Okay, we know… taxes are booooring! But we have some exciting news for rideshare drivers when it comes to taxes this year. We’ll get to that in a moment. But don’t stop reading here because we’re going to show you how you can potentially save a lot of money on your taxes by doing rideshare.
First things first though. As a rideshare driver, you have the potential for a tremendous tax deduction at the end of the year… if you keep track of your miles.
This is a great little app and it’s free. It also has great reviews! Once you have it set up it will automatically track your mileage. That means it will start automatically when it detects that it is connected to your car and that your car has moved over a certain speed for a certain period of time. And if you don’t want it to auto start you can always start it manually for each tri.
There are a lot of other good apps that track mileage. Ridester has a whole page of reviews on these apps which will give you a lot more in-depth information about them.
Taxes for Independent Contractors vs. Employees
It’s easy to forget, so remember, when you drive for Uber or Lyft, you’re not an employee. You’re an independent contractor. And that changes the way you’ll do your taxes.
As an employee, you know that you get a W2 form at the end of the year which states your total annual income. You also know your employer withholds your taxes from your weekly, bi-weekly or monthly paycheck. The amounts they withhold are actually amounts they send to the IRS on your behalf to cover your estimated taxes for the year.
However, when you work for yourself, which is exactly what you’re doing as an independent contractor, you become responsible for paying all your own taxes yourself. No one is going to do it for you now. That’s the bad news. But there is good news, so hold on!
You’ll soon learn if you’re not withholding money each week that coming up with the amount due at the end of the year may be impossible. So, it’s really important that you learn to set aside an amount that you and / or your accountant estimate that you will owe for that week’s worth of income.
If you withhold weekly, you will be fine when April 15th comes around the next year. If you don’t, you could be looking at what will appear to be a gigantic tax bill. And the government expects it to be paid on April 15th! They don’t take installments. You have to pay the total amount you owe at that time. That’s why it’s so important for you to set aside money each week you drive to save for taxes.
We recommend setting up a new and separate bank account. One that is separate from any other bank accounts you have. And put the tax money into that account each week. As long as you hold this money outside of your normal bank accounts that you use for spending, you’ll have a much better chance of holding onto it until the end of the year.
We understand that as Uber and Lyft drivers, you’re probably not making that much to start with. So, it might be very difficult to set any money aside. We do have some good news for you about that later on.
As an Independent Contractor – You’ll Actually Owe More Taxes than an Employee
One more piece of bad news before we get to the good news. When you work for an employer, your employer actually pays some taxes for you that you never have to pay. The law says they have to split some taxes with you. So instead of paying 15.3% of these taxes, you only have to pay 7.65% These taxes are for Social Security and Medicare. When you’re employed you pay 7.65% of your income total for these two taxes. Your employer pays another 7.65%.
But when you work for yourself, as all independent contractors do, you have to pay the total amount of 15.3%! This is on top of your regular income tax. And yeah, it’s not pleasant. The fact is though, many employees aren’t even aware these taxes are being paid on their behalf. It’s not until they get out from under their employers that they discover this little financial reality!
On the upside though, when you work for yourself, you can deduct a lot of expenses that you can’t deduct when you’re employed.
What Expenses Can Uber & Lyft Drivers Deduct?
As an Uber or Lyft driver, you’re allowed to deduct any expenses that you incur in the normal course of business. In other words, any expenses you have to pay to keep your driving business going. These are also expenses that you would not pay if you didn’t do this kind of work.
So, any expense you have that is directly related to your Uber and Lyft driving is considered deductible. Gasoline you buy is deductible. However, gasoline you buy for personal travel is not deductible and you will have to keep the two expenses separate.
Everytime you get your car washed for the purpose of having a clean car to drive with for Uber and Lyft – that’s deductible. Any repairs you have are deductible, but you have to allocate the percentage that you use the car for business. You can only deduct that portion of the full expense.
So, say you drive your car 80% of the time for Uber and 20% of the time for personal use. You then incur a $100 repair bill. Well, you can deduct $80 as a business expense because you use your car 80% of the time for business. And the remaining $20 is counted as a personal expense which is not deductible.
And just to be clear, let’s talk about what a deduction is exactly. A tax deduction and a tax credit are two different things but people easily confuse the two.
A tax credit means, if you owe $7,000 in taxes but you have a $500 tax credit, you subtract the $500 from the total due of $7,000 and you now only owe $6,500.
