If this is your first year driving for Lyft, you know how freeing it is to be your own boss. However, your increased flexibility comes with extra responsibilities. As an independent contractor, you are responsible for your own health insurance and covering your expenses. Also, you are responsible for paying taxes on your earnings.
If this isn’t new information to you and you’ve paid Lyft taxes before, you may be curious about how to simplify the tax payment and tracking processes.
No matter if you’ve been driving for Lyft for months or years, the information in this article can help. This post is your one-stop-shop for everything you need to know about Lyft taxes.
- How Do Lyft Taxes Work?
- How Much Am I Going to Pay?
- Do You Have Any Tax Tips to Reduce What I Owe?
- Frequently Asked Questions
How Do Lyft Taxes Work?
When you receive a paycheck as an employee, the money deposited into your bank account is net pay. Taxes have already been withheld.
However, Lyft drivers operate as independent contractors. Independent contractors are noticeably different from employees in that their income taxes are not withheld from their paychecks.
This is not the case for independent contractors. The money paid is gross income, so as a self-employed rideshare driver, there are no taxes withheld from your pay. That means the onus is on you to pay taxes to the Internal Revenue Service (IRS) and your state government.
This may not seem too severe. Unfortunately, there’s a catch. The tax bill for self-employment income is higher than it would be if you were working as an employee.
How Much Am I Going to Pay?
As a Lyft driver, you’re responsible for paying a self-employment tax on your business income. The self-employment tax is better known as Social Security and Medicare taxes. The self-employment tax is 15.3%. Social Security tax comprises 12.4% of this number, while the other 2.9% is a Medicare tax.
This is double what you pay as an employee. Employees are responsible for paying 6.2% in Social Security and 1.45% in Medicare. The IRS still receives 15.3%, but the employer pays half and the employee pays half.
So, in a nutshell, Lyft drivers need to pay 15.3% on their gross income toward Social Security and Medicare. If you happened to work as an employee for a company, you would only pay 7.65%.
A quick example — let’s say that you earn $100 in a day driving for Lyft. Lyft will pay you the entire amount, $100. However, you’ll pay $15.30 for that day’s wages when you file taxes. You should also keep in mind that you’re also responsible for paying taxes on the entirety of your taxable income. The IRS, for instance, has tax rates ranging from 10% to 37% depending on how much income you earn.
We advise saving for quarterly taxes so you aren’t surprised at tax time. Quarterly taxes are required by the federal government and many state governments. As a contractor, you cannot pay all of the taxes you owe at the end of the year. Instead, you need to pay as you go each quarter. Your quarterly estimated taxes, if calculated properly, account for both federal income taxes and self-employment taxes.
This puts you in the 22% tax bracket. The IRS has tiered brackets, so you’ll owe 10% on the first $9,700, 12% on the earnings between $9,701 and $39,475, and 22% on the earnings between $39,476 and $50,000. This breaks down to $6,858.38 due for the tax year.
Remember, you still owe self-employment taxes on top of this. 15.3% of $50,000 is $7,650. In total, you’ll owe $14,508.38 on the year in taxes. Even though you’ve received $50,000 from Lyft and Uber, your take-home pay is $35,491.62. If you make quarterly payments, you’ll owe $3,627.10 every three months.
This does not account for what you’ll owe in state income taxes. Not every state has income taxes, and those that do tax at lower rates than the IRS. However, state income taxes will increase your tax burden even more.
If you’re worried about the amount you will pay in Lyft taxes, there’s no need to fret. There are things you can do to reduce your Lyft tax burden.
Do You Have Any Tax Tips to Reduce What I Owe?
Yes, there are certain ways to ease your tax filing burden. To get started, you need to understand that you can deduct business expenses from your gross income, thereby reducing the amount of money that you owe taxes on.
- Business miles traveled
- Roadside assistance subscriptions
- Parking fees
- Vehicle expenses like car washes and oil changes
- Insurance premiums
- Other business expenses, such as water bottles you provide to riders
- Your cell phone bill, since you use it for GPS and to connect with riders
- The software you use to track your mileage or for tax preparation
If You Only Use Your Car for Lyft Rides
There are two ways to track your vehicle expenses. If your vehicle is strictly for business use and you do not use it for personal errands or trips, then you can itemize every expense. This means every oil change, gas fill-up, and maintenance event is deductible from your gross income. Be sure to keep a detailed, up-to-date log of all these expenses.
As a self-employed contractor, you are technically a small business owner. The expenses you incur are necessary business expenses to help you run a successful company. Any expenses associated with running your business can be written off on your tax return.
If You Use Your Car for Other Purposes as Well
The other option to use the standard mileage deduction. This is for people who do not only use their own vehicle for full-time ridesharing. If you use your car for road trips, to head to the grocery store, to visit your friends, or to do anything else non-ride related, then it’s no longer strictly a business vehicle.
Each year, the IRS sets a per-mile rate. The standard per-mile rate for 2020 is 57.5 cents per mile. The reason this number is so high is the IRS considers it all-inclusive. This rate is supposed to cover things such as oil changes and gas.
You’ll need to use a mileage log to track how many miles you can write off. You can download mileage-tracking apps on your phone to simplify the process.
Let’s take a look at how the mileage rate works. If you drove 100 miles in a day and earned $300, the standard mileage deduction would break down to $57.50. You could deduct this from your gross pay. That means you would only need to pay taxes on $242.50 of earnings from this day.
Frequently Asked Questions
If you thoroughly understand how Lyft taxes work, you can enter tax season with confidence. To help you prepare, let’s discuss answers to some common questions.
Where can I find information about Lyft taxes?
Your tax forms and information are located in your Driver Dashboard. Within the Dashboard, you should see a tab titled “Tax Information.” Here, you’ll find your “Annual Summary” page, which includes a breakdown of everything from how many rides you gave to non-ride earnings such as bonuses and tips. All drivers receive this regardless of how much they earned through Lyft.
Each year, you’ll also receive a tax summary form if you meet certain thresholds. Form 1099-K is given to drivers who have at least 200 ride receives and gross earnings of at least $20,000. This is the case for everyone except drivers in Vermont and Massachusetts, who receive a 1099-K if they earn at least $600, regardless of how many rides they give.
Form 1099-MISC is for those who earn at least $600 from non-driving activities such as referral bonuses.
How do I pay Lyft taxes?
The United States has a “pay as you go” tax system. This means independent contractors like you need to make estimated quarterly tax payments to the federal government. If you don’t, you can be penalized by additional taxes at the end of the year. You can make quarterly payments by filing Form 1040-ES online, by mail, or by phone.
Do I always have to pay Lyft taxes?
You may think that because you did not receive formal tax documents like Form 1099-Misc or Form 1099-K, you don’t need to pay taxes. However, this is not the case. The IRS requires you to pay taxes on all income you earn, and failure to do so can result in penalties such as hefty fines.
Does Lyft help with taxes?
Lyft makes it clear they are not tax professionals and therefore cannot offer legal advice about your taxes. Having said that, they offer a few ways to assist drivers with their taxes. For instance, drivers receive access to TurboTax Self-Employed for free.
Prepare for Lyft Taxes Before Driving
Driving for Lyft means more flexibility and freedom — you get to be in charge of your own schedule. However, you also need to take responsibility for paying your own Lyft taxes accurately and on time. Otherwise, you will be in for a rude awakening when tax season arrives.
Be sure to consult a professional for tax advice so that you do not expose yourself to an audit or any penalties. Also, track your expenses throughout the year to reduce your tax burden. Lastly, make quarterly estimated tax payments so your end-of-year tax bill is more manageable.
Need to do taxes for Uber, too? Get started with our simple Uber tax guide.