxes
- Filing for an Extension or Payment Agreement
- How to Avoid an Audit From the IRS
What Are Self-Employment Taxes?
If you’ve ever been a regular employee with a W-2, you are well aware of the withholding from your regular paychecks. Your employer would withhold…
- Federal income tax
- Social Security tax
- Medicare tax
When you’re an independent contractor, however, taxes are not withheld and you’ll be responsible for paying these yourself.
Self-employment taxes may seem much higher than the taxes you would pay through an employer, but they’re really about the same. The difference is, all three forms of employer-withheld taxes are paid in one lump sum. Your self-employment tax is income tax, SSI, and Medicare all in one.
Self-employment taxes are a pretty complicated subject, so rather than drone on about all the basics, I’ll let you watch the video below. It will break down taxes for contractors and give you the foundation that allows you to understand the rest of this article.
Take a look:
When filing self-employment taxes, the most important thing you need to do is get, and stay, organized.
- Do you have the proper tax forms from your driver account?
- Do you have an itemized list of all the business expenses you incurred throughout the year?
- Do you have a CPA to walk you through everything step-by-step?
These are just a few things that you’ll need now that tax time is finally upon us. Let’s talk about a few of the most important in greater detail.
Tax Preparer or Software
If you plan to have a professional prepare your taxes, it may cost you more than you expect.
Generally speaking, self-employment filing takes longer and it also requires more forms. The longer your tax return takes to prepare, the more you can expect to pay.
If you don’t feel confident enough to prepare your taxes by hand or with software, then it may be advantageous to enlist the help of an expert. Don’t be deterred by the cost, however. Paying to have taxes done right is worth every penny.
There are plenty of software packages and websites that provide access to your self-employment schedules.
I purchased H&R Block Premium software from Amazon at $44.99. It’s user-friendly and boasts that you’ll get the maximum refund.
You’ll also be able to file federal returns five times using this software. H&R Block also provides audit assistance in the event you are the unlucky schmuck who gets audited. If you file using H&R Block online, it will cost $74.99.
Here’s a video that outlines a few of the features of H&R Block tax software:
TurboTax online is probably the most user friendly but it is also the most expensive at $84.99. However, it does include access to Quickbooks for the year.
Quickbooks is especially helpful if you have multiple sources of self-employed income. The biggest inconvenience of TurboTax is the constant hounding for upgrades or “ask an expert” services. They do offer to deduct the price of your filing from your refund, if you’re getting one.
Here are the main features that you can expect with TurboTax:
You always have the option to file your taxes through the traditional method of pen and paper. If you choose this method, you are braver than me. I suggest you get a good calculator and have plenty of ibuprofen on hand.
Deductions are your best friend. I’m not talking your student loan interest or regular itemized deductions, I’m referring to your self-employment expenses. These deductions are absolutely necessary if you want to save yourself some tax liability.
You are able to deduct almost anything that could be considered “ordinary and necessary” for the daily operations of your business.
If you carry snacks in your vehicle for clients, deduct that. The cart you bought for delivering packages, that’s deductible. If you purchased bags to put packages in to keep them out of the rain, they’re deductible too. Anything you purchased to identify yourself as a rideshare partner – deduct that too.
Here’s an example of some of the most common expenses for Uber drivers as an example:
Vehicle deductions will easily be the largest deductions you’ll have and there are a couple ways to account for this.
If you’re using the standard mileage deduction, have those numbers ready. You’ll want to have the total miles driven for business, the starting odometer reading for the beginning of the year, and the number miles driven for commuting, if necessary.
If you plan on using the actual expense method, have those receipts ready and totaled before you begin. It will save you time in the long run.
W-2s vs. 1099-MISC
Independent contractors can expect to receive a 1099-MISC. The income received will be listed in box 7. Unless you’ve been given the option to have an amount withheld from your payments, you’ll see that there is no federal income tax withheld.
This form is quite different from the standard W-2.
If you use your rideshare gigs as side hustles, then it’s likely that you’ll have a W-2 from your main job. If you’re used to receiving a refund each year, then your self-employment taxes could eat into that refund substantially. The withholding from your regular job may be your best defense against a hefty tax burden.
You’ll need the standard 1040 tax form as any other form will not provide the necessary boxes for self-employment taxes. A 1040A or 1040EZ will not work for your filing situation.
This is the form that will likely give you the biggest headache. If you have multiple sources of self-employment income, you’ll need to fill out separate forms for each. If you’re using tax software, each source of business income will be entered separately.
If you drive for multiple rideshare platforms, you may want to consider forming an LLC or S-Corp. As a regular self-employed individual, you are already considered a sole proprietor.