A tax deduction however, doesn’t work like that. A deduction works like this. Let’s say you made $23,333 for the year. And on that you owe 30% (this is just a made up figure and not reflective of the real tax rates). So, you owe $7,000 in taxes. But, you have a $500 tax deduction. Well, you’re not going to subtract $500 from the $7,000 this time. This time, you’re going to subtract $500 from your total annual income. So now instead of paying taxes on $23,333, you’ll pay taxes on $22,833.
You can see that a tax deduction is not nearly as powerful as a tax credit! But tax deductions are much easier to come by than tax credits are. In our example above, a $500 tax deduction will only reduce your total taxes due by $165 (using our imaginary tax rate of 30%). $165 is 30% of $500. So, in this example, instead of owing $7,000 you would owe $6,835.
Keeping Track of Tax Deductions
Above we said, you can deduct the portion of your annual car expenses that correspond with the percentage you use your car for Ubering and Lyfting. You might decide you use it 80% of the time for rideshare and 20% of the time for personal use.
But how did you arrive at that? And do you really use it 80% of the time for work? Or could it be closer to 73.293820% of the time! How do you know you’re really using it 80% of the time? Is it just a guess?
Well, the reality is, it is just a guess. It’s almost impossible to allocate an exact percentage to this. And since it is so difficult, it gives the IRS a wide open path to challenge you on how much income you declared.
There is another way though. Instead of keeping track of every single expense you incur during the year involving work… the IRS will let you deduct a standard amount for each mile you drive for business. That’s called the standard mileage deduction. When you use this deduction, you no longer have to keep track of every expense. Now, you only have to keep track of how many miles you drive for work and how many you drive for personal use.
And that’s why the mileage tracker apps we mentioned above suddenly become so important and so convenient. With them, you can easily indicate to the app when you’re driving for business and when you’re driving for personal reasons.
When you’re driving for business, you start the app and indicate that and then it counts how many miles you drive until you tell it you’re finished for the day.
Coming Up with the Right Percentages
At the end of the year, they’ll give you a nice print out (on a computer screen), of your exact mileage. They’ll tell you that you drove 72,349 miles for business and 8,453 for personal. And there, you have your percentage. You drove approximately 89.54% of your miles for work and about 10.46% for personal use.
They’ll also detail the dates and times of each trip. This is important in case the IRS asks you to backup your claims with evidence.
So now you know the exact percentage you drove for each, but you won’t need that. You don’t need to now the percentages if you’re going to use the standard mileage deduction provided by the IRS.
If you’re going to use the standard mileage deduction in 2018, you can deduct 0.545 cents per mile. Which if you drive a lot of miles, can add up to a substantial sum! In our example here, it would come to $39,593.
How to Pay Almost No Taxes at All!
Let’s say you made $51,000 from driving and you can deduct $39,593 from that… that leaves you with just $10,407 left over. And you will only pay taxes on the $10,407! Not the $50,000. So, with our imaginary tax rate of 30%, you would pay $3,122 instead of $15,000!
But there’s more! You’ll actually pay less than $3,122. Because the tax rates are lower for lower incomes. The tax rate for $50,000 is a higher percentage than it is for $10,000. So, not only will you save because the deduction gives you a substantial reduction income, thanks to the fact that you drove so many miles. But you’ll also save because the tax rate at the lower income – is itself lower!
In an example like this, you’d probably end up paying just a few hundred dollars in taxes for the whole year. And that’s on a $50,000 income! But it only works if you drive a lot of miles and use the standard deduction.
If your true car expenses come out to more than the standard deduction would give you, you can opt to forego use of the standard deduction and deduct your actual expenses. And now that you know what percentage to apply to your car expenses for business, you’ll be able to have an accurate figure.
In this case, however, you would have to have had $44,218 in actual car expenses in order to equal what the standard deduction would give you. That’s because $39,593 is 89.54% of $44,218. And you would need $39,593 in actual deductible expenses to equal the amount the IRS would allow you to deduct if you drove 72,349 miles in a year.
We know you’re most likely not going to have $44,218 in car expenses! We hope not anyway! If you bought the car for the purpose of using it with Uber and Lyft – the car shouldn’t even be worth anywhere near that amount! Much less having expenses that high. So, it’s usually best to just take the standard amount the IRS gives you for the miles you drive. Plus, it saves you all the headaches of trying to keep track of the hundreds of receipts you’ll collect up over the course of a year.
