DISCLAIMER: Nothing in this article is intended to be taken as specific advice for any specific individual. You should always consult an accountant or other tax expert who can give you the best advice for your own particular individual situation.
You may have read a slew of negative stories in the news recently about Trump’s new tax plan that passed in the Congress this past December. And at first glance, it’s hard to see why drivers are scratching their heads.
The New York Times said:
In most places, a dollar is a dollar. But in the [new] tax code… the amount you make may be less important than how you make it.
That’s true. The New York Times got the facts right – although they got the sentiment wrong. Their point is that the tax plan is unfair because as they say in their headline it, “may give your co-worker a better deal than you”.
The way you make money under the Trump tax plan will make a big difference in how much of a tax cut you actually get. But, most people are expected to get a tax cut, rich and poor alike. The media, however, is making it look like low-income workers are not going to benefit as much as the rich.
The LA Times said:
The clearest winners (of Trump’s tax plan) are therefore owners of existing large pass-through businesses with many employees or lots of physical assets. The wealthy, in other words.
…Far more than most other types of income, pass-through business income is concentrated among the country’s highest earners. The top 1% currently earns less than 12% of labor income, but more than 50% of all pass-through business income. By slashing taxes for pass-through businesses, the deduction will exacerbate our widening income gaps.
Our advice to full-time drivers is – don’t pay a bit of attention to these negative articles. If you receive your full-time income from driving, (or any other on-demand, app-based work or any work where you are classified as an independent contractor), then the Trump tax plan was written with huge benefits for you!
The new tax plan is definitely not just for the rich – as the media would have you believe. There are significant tax savings for even the hard-working poor.
In fact, there’s a good chance that full-time Uber/Lyft drivers in most of the country won’t have to pay any taxes at all on their driving income. We’ll show you why and how in a minute.
The Media Weighs In
While the words of the LA Times article are accurate – that owners of existing large pass-through businesses with many employees” will greatly benefit from the tax plan – I think the impression they give is wholly inaccurate.
They give the impression that these large wealthy business owners are the only people who will benefit from the tax plan. My opinion: I politely disagree.
Another major group that will benefit from the new tax plan are independent contractors.
And as you surely know – Uber and Lyft drivers, as well as people who work with any of the other on-demand, app-based companies, including Airbnb, Door Dash, Amazon Flex, Uber Eats, etc. are all considered independent contractors!
The truth is however, that the new Republican tax plan is going to mean significantly lower taxes for most full-time Uber and Lyft drivers as well as anyone else who works in the “sharing” or on-demand economies as an independent contractor.
The Standard Deduction Will Double
In the past the “Standard Deduction” was $6,350 for individuals filing alone (in tax lingo, they are called “single filers”). Now it will almost double to $12,000 for single filers.
Previously, the standard deduction for married people who file a joint tax return was $12,700. Now that will be raised to $24,000.
This means that you can subtract one of these amounts, the one that is applicable to your tax filling status, from your total annual income. You then pay taxes on the difference.
If you’re a single filer, and you earn $40,000 from driving, instead of paying taxes on the full 40,000 you will now subtract the new standard deduction amount of $12,000 and you will pay income tax on $28,000 rather than the full $40,000.
Prior to this new tax plan, the standard deduction was only $6,350 so you would have ended up paying income tax on $33,650 – instead of $28,000.
Under the new tax plan, you’re getting $5,650 in additional free and clear income that you won’t have to pay any income tax on at all!
For married couples who file jointly, the news is even better!
Again, if you’re the same driver who earns $40,000 a year from driving, then as a married couple, you will now have a $24,000 standard deduction. That means you’ll only pay income tax on the remaining $16,000 of income that you made that goes over $24,000!
20% Deduction on “Pass-Through” Income
But wait… there’s more! Before you start subtracting that $12,000 or $24,000 from your total annual income, you may be able to lower the annual income by 20% first!
You may remember that Uber and Lyft tell us we have our own business as drivers. That’s technically true actually. And tax law is only concerned with what’s technically true. So, as a “business owner” (technically, in the view of the IRS), you quality for a business tax reduction that is included in the new tax code.
This is where I think the media really get it wrong: they look at the business deductions and claim those will only benefit the rich. What they completely overlook though, is the fact that there is nothing in the tax code that says “business deductions only apply to rich people”.
The tax code says, in essence, ‘business deductions apply to business owners’! And as an independent contractor, you are technically now a business owner.
|Income Tax Rate||Income Levels for Those Filing As:|
The new tax code raises the standard deduction to 20% for what they call pass-through businesses.
Pass-through businesses are legal entities that are setup for businesses whose income is not taxed at the company level. Instead, any money the company makes, is passed onto the owner(s) and the owner(s) pay the regular income tax that everyone pays on their personal income.
Here’s a quick video that summarizes my explanation below:
In other words, let’s say you decided to setup a corporation. You pay some lawyers and accountants, then you pay some state incorporation fees and you incorporate your company.
In the case of a normal corporation, if your company earns say, $200,000 during the year as profit, the company itself would have to pay income tax on its net profit. Let’s say after paying income tax, you have $120,000 left over and you pay that $120,000 to yourself as salary.
Then, you would be personally responsible for paying personal income taxes on the $120,000 that you just paid to yourself as salary. However, if you noticed, you already paid a corporate tax on that $120,000! In this type of setup, you actually pay taxes on your earnings twice. You pay once at the corporate level and once at the individual personal level.
Many years ago, if a business owner wanted to incorporate – in order to protect their personal assets from liability and lawsuits, they could only incorporate as what is called a C-Corporation. But because of the double taxation that was involved, many small business owners could end up paying 90%-96% of their net profit in income taxes!
In 1958 President Eisenhower proposed the creation of “subchapter S” of the IRS tax code. This setup the creation of S-Corporations, which are designed for small companies.
The main reason for creating S-Corps was to create a legal corporate entity that would allow income to pass-through the company and go directly into the pockets of the owner. Which means the company itself paid zero income taxes in the earnings. But the owner of the company paid the regular personal tax rate on the income. This way the income would be taxed only once – rather than twice.
Sorry for that long explanation! But I wanted to make sure you understand what is meant by pass-through income because that’s a big part of the Trump tax plan and it directly affects Uber drivers.
The new tax plan, as I mentioned, will allow people who have setup legal entities to receive pass-through income to deduct 20% of that income from the top – before they pay any taxes on it.
Why I Think Legal Entities that Will Benefit from the Pass-Through Income Deduction
The 20% pass-through business deduction applies to partnerships, limited liability companies (LLCs) and S corporations. But wait… you’re saying, “I don’t have any of those!”
Good news though – there is one more legal entity that is included in the new tax plan that will qualify for the 20% tax deduction. And that is what they call a “sole proprietorship”.
Sole proprietorships are simply businesses that are owned by a single individual. They…
- Are one-person businesses
- Don’t have to register with a state to exist
- Lack the amount of legal protection afforded by LLCs
According to Nolo, if “you are the sole owner of a business, you become a sole proprietor simply by conducting business.” However, “even though there aren’t complicated start-up requirements for establishing a sole proprietorship, there may be local registration, business license, or permit laws you need to comply with to make your business legitimate.”
Here is a 50-state guide with some of the specifics it might be helpful for you to know about establishing a sole proprietorship in your state:
The Standard Mileage Deduction
The IRS has increased the standard mileage deduction for 2018 to 54.5 cents per mile – up 1 cent over last year. This means for every mile you drive, you can deduct $0.54 from your income. This adds up pretty quickly to real money. If you drive 100 miles, you can deduct $54 from your total driving income for the year.
The standard mileage deduction is in place of deducting your actual car expenses. You could forego the standard deduction and deduct your actual car expenses for the year if they’re significantly higher. The only problem with this is, that it’s very difficult to for most people to keep up with all their car expenses. You also need to keep all your receipts if you decide to go this way.
However, we have the option of simply deducting the standard $0.54 per mile and that way we don’t have to keep track of all the details of our actual expenses. We only have to keep up with our mileage to do that. And there are many good apps that make doing so automatic. One of the best is TripLog Mileage.
Now here is the only place where Uber’s and Lyft’s low, low rates are going to benefit you.
In most of the country they charge less than $1 per mile. Let’s say you’re in an area where the rate is $0.80 per mile and your net earnings from that are $0.60 per mile (75% of the 80 cents).
Well, $0.60 is very close to the standard deduction of $0.545. It’s only 5.5 cents away. So, if you only deducted the miles you drove with a paying passenger in your car – you would only be earning approximately 5.5 cents per mile! Or, $5.50 for every 100 passenger miles.
But, your deductible miles are not made up solely of the time when a passenger is in your car. They include all the miles you drive in relation to your work with Uber and Lyft.
To make it simple, you could say they basically include all miles you drive while logged into the driver apps. They include all the miles you drive empty to pick up your passengers. They include the miles you drive between the time you drop someone off and the time you pickup your next passenger.
So, let’s do a hypothetical example.
Let’s say you pick up a passenger, take them five miles and 15 minutes away. In most parts of the country, you would earn something close to $4.70 for this trip. But since you drove them 5 miles, you can now deduct $2.73 from your income for tax purposes – just for the mileage you drove while you had them in the car. So now you’re down to just $1.97 in income that you would have to pay income taxes on.
But, we’re not yet including the mileage you drove to pick them up and the mileage you drove after you dropped them off, while you were waiting for another ping.
If you drove one mile to pick them up and another two miles after you dropped them off, that’s another $1.64 you can deduct. Now you’re down to just $0.33 that you’d have to pay taxes on! But wait… that’s not all!
That’s before the Trump tax plan. Look at what happens now, after the Trump tax plan takes affect this year:
|Your Gross Trip Earnings:||$4.70 taxable income|
|Now deduct 20% for the new pass-through earnings deduction:||-0.94|
|Total:||$3.76 new lower taxable income figure|
|Mileage deduction for the 8 total miles you drove for this trip:||-$4.36 (this is more than you actually made on the trip)!|
|TOTAL TAXABLE INCOME from this trip:||$ -0.60|
To the IRS you will have a 60-cent loss on this trip and you will owe no taxes at all! You can also apply this loss to any other income you may have earned during the year from other sources.
Driving for Uber and Lyft has now become a tax write-off – for the poor! You thought only the rich could benefit from tax write-offs! Now, we all can.
With Uber’s and Lyft’s rates so low, it is becoming smart for drivers who have other sources of income to logon to the driver apps for several hours a week, drive around and use the mileage as a deduction against your other income.
The Bottom Line
First, check with your tax accountant and if you don’t have one, get one. Or use one of the popular tax services to get an expert to look at your specific situation and advise you on how you can best minimize your income tax for the year.
Second, check out the links above to get the information on your state about setting yourself up as a sole-proprietor. You could also look into setting up an S-Corporation – it’s not hard or expensive to do.
You can use one of the web services to do it for around $100-$150. Or, possibly look into setting up an LLC. A sole proprietorship is generally the cheapest way to go. But today, it doesn’t really cost that much to setup an S-corp or an LLC. And you can do it all online with just a few minutes of your time.
For more information on rideshare taxes, check out our video “How To Handle Taxes and Maximizing Your Deductions” from our FREE rideshare training course below”: