Wondering how to file rideshare taxes? If you’re stumped, we understand. After all, rideshare drivers for Uber and Lyft find that tax filing information and details can get pretty complicated.
This is because rideshare drivers are considered by the IRS as “independent contractors” and as such have different tax filing information from regular employees on a consistent salary. But you’re in luck.
Because this process is unfamiliar to many, Ridester has compiled all the tax filing information tips for rideshare drivers that you need to know below.
How to File Rideshare Taxes? Tips for Rideshare Drivers
1. 1099, Not W-2
Regular employees of companies are used to getting W-2 forms for their tax filing information. However, since rideshare drivers are considered self-employed by the IRS, they receive the 1099 form.
This form is given to individuals with private businesses. If a driver earns from other driving services besides Uber or Lyft, income from these jobs also falls under the 1099 umbrella. Despite the difference in forms, one thing remains the same across contractor and employee jobs: no matter how much a person earns, they will have to pay their income taxes just like everyone else.
2. Drivers Responsible for Own Taxes
Technically, rideshare drivers are not employed by the companies they work for. Therefore, they are considered by the IRS as “independent contractors”. Consequently, these drivers will use the Schedule C form.
Additionally, as drivers are not full employees, Uber or Lyft does not withhold medicare, social security, and federal income taxes from their income. Because of this, drivers are responsible for filing and paying for these expenses during tax season too.
3. Taxes Should be Paid in Increments
While tax filing information can indeed be difficult, so is paying the taxes themselves. Many drivers might choose to pay their taxes once at the end of the year.
While this is certainly an option, this often results in an excessive tax payment. To avoid this, it is advisable for drivers to start paying their taxes in increments throughout the year. Not only will this protect them from any excessive fees at year’s end, but it will also keep the IRS from looking into their records for penalties.
Ask your CPA about “estimated quarterly taxes” and they’ll get you set up from there.
4. Understand Deductions
Tax filing information for rideshare drivers is complicated, but it’s not without its benefits. For example, there are ways for drivers to lessen their income tax, namely through deductions.
The IRS considers deductions as “ordinary and necessary” expenses. As this wording is quite broad, this allows rideshare drivers a significant grey area. However, car expenses such as maintenance, gas, and deprecation certainly count as deductions.
There are two ways drivers can calculate their deductions — through actual expenses and standard mileage.
Actual expenses are calculated through the expenses rendered for the maintenance of the driver’s car. This includes gas, tolls, oil, parking fees, and everything for the car’s maintenance. If a driver has a major repair for their vehicle according to Uber’s guidelines, this will show up as a deduction as well.
The second method is through standard mileage. This is calculated by the number of miles in trips multiplied by the standard rate given by the IRS yearly. After that, drivers should add what they paid in tolls to the equation. The resulting amount is the deduction from their income tax. This is usually the method that gives the biggest deduction.
5. Why Are Mileage Logs Important?
Keeping track of your mileage logs as a rideshare driver is very important. When it’s time to pay taxes, the driver should have supporting documentation of expenses pertaining to the vehicle.
For example, mileage logs are proof of expenses and distance traveled and can be given to the IRS to aid in the operator’s tax return. There are a lot of downloadable apps for both iOs and Android to help keep track of mileage and car-related expenses.
Tracking miles is especially important, because it helps the driver get the biggest tax deduction. It also helps keeps track of the actual profit after expenses. Most phone apps have tools for tracking expenditure deductions in addition to the mileage tracking feature.
Some of these apps are…
… but there also many others.
6. Practice Good Record Keeping
Record keeping is essential in monitoring your earnings and business expenses. The IRS will look into four important things in your records upon examining business expenditures: the nature of the business, the date and time of the transaction, and the amount. Record keeping can be a daunting task, especially when put off at the end of the year.
To stay on top of accurate record keeping, here are a few tips worth noting:
- Have a central location in your house to dump all those receipts, things you need to file, check duplicates, and the like. This way you’ll know where to go right away when you need them.
- Categorize the receipts in such a way that you won’t have a hard time looking for one when necessary.
- Set a certain day in the month to go through all those receipts. Dedicate this day to work on tax matters.
7. Understand Tax Documents
Rideshare services are required to supply all their drivers with their tax documents every year, so it is advisable to wait for these documents before filing taxes.
It is understood that most rideshare drivers come from fully-employed backgrounds. Therefore, it may take some time for them to get to understand their tax documents. Drivers should know how to read the Schedule C and 1099 forms. If you don’t, there are guides online that can help you get started.
Additionally, hiring a tax expert or using a tax filing software can help drivers streamline their tax filing information.
While there’s no avoiding your taxes, there are ways to make them less stressful. Drivers who know how to file rideshare taxes avoid huge penalties and can actually save money.
Though it may be difficult, with excellent bookkeeping and a little patience, drivers will find that filing as an independent contractor also has its rewards!
Still confused? Here are a few tips from Action From Square One answering how to file rideshare taxes.
Do you have any tips on how to file rideshare taxes efficiently? Leave them in the comments!