Ubering for the Tax Deduction
We all know Uber and Lyft don’t pay very well. Most guys who do this as a full time job, are pretty close to the poverty level. But there are a lot of drivers who drive part time because they have other sources of income at the same time.
As self-employed people they may have several different sources of income. And they may not have many expenses they can subtract from the income on those other jobs which means they’ll have a pretty hefty tax bill at the end of the year from what they earn outside of Uber and Lyft.
However, since the mileage deduction is pretty generous, some drivers we know actually drive for the tax deduction alone! If they can get in 500 miles per week, that’s $272.50 they can deduct from their other sources of income. And it adds up to $14,170 of income deductions over the course of a year!
So, maybe you have a guy who’s making $35,000 in other business ventures he’s involved in. He can apply the mileage deduction against all his income, not just his Uber income. So, applying this $14,000 would give him a net annual income from his other businesses of roughly $21,000. He’ll pay taxes on $21,000 instead of $35,000.
But you say, if he’s driving for Uber to get a tax deduction to apply against his other income, he’s also making even more money with Uber which will lessen the effect of the deduction. And that’s true. But, as every veteran driver knows, there are ways to drive for Uber and not get too many trips. You could drive during times when you know it’s not going to be busy. Or you can drive in places where you know it’s not too busy.
As long as you’re signed up to drive for Uber and as long as you will take any trip that does come in, all you have to do to turn these car miles into business expenses, is keep the Uber app on while you’re driving. As long as the app is on and you’re prepared to accept calls, every mile you drive during that time will count as a deductible business mile!
All right. Without further ado, this is the most exciting video of the course, and that is how to maximize your taxes.
Now, it’s not that fun but it’s something you have to think about. You have to pay taxes. You are making, earning an income and the government gets a piece.
However, I would say if you do it right and if you’re in a lower tax bracket that I would assume many of us are, you’re going to turn out okay.
So let me teach you how to do it and avoid some of the common mistakes that can happen.
First of all, you want to get an app like this one. This is called Stride Drive. Stride Drive is a really, really helpful app and what’s really sweet about it is that it’s free. The other most popular one is called MileIQ and there’s plenty of other ones out there in the market.
And by the time you are watching this video, there may be even better ones. So do a little research, but this is the one I use. It’s free and it’s clean and I like it and it’s simple.
Now, remember because you are not an employee of Lyft, you technically don’t work with Lyft or Uber, you’re an independent contractor, they don’t give you benefits and they don’t deduct taxes or social security or Medicare or anything like that.
So if you ever worked a normal job, you fill out a W-2. And let’s say you’re getting paid $1,000 a week. However, because of other things, you may be getting $700 a week and it’s very frustrating.
And so it’s super cool that you get the entire amount and none of it is deducted. However, you need to keep track of all of it. That’s where MileIQ and Stride Drive really, really come in and they’re really helpful.
So a couple of things to keep in mind when you think about how much you’re going to pay for taxes. The typical wisdom is 28% to 40% you set aside.
So let’s just say 30% of whatever you can have set aside to pay your taxes. However, if you do it right, you’re going to probably pay a lot less. And if you have that 30%, then boom, that’s a little bonus for you to keep, whatever the difference is.
Something you have to keep in mind is what kind of tax bracket are you right now? For most of us, we’re going to be doing this part-time and not full-time.
And so think about all your other streams of income. In total, are you going to be over, you know…? It is right, you’re going to push into another tax bracket. And if that’s the case, you may see an increase in your taxes.
For many of us, we’re still going to be lower and so then it’s not going to hurt us at all. If you’re married, you have kids, you have to look at the tax bracket.
Just Google tax brackets in the U.S. for this year and you can get a feel for how much, what percentage you’re paying. So if you’re wealthy and you’re doing this on the side, then you may see some significant taxes you need to set aside.
But I want to say most of the audience who is going to watch this video you’re actually not going to pay much taxes.
So as an independent contractor, if you earn more than $600, Lyft is going to send you a 1099K. They can also [send] you a 1099-MISC, which is if you are earning a certain amount of referrals or another kind of bonuses that are not driving-related.
Now, I’m going to send a link in the notes that you can look more clearly at the different tax stipulations. And it’s important to look at the links because this stuff changes all the time.
