There’s one thing that everyone can agree on – it’s no fun having the IRS knocking on your door. At worst, it can be a scary and potentially confusing situation. At best, it’s a massive hassle that no one wants to deal with.
As an independent contractor, filing your self-employment taxes can be intimidating, especially at first. It’s essential to do all you can to avoid having to deal with the IRS on a one-on-one basis.
And if you structure your business the right way from the start, it’s an easy situation to avoid.
Whether you drive for Uber or Lyft or another ridesharing service, keep reading. We’ve got lots of tax tips and helpful information on how you can make sure your operation is legal and steer clear of the IRS.
Table of Contents
- What is an IRS audit?
- What triggers an audit?
- What happens if I’m audited?
- Where can I go to learn more?
- What steps should I take to avoid an IRS audit as a rideshare driver?
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.
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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 or Lyft 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.
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