When it comes time to file your taxes, it’s natural to feel a little bit of dread. Taxes can be complicated, and the threat of getting audited looms for us all. If you work as a rideshare driver, this is even more true. This may be your first time dealing with the considerations that come with filing income taxes as an independent contractor.
However, tax time doesn’t have to be scary. In fact, it can be a chance to reduce the amount of tax you owe…if you take the correct deductions. We’ll look at different types of tax deductions you can take as a rideshare driver so you can have increased savings and greater peace of mind.
Rideshare Drivers Are Independent Contractors
The first thing you need to understand when filing your rideshare taxes is that Uber partners and Lyft drivers are considered independent contractors. The companies do not withhold any taxes from the money they pay you.
All they’re responsible for is informing the IRS of the wages they paid you and sending you a Form 1099 at tax time. This form contains a summary of all the non-employee income you received as a Lyft or Uber driver. If you drive for both companies, each will send you a separate form.
We cannot stress enough how important it is to put aside a portion of your Uber and Lyft earnings for taxes. If you do not, then you could be due for a nasty surprise at tax time. For more information on how much to put aside, check out our self-employment taxes guide. If in doubt, consult an accountant.
What Is a Tax Deduction?
Tax deductions reduce the total amount of your income that is subject to tax. For example, if you earned $40,000 but were able to deduct $5,000, your taxable income would only be $35,000. This can help reduce the total amount you owe in taxes. In some cases, it can even drop you into a lower federal tax bracket, leading to dramatic reductions in your tax rate.
The full list of possible tax deductions is massive. In fact, most of the U.S. tax code exists to cover all the possible deductions you can take. Let’s discuss the deductions that are relevant to Uber and Lyft drivers.
What Expenses Can Uber and Lyft Drivers Deduct?
When filing your rideshare driver taxes, you’ll use a tax form called Schedule C to record your tax deductible business expenses. Don’t worry about understanding the particular details of filling out the form — any tax preparation software you use will walk you through the process.
But what exactly can you deduct? Can you just choose any expense you incur while driving for Uber and Lyft? Sadly, no. There are specific rules for what expenses you can write off. First and foremost, for the purposes of this article, we’re discussing business expenses. There are other deductions available, but they’re not relevant here. We’re interested in the expenses that relate to the operation of your Uber or Lyft business.
What sorts of expenses qualify? In general, you can deduct any expense that’s necessary for the normal course of business, as long as someone else doesn’t reimburse you for it. Since Uber and Lyft don’t reimburse drivers for expenses, you don’t have to worry about the reimbursement aspect. You’re more likely to run into trouble when attempting to deduct expenses that are not necessary for running your rideshare business.
For example, you can’t deduct the cost of what you spend on fueling your car when you’re not giving rides. This is personal transportation, and it doesn’t count as a business expense. However, you could deduct the cost of gas you used while giving rides.
To get a better understanding of what expenses you can and can’t deduct, let’s look at some common Uber and Lyft tax deductions:
1. Actual Vehicle Expenses
With the proper preparation, you can deduct any expenses that relate to operating your vehicle for business use with Uber or Lyft. These expenses could include (but are not limited to) the following:
- Car depreciation
- Lease payments
- Car loan interest rate
- Registration fees
- Rideshare insurance
- Vehicle repairs
- Oil changes
- Garage rent
- Parking fees
- Roadside assistance
To use the actual expenses method, you’ll need to keep very detailed records, with receipts for each transaction. It can work, but things can get murky. For example, if you filled up your car with gas at the beginning of the day, drove for Uber for a couple hours, and then drove home, you’ll need to calculate how much of those gas costs you can claim as business expenses.
2. Standard Mileage Deduction
As a rideshare driver, the mileage deduction is perhaps the most important to understand. It offers a simple way to calculate and write off the expenses you incur when driving your vehicle for business purposes.
Using the standard mileage rate that the IRS provides, you can calculate your business expenses related to driving. All you have to do is keep a mileage log of the distances you drive while you’re giving rides to passengers. Note that deductible miles do not include any you drive when you have the driver app off (such as when you take a lunch break).
For 2018, the standard mileage rate is 54.5 cents for every mile of business travel driven. You must keep track of these miles yourself. To make this easy, we recommend you use a mileage tracking app. Check out our reviews to find the mileage app that’s right for you.
3. Cell Phone Expenses
If you have a dedicated cell phone that you use for your rideshare work, you can deduct any costs related to using it. This could include the purchase price of the phone, as well as the cell service plan you use and any relevant phone accessories, such as a phone mount.
However, things can get more complicated if you use the same phone for business and personal use (as many drivers do). In this case, you can only deduct the percentage of your phone expenses that relate to your business. It can be tricky to calculate this, and in many cases the amount it would save you on your taxes is not significant enough to be worth the time required.
4. Service Fees
Whenever you give a ride, Uber or Lyft takes a percentage of the fare. This amount is deductible, as it is an expense that you incur in the course of your business. Drivers often overlook this deduction, as Uber and Lyft don’t go out of their way to show it to you. To view these expenses for Uber, go to your Tax Summary on Uber’s website. To find them for Lyft, check your Driver History within the Driver Dashboard. You can also use both of these dashboards to find your net income as a driver.
5. Complimentary Items for Passengers
If you keep snacks, bottled water or gum in your car as an amenity to offer passengers, you can deduct the expenses of these items. Just make sure to keep detailed receipts.
6. Dash Cams
7. Accounting Software and Tax Preparation Fees
Whether you pay someone else to help you prepare your tax return or use tax preparation software, you can deduct whatever this service costs you.
When you’re in the ridesharing business, doing your taxes can feel intