- 1 The Definitive Guide To Lyft And Uber Taxes
- 1.1 What Exactly is an Independent Contractor?
- 1.2 What is a Tax Deduction?
- 1.3 What are Your Tax Filing Requirements?
- 1.4 What is a Schedule C?
- 1.5 Form 1099
- 1.6 How do I File Electronically?
Let’s face it… Lyft and Uber taxes are a very complicated subject that most drivers don’t fully understand.
App-based workers for “on-demand” companies like Uber, Lyft, DoorDash, and Postmates fall into an interesting and different tax category than people who are full-time employees with steady salaries.
Because of this, the way they file taxes and categorize their income and expenses needs be done correctly to avoid underpaying or overpaying Uncle Sam.
While it’s important for drivers to understand how these taxes work before filing a return, there still isn’t a ton of simple and easy to understand information on the internet about how rideshare taxes work and best practices for them.
That’s where we come in.
The Definitive Guide To Lyft And Uber Taxes
Ridester was founded with drivers in mind, so our team wanted to provide you with a full guide to rideshare and app-based, on-demand driver taxes to help you stay educated.
Our detailed guide will explore the various parts of rideshare taxes, and explain everything in great detail so that even someone who knows almost nothing about U.S. taxes can understand it.
Our guide will cover:
- How the IRS categorizes on-demand workers.
- Tax deductions for rideshare drivers.
- Uber and Lyft tax filing requirements.
- Self-Employment, Social Security, and Medicare taxes.
- The different types of forms rideshare drivers receive.
- Filing taxes electronically.
- And much more.
We plan to update this guide as time goes on, but the initial information below should help give drivers a better understanding of taxes for rideshare drivers once they start receiving tax forms in January.
Disclaimer: Please keep in mind this information is provided for general informational purposes only to help you understand Lyft and Uber taxes. It is not intended to be tax advice for any specific individual as all individuals have different tax situations. Ridester advises obtaining tax advice from a Certified Financial Adviser or a Certified Public Accountant who can address your specific situation.
What Exactly is an Independent Contractor?
You have probably heard that we drivers are called Independent Contractors. “Independent Contractor” is a technical legal term which indicates that certain legal and tax ramifications will apply to us.
As an independent contractor you are considered to be self-employed – and this has several tax ramifications that you need to know about.
For independent contractors, as opposed to employees, the companies you work for do not withhold any money from your income to pay towards your taxes. They also do not pay certain taxes that employers normally pay. You will be responsible for paying those taxes. More about that later.
These are the downsides of self-employment as an independent contractor because you are ultimately responsible for setting enough money aside each week to pay your taxes. And you’re responsible for paying certain taxes that employees don’t have to pay.
The upside is that you can write off expenses associated with your work.
Employees of companies normally cannot deduct any of their work-related expenses from their taxable income. But as an independent contractor you can.
For instance, as an Uber or Lyft driver or as any kind of on-demand, app-based driver, including delivery drivers, you can write off all kinds of expenses associated with your work.
These expense write-offs are called “deductions” or “tax deductions”. You can write off every dollar you pay for gas – for those gallons you use for work. You can write off most of your car maintenance expenses. And you can write off the interest you pay if you have a car loan.
What is a Tax Deduction?
It’s easy to get confused about what a tax deduction actually is.
Some people think it’s an amount you deduct from the final total of taxes you owe. So, if you owe $1,000 in taxes and have $900 in deductions, you only pay $100 in taxes.
That would be nice, but unfortunately that’s not what a tax deduction is.
A tax deduction is a business expense that you subtract from your total business income which leaves you with your net income. Your taxes are then paid on that lower net income figure.
For example, if you made $10,000 driving for Uber and you had $4,000 in driving-related expenses, your taxes would be figured based upon $6,000 of income, rather than $10,000. Your taxes will be paid on a lower income, saving you money in the process.
The good news for Uber and Lyft drivers is that trip rates are so low in most of the country, with drivers being paid less than $1 per mile, that in many cases drivers won’t owe any income tax on their driving income as their expenses will come pretty close to matching or exceeding the amount they’ve earned.
Tip: We released a simple tool that allows drivers to calculate fare prices before they give a ride, or to help calculate how much they can make.
What Qualifies as a Tax Deduction for Drivers?
The answer to this question isn’t the same for everybody. So, let me give you some examples and you can use the general principles to figure out the specifics for your situation.
Let’s say you own a car to earn money, and never drive it for personal purposes; you drive it 100% for an on-demand app-based company like Uber or Postmates. That of course is not true in the real world, but bear with me for a minute as I illustrate the principle.
If your car is used 100% for business, then you can deduct 100% of all expenses related to your car.
You can deduct all expenses related to:
- oil changes
- new brake pad
- car washes
- all other maintenance expenses
- water, snacks, anything you put in the car for passengers to eat or drink
- if you lease the car you can deduct your lease payments
- if you financed the car you can deduct your interest payments (only, you can’t deduct your full monthly payment)
- car insurance payments
What if You Also Use Your Car for Personal Reasons?
Here’s what it gets a little tricky.
If you use your car for personal reasons as well as for work, then things get a little trickier.
Theoretically, it’s as simple as taking the percentage of time your car is used personal reasons versus work use. You would deduct that percentage of your expenses for tax purposes.
Let’s say you used the car 50% of the time for personal reasons and 50% of the time for driving work. Then you would take half of all of the above expenses and that would be your tax deduction. If all total you spent $3,000 on all car expenses during the year, but you used it only half the time for work, then you could deduct $1,500 from your taxable income.
The reason it gets tricky though is it’s very difficult to determine what the percentage is that you use it for work versus personal.
Because it’s so difficult most people are tempted to say they use it a greater percentage for work than they actually do. And because the IRS knows this, if they ever audit you, they will look closely to see if you can provide proof that you used it for work as much as you say you did. And that proof can be very hard to come by!
The one sure way to prove it is to keep very close track of exactly how many miles you drive your car for each purpose – personal and business. But this is a lot of work and if you miss or forget to keep track of a few trips each month, then your whole count will be off.
The better way is to use an app like TripLog which has revolutionized and almost totally automated our ability to keep track of all this.
TripLog is an app you put on your phone and once you’ve set it up, it will automatically start keeping track of your mileage the minute your car starts moving. The best part is, it requires no input from you. So if you forget to track your mileage – it’s no problem because TripLog won’t forget.
I’ve been using TripLog for a couple of years now and it has radically improved my ability to keep track of my mileage.
The only thing you have to do though is mark your trips as either personal or business and this does require some input from you – daily.
If you know all of your driving for a day is going to be for business, then just set it to default to business and you won’t have to do anything. But if some of it was personal, you’ll have to go in and find those trips and mark them as personal.
The helpful thing is TripLog gives you the time and date of each trip and even gives you a map showing you the route, so it makes it easy to pinpoint which trips were personal and which ones weren’t.
TripLog also gives you a full dashboard of reports that update in real time (with a well-worth-it paid subscription) and you can track your mileage by days, weeks, or months. It also calculates the amount of the “standard deduction” for mileage so you can see every day, week or month how much money you’ve racked up in tax deductions.
What is the Standard Mileage Deduction?
The IRS knows that it’s very difficult for people to keep track of every single car expense they have. We lose receipts, we forget to type them into our financial software and for all sorts of reasons we may not keep an accurate record of our actual expenses.
This is why the IRS allows what they call a Standard Mileage Deduction where you can deduct a set rate for each and every business mile you drive.
The standard mileage deduction for 2017 was 53.5 cents per mile. So, for every mile you drive, you can deduct a little more than half a dollar from your taxable income.
That’s why I said earlier that a lot of Uber and Lyft drivers may end up with no taxable income at all.
Because a lot of drivers are making just a little over 53.5 cents per mile when they have a passenger in the car. But, they can also count all those miles in between passengers, like when they’re driving to a busy area looking for passengers and when they’re driving to pick your passengers up.
A lot of times they’ll end up driving as many or more miles in between trips as they do on trips. When that happens, they could earn $1.07 in tax deductions for every passenger mile they drive. And they’re probably making less than $1.07 per mile which means all of their driving income could potentially be deducted, which means they’ll owe nothing in taxes at the end of the year on their driving income!
What are the Rules About Using the Standard Mileage Deduction?
Ridester recommends keeping track of all your expense receipts and your mileage.
At the end of the year, you can then decide whether you want to use your actual expenses or the standard deduction. You use whichever one is higher, but you can’t use both.
If you decide to use the standard mileage deduction, then you can’t use any of your actual expenses. So, the best practice is to keep track of all your car expenses all year long and keep track of your mileage. At the end of the year if your actual expenses come to $7,000 and your mileage deduction is $7,400, you’d use the mileage deduction.
In general, most drivers find that the standard deduction is usually a little more than their final actual expenses. But it’s still a good idea to keep track of both.
If you decide to use your Actual Expenses rather than the Standard Mileage Deduction, the IRS says you can deduct expenses that are considered “ordinary and necessary.”
The IRS defines “ordinary and necessary” as the following:
An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
What are Your Tax Filing Requirements?
The most important thing you must do is file a tax return with the IRS every year.
- If your net earnings from self-employment are more than $400 a year, you must file an income tax return.
- If your net earnings from self-employment are less than $400 a year, you still have to file an income tax return if you meet any other filing requirement listed in the 106-page instructions for IRS Form 1040.
Basically, if you make more than $400 a year, you have to file a tax return.
You may also request an extension on your annual tax filing and get up to six months more which will give you until October 15th to file your return. However, if you request an extension, you’re still required to pay the full amount you believe you owe by April 15th.
If you request an extension, the IRS will ask you why you need more time. The most common reason given is that you need more time to collect all the information you need to file the return.
Any certified tax accountant can help you with this and insure you do everything in the right way.
Quarterly Estimated Taxes
As an independent contractor, along with filling the required annual 1040 return you are also required to file and pay estimated taxes every quarter.
The companies you work for will not deduct taxes from your pay and pay them weekly, so you’ll have to set aside an amount each week and save it so you can make these estimated quarterly payments.
They’re called “estimated” payments because the IRS understands that you won’t know for sure how much you’ll owe in taxes until after the end of the year. That’s when you’ll have your final income and expense figures in, and when you can calculate your final total net income that you’ll owe taxes on. But, you should be able to estimate, or guess, each month approximately how much you’ve made in net income (after deductible expenses).
Let’s say that for the first six months of the year you make around $3,000 a month in self-employed net income. And you expect to continue making around that same amount for the whole year.
You would then calculate how much you’ll owe in taxes on $36,000 of net income. Then you’ll divide that amount by 4 and send that amount to the IRS every quarter (or every three months). You can actually send it more often if you like.
You can send it by mail along with IRS Form 1040-ES (pictured above), which you can download from the IRS site here. Or, you can pay online here. You can also pay by phone by calling the IRS at 800-829-1040.
In the example above, you made $3,000 in net self-employed income for the first six months of the year, and you paid estimated quarterly taxes based on your assumption that you would make $36,000 for the entire year.
But, let’s say something happened in the last six months of the year and you were not able to continue driving and earning and you ended up making nothing in self-employed income for the last six months of the year.
You paid estimated taxes based on your assumption that you would make $36,000 for the year. But in the end, you’ll only make $18,000.
So, you may find that you over paid a bit and you’ll get a small refund at the end of the year. Or, you may have paid just enough to cover your tax obligation for the entire year.
You’ll have to do your taxes at the end of the year to know for sure. But, as long as you’re making your estimated quarterly tax payments, chances are you will not have to worry about having enough money at the end of the year to pay your taxes!
Self-Employment and Social Security and Medicare Taxes?
Self-employed independent contractors generally must pay what the IRS calls a “self-employment tax” as well as the income tax. If you make a profit in your self-employed work that’s more than $400 a year, you must report this on your tax return.
The law sets the self-employment tax rate as a percentage of your net earnings from self-employment. This rate consists of 12.4% for social security and 2.9% for Medicare taxes.
These are taxes that would be paid by your employer if you had a regular job. But as an independent contractor this is a tax, totaling 15.3% of your net income that you must pay yourself.
This tax is above and beyond the regular income tax and is an amount that regularly employed people don’t have to pay.
According to the IRS, you can…
compute the self-employment tax on Form 1040, Schedule SE. When figuring your adjusted gross income on Form 1040, you can deduct one-half of the self-employment tax. You calculate this deduction on Schedule SE. The Social Security Administration uses the information from Schedule SE to compute your benefits under the social security program.
When you work for a company as an employee they pay several taxes for you that you have to pay when you’re self-employed and remember as an independent contractor you are considered to be self-employed.
What is a Schedule C?
A Schedule C is the IRS form you use for reporting income or loss from a business you operated. Driving for Uber and Lyft qualifies as “operating a business.”
This form is fairly complicated and it is highly recommended that you use either tax software or a tax accountant.
Basically, the Schedule C form gives you a place to document all your business income and expenses. It will ask for many details about your expenses, like what each expense was for.
If you can follow the complex instructions, by the time you’re done you’ll have a very thorough documentation of your income and expenses. And you’ll end up with a total net income figure which will be copied to your form 1040.
It seems fairly simple but in the end, nothing with the IRS is simple. The Schedule C comes with 18 pages of instructions!
On this form, you will give details of your income and expenses for the year. Keep in mind that this form, like the others are very complicated. This one comes with 18 pages of instructions! Unless you’re very familiar with working with it, it’s highly recommended that you use a tax accountant to prepare your taxes. At the least, you should use tax software. For regular people, these forms are just too complicated to figure out on your own.
Uber and Lyft or any other company you work for as an independent contractor are required to file an IRS 1099 form for you at the end of each year, if you made more than $600 with them.
If you work for several different companies and make more than $600 with each of them, you may receive several of these forms.
The 1099 is what the IRS calls an “information return.”
There are various types of 1099 forms that report various types of income. Uber and Lyft issue several different types of 1099s.
One type is for your regular driving income. For this, they issue a 1099-K form. You may also receive other types of income from them. One common type is referral fees. If you’ve referred other drivers and received a bonus payment for that, these fees will be reported on a 1099-MISC form.
Neither Uber nor Lyft will mail paper 1099s to you. Both companies provide the 1099s via their websites and you can download and print them if you have the need for a paper copy.
Companies must provide you with 1099s by January 31st of each year. But most will get them to you much sooner than that.
How do I File Electronically?
Today, most taxpayers file all their returns electronically. In the case of independent contractors, you have at least two separate filings you need to make. One is your qurterly estimated payments filing and the other is your annual Form 1040 tax return filing.
For your annual returns, there are three ways to file electronically. You can do it yourself if you’re comfortable doing your own taxes, by using the IRS’s “Free File Fillable Forms.” To get started, check out this page on the IRS’s website.
If you use a commercial tax preparation software package, you can also file your taxes electronically directly through the software. For more information on this, click here.
If you use a tax preparer they can file your taxes electronically for you directly with the IRS and with your state tax agency. For more information on this, click here.
Where Can I Get the IRS Tax Forms I Need?
Form 1040 – This is the main form you will file with your annual tax return
Form 1040 ES – Estimated Tax for Individuals – to be filed with your quarterly estimated tax payment
- You can also pay your Estimated Taxes, as well as all your taxes, online at the IRS website. Before you can make payments online though, you have to sign up for an Electronic Federal Tax Payment System (EFTPS) account. These accounts can take up to 5 business days to approve, so sign up now! You can sign up by following the instructions Form 1040 ES. Sign-ups are done by phone.
- You can also pay estimated taxes by bank account, credit or debit card, here.
Schedule SE – Self-Employment Tax form
Schedule C – Profit or Loss From Business (for Sole Proprietorship)