There are benefits and disadvantages of forming these types of businesses, but depending on your circumstance, it may prove beneficial. You should speak to a tax lawyer for advice on which is best for you.
There is both a long and short form for the Schedule SE. Most likely you’ll be using the short form. The only reason you might use the long form is if you meet certain criteria and it’s unlikely that you do. If you do meet the criteria for the long form, you’ll be well aware of it.
Depending upon your filing status and situations, you may need additional forms when filing. You’ll want to have these forms ready and accessible.
Some additional forms may be the Earned Income Tax Credit form (EIC), Schedule A (for itemized deductions), Schedule 8812 (Child Tax Credit), any other forms you’ve received regarding insurance or other income sources.
Starting Your Return
At this point, I’m going to assume you’ve opted to go with some form of tax preparation software. If you’re using the traditional pen and paper method, then more power to you! The rest of us living in the 21st century will opt to go with technology-based filing.
This first portion of your taxes is relatively cut and dried. You’ll enter things like your address, profession, filing status, and your dependents. This is the easy part, just like filling in your name for the SATs you took in high school.
You’ll also enter your W-2s and 1099-MISCs.
This information will be generated on your 1040.
When you start entering the information for this form, you may not even realize it. If you’ve already entered the information from your 1099, it might auto-populate that information, otherwise you’ll have to enter your income for each self-employment source.
Once you’ve got that out of the way, it will then direct you to enter your expenses. This will include startup costs, supplies, office expenses, taxes and licenses, vehicle expenses, communications expenses, and a variety of other expenses.
The most common deductions you’ll use as a rideshare provider are communications and vehicle expenses. If you provide snacks or drinks to your riders, purchased vehicle chargers or additional batteries for your phone, or if you purchased a cart to deliver packages, you’ll be able to deduct those purchases as supply expenses. You’ll just need to know the amount you paid and have the receipt available to protect yourself if you are audited.
For communications expenses, you’ll want to deduct the cost of your cellular service for each month you were using the device as a rideshare partner. You’ll also be able to deduct the device cost.
When it comes to vehicle expenses, you have two options to consider. You might want to enter actual expenses or standard mileage.
The safest and least tedious method would be to go with the standard mileage deduction. If you choose this method, all you’ll need to enter is the number of business miles driven and the beginning odometer reading of 2021 for the vehicle you used for your rideshare gigs.
It will also ask that you provide additional mileage information for commuting. You may not have a regular commute to work so it’s not required that you provide that information. Your deduction is your business mileage times $0.545 (this number will go up to 58 cents per mile in 2019).
If you choose to enter actual expenses, you’re likely going to save yourself some tax liability but it requires accurate record-keeping.
These expenses are actual gas cost, repairs, routine maintenance, tires, and cleaning services. This will require you keep your receipts to prove the costs are legitimate in the event you are audited. If you get regular car washes or have your vehicle detailed, you can deduct those costs here. In addition, if you damaged your vehicle and paid out of pocket for the repairs, you’ll be able to deduct those expenses as well.
This form is rather easy in comparison and you’ll likely not even know it’s being computed until you see it in your final tax filing paperwork.
Most tax software packages will transpose the information from your Schedule C directly to the Schedule SE. The program will then auto-populate the numbers into the 1040 form and you might know whether or not you’ll be getting a refund or how much you owe.
In addition, 50 percent of your self-employment tax is deductible from your adjusted gross income. That will also be auto-populated into your 1040.
By now you have a decent idea of what your 2021 tax outlook is. You might be ready to scream or, for some, breathe a sigh of relief.
It can be jarring to really see and feel the brunt of how much of your income is paid out in taxes. Most never understand the reality because it’s taken out weekly in smaller increments.
For my family, we usually receive a refund. While we are still receiving one this year, it’s dramatically reduced to the tune of more than $2,500. Our total withholding for the year was near $6,000 and we’re receiving nearly $2,000 in a tax refund.
If it were not for my accurate record keeping and allowed use of deductions, we’d likely owe a fair amount of tax for the year.
Quarterly Estimated Taxes
If you’ve made rideshare gigs your full-time income source then it’s definitely in your best interest to make quarterly payments to avoid large, lump sum tax payments. With quarterly payments, you can make several smaller payments four times a year. If you find yourself owing more than $1,000 during tax time, then you are required to make quarterly payments.
To make estimated quarterly tax payments, you’ll need to keep a running 1040-ES form for each quarter. It will be like predicting what your taxes will be when you officially file for the current year.
You may want to complete a 1040-ES every quarter just to see what your tax liability may be for the current year. This way you’ll be prepared if you find yourself owing a hefty sum when filing. You’ll be able to apply the quarterly payments to the total tax when officially filing for the year.
You can make quarterly payments to the IRS through their website.
Filing for an Extension or Payment Agreement
If you’re unable to file your taxes by the April 15 deadline, you’ll want to file for an extension. You’ll use form 4868 to request the extension. An extension does not prevent you from accruing interest and penalties. Extensions are only helpful in situations where you just cannot file due to circumstances.
Many people in the rideshare business find themselves unprepared for a hefty tax bill and it may take time to come up with a large sum of money by the due date. If you find yourself unable to pay the full amount of your tax liability, the IRS has options to help.
You’ll want to file your taxes by the regular due date and also apply for an Installment Agreement using form 9465. When requesting a payment agreement, pay as much as you possibly can with the agreement request and make sure to keep up with the installments if it is approved.
If you find yourself seriously unable to make any payments and your tax burden is causing you a great deal of stress, you might be able to work something out with the IRS. Working with the IRS is your best option because simply ignoring the issue will cause you much greater stress at a later date.
The IRS is not an organization you want to ignore. If you think a debt collector is aggressive, the IRS makes them look like kittens in comparison.
What is an IRS audit?
Most self-employed workers will tell you that tax season can be one of the most stressful times of the year.
Even after you file and pay your tax bill, there’s always the dreaded feeling that you may have done something wrong and may have to face a potential audit.
Audits are the IRS’ way of verifying that you did your taxes correctly. It’s the most effective way they have of reviewing your documents and seeing proof of your earnings, business expenses, and deductions.
Related: What Uber Car Makes the Most Money?
Even if you think you’ve done everything right and mean no harm, if there is something wrong with your taxes, they will seek you out.
Having to do an audit doesn’t necessarily mean that you’ve done anything wrong. It’s just the IRS’ way of checking further into your finances if your returns show something out of the norm.
The IRS uses various methods to determine who to audit.
Your chances of facing an audit skyrocket if you don’t report all of your income or take deductions that don’t make sense for your situation.
What triggers an IRS audit?
There are quite a few things that the IRS looks at to determine if they need to audit you. Most of these factors revolve around how much you’ve taken in deductions and how much you’ve claimed you’ve earned.
For 2018, the standard mileage deduction is $0.545 cents per mile. So you would multiply $0.545 for every mile you put on your car while you were driving for Uber or Lyft.
Another way to do it is to deduct your Actual Vehicle Expenses. That means instead of one simple calculation, you will need to add up everything you’ve spent on your vehicle for that year.
That includes everything from gas to insurance to vehicle repairs. The Actual Vehicle Expenses will give you a much more accurate figure.
The best thing to do is to calculate your vehicle costs both ways and see which way works out to your benefit.
If you take the standard mileage deduction, you can’t deduct individual expenses for your car. It’s a general rate that’s designated to cover all car costs. By using the Actual Expenses method, you can break it down to include gas, lease payments, insurance, and repairs.
Things like passenger treats, parking, and tolls can also be listed — and deducted — as part of what the IRS calls your “operating expenses.”
In some cases, it may be to your benefit to take the standard mileage deduction. In other cases, it may benefit you to calculate your actual expenses.
Whichever method you choose, make sure you do it properly. Otherwise, you could face an audit.
If you don’t accurately track your miles:
It’s imperative that you keep a mileage log of all the miles you’ve driven while on the clock. Uber tracks your miles for you whenever you have a passenger in your car. To track all of your deductible miles, including the time it takes you to drive to a pick-up, try using a 3rd party app like MileIQ or Stride Tax.
It’s crucial that when you file your taxes, you report your mileage accurately. False reporting is a surefire way to get audited.
If you declare the wrong amount of income:
Declaring that you made a small amount of money when in fact you earned much more is a huge red flag for the IRS. As a self-employed independent contractor, it’s up to you to report your earnings accurately and honestly when you file your 1099-K and 1099-MISC tax forms.
Uber and Lyft drivers tend to do this incorrectly more often than you’d think. Some add up all of their weekly payments and report that as their income.
Others report the gross fares from their 1099 forms without deducting the Uber and Lyft fees.
Uber and Lyft report your total earnings, as well as the fees that they take from these total earnings, to the IRS. Reporting either of these number incorrectly could result in paying far too much in taxes, or facing a tax penalty from the IRS.
The proper way to report it is as follows:
Report your gross earnings as your business income (so it matches up with your 1099).
Deduct the Uber and Lyft fees where it says “commissions and fees” on the Schedule C tax form.
Your other deductions, such as the mileage deductions discussed above, should also be reported on the Schedule C form.
If you fail to file your taxes:
Some people like to file their taxes as early as possible (usually in the hopes of getting an early refund). But there are some people that actually to forget to file altogether.
Not filing your taxes on time will undoubtedly make the IRS come looking for you.
No one likes paying taxes. But as an independent contractor, you are responsible for every part of your business – including filing your taxes correctly. Don’t be one of those people that forgets or ignores the deadline date.
Filing can be time-consuming and stressful, but it’s much easier and much less expensive than having to deal with the IRS in person.
What happens if I’m audited?
Should you receive notification of an audit, take a deep breath. Don’t panic. It’s possible you’ve done nothing wrong.
Most audits are conducted by mail and are called “correspondence audits.” In most cases, they only require you to answer a few questions or provide a bit more information for IRS records.
That’s why it’s so crucial to track your deductible expenses and earnings throughout the year.
If you do have to deal with an audit, you’ll need proof to back up the claims you made on your return.
Providing a little information is usually enough to satisfy the IRS and put your case to bed. But there are times in which you will have to speak to an auditor in person or on the phone.
If the IRS isn’t satisfied with the information you’ve provided through the correspondence audit, you may be required to meet with them in person.
An in-person meeting will also require that you bring additional documents along.
Where can I go to learn more about IRS audits?
There are tons of sites, resources, and tools that you can visit for more information on how to avoid an audit by the IRS.
You can learn the basics, so you know what to do, what not to do, and how to prepare for tax season.
Consider hiring an accountant who specializes in independent contractor taxes
Most people are used to getting a W2 from their employer, having them withhold taxes each pay, and filing a simple form at the end of the year.
But with the gig economy growing, there are more and more people filing tax returns as independent contractors.
Driving for Uber might not make you feel like you own your own business, but as far as the IRS is concerned, you do. And that’s why it’s crucial to make sure your taxes are filed properly.
Filing your taxes the right way is the best way to avoid an audit – but it’s also the best way to ensure that you’re paying the proper amount.
If this is your first time filing taxes as a self-employed person, it may be worth it to seek the help of a professional. Knowing where and when to take the proper deductions can be tricky – especially the first time you do it.
And if you want to pay as little taxes as possible (as everybody does), then you have to make the most of your write-offs.
A tax professional or CPA can help you do that. Just remember, that even by having a professional prepare and file your returns, that’s not a guarantee that you won’t be audited.
When it comes to the IRS, there are no guarantees. These professionals are also full of helpful tax advice that might save you money and time!
There are also lots of great online services, such as TurboTax and QuickBooks, that make it easy to file on your own.
Depending on your situation, the software may be free to use. But sometimes it’s best to pay for a premium version that will walk you step by step through every possible deduction.
Take the proper measures to make sure that your taxes are filed the right way, and there’s a good chance you’ll never have to deal with the IRS.
Keep in mind that independent contractors are also required to make estimated tax payments throughout the year. If you haven’t done so already, get in the habit of doing that now.
Set money aside from every pay, so you have the funds to make the required quarterly tax payments throughout the year. By doing so, the tax burden in April won’t seem so bad.
If you pay too little, you’ll have to pay the difference come April. If you pay too much, you’ll get a refund or be able to apply that to next year’s taxes.
Be mindful of the system and do what’s required and you’ll probably never have to worry about an audit.
There’s no question about it – nobody wants to have to deal with the IRS. And unfortunately, everyone that works and files taxes is subject to the possibility of an audit.
For independent contractors, tax forms can be a bit more complicated than for traditional employees who receive a W2.
But fortunately, there are some things you can keep in mind to reduce your chances of getting audited.
Uber and Lyft drivers need to make sure they take the proper mileage deductions and vehicle expense deductions. We suggest tracking your miles through a 3rd party app, so you know exactly how much you drive each time you’re on the road.
It’s also crucial that you report the proper earnings. Uber and Lyft send 1099s to the IRS, so your earnings need to match what they say they’ve paid you.
However, you need to deduct the Uber and Lyft fees and other expenses to reduce your tax burden.
Remember, you only need to pay taxes on your net profits, not on your gross earnings before expenses and fees.
And most importantly, remember to file! File on time. File properly. And if you need the help of a tax preparer, seek professional advice.
You’re better off paying a small fee for some professional guidance than running the risk of doing it yourself and doing it wrong.
If you do get audited by the IRS, don’t freak out. In most cases, you can resolve the issue by providing some additional paperwork and documents.
Take the process seriously and treat your Uber or Lyft job like it’s your own business because as far as the IRS is concerned, it is.