Now, you want to use Stride Drive and MileIQ primarily because you can keep track of all your expenses and how much you are spending and so what you can deduct. Now, at the end of the year, you can see a tax statement on Lyft and Uber and see how much you made, and that’s all handy there and set aside for you and you can calculate all your earning statements.
Now, when it comes to expenses, if you don’t calculate them and track every single one of them, you’re going to be missing out on a lot of savings.
So tax deductions. Let’s just talk about tax deductions. So right here you see I have $4,159 of tax deductions at this point. However, what does that mean?
Does that mean that I get $4,159 off my taxes? No, no, no. Let’s say I made… And I made more than this, but let’s say I made $5,000. If my tax deduction is $4,000, then I’m only going to be taxed only if I’ve made $1,000.
Remember, it’s tax deducting. It’s deducting off your total income, not what you pay for taxes. So please, please, keep that in mind. That is super important.
Now, tax deductions, according to the IRS, it’s just basically anything that is necessary to run a business. So let’s look at some of the different things you can do.
So if I press Add, I can look at Add an Expense. And let’s say I’m a delivery driver on the side. I can add $16 for a DoorDash, hot bags. And that’s the expense because I need that to run my business well.
Anytime you do a carwash, you can add it. Let’s say you do it to a $30 a month carwash pass. Boom. You can add that. I would also encourage you to keep another note for the things that are reoccurring that you can add.
Office supplies, passenger goodies. Okay. If you get some Jolly Ranchers or candy or whatever it is for people to have, you can tax deduct it.
Now, there’s this. So let’s say it’s $10. Usage for work. Is this something you’re going to be chowing down and you’re going to be giving to your kids?
Then you can’t claim and you need to be honest. You can’t claim that this is 100% for work. So you need to keep in mind what percentage are you using.
So if you’re going to do anything, like a music paid app, “Oh, hey, I’m using Pandora,” and you do a $10 thing but you only drive one hour a week, so let’s just be real.
You’re not using 100% for work. So you need it, be honest about those and keep track of those different factors. So you can track a lot of things. Look at all these different, amazing expenses you can do.
At the end of the year, you can go right here. “Send my tax report.” And you can look at your expenses and your mileage, and you can send your report straight to your email, and then you can send that to your CPA or you can use…TurboTax is what I use.
Let me address one final thing that’s super important. When it comes to driving, that’s going to be the number one tax deductible thing. Right now, as of now, the IRS has set apart 53.5 cents per mile, meaning…Let me just show you how that looks first.
And this is important for me to show. Let’s say I start driving right now. “Record a drive.” You see it says 53.5 cents per work mile. Wherever I drive, it will track it.
And at the end of it, I press Stop and Save. It will show me how much that’s tax deductible. I didn’t drive anywhere at that moment, so it didn’t show. So let’s see.
This is one I did the other day. I drove for 52 minutes and I drove 27 miles, so 27 times 53.5 is $14.89. So that can be a tax-deductible account. This is really good for me because I have killer gas mileage.
But if you do not have the gas mileage, let’s say you’re driving a van or you’re doing XL or UberXL or something like that or you just have the gas-guzzler and you’re getting 70 miles per gallon, maybe you should track it.
What that would require is that you’d keep all your receipts of all your gas and add them all up. And if you add them all up, you can actually turn out a lot better than this 53.5 cents a mile.
But for most of us, especially if you’re driving UberX and regular Lyft, you are going to turn out better for the 53.5%.
And here’s another thing. Let’s say you get a car and you have tons of expenses on your car. This 53.5% is including wear and tear. It’s including oil changes and so forth.
But let’s say you get a crazy big expense like you need new tires. You need new transmission gear and everything. It’s like $5,000. That happens. You get a lemon car. You’re putting down $5,000.
There’s no way what you’re driving 53.5 cents a mile is going to total that. So in that case, tracking everything is going to turn out for the biggest tax deductible.
So you have to play around with this. You’ve got to know…honestly, if you want to do it best, you want to track both. And at the end of the year, calculate which one turned out better and then you will maximize your tax return and perhaps pay little to nothing on taxes.
I hope this is helpful. And make sure you pay your taxes, and especially, track your tips because that’s when you get in big trouble for not claiming. All right. I hope this is helpful.
Related Content From Ridester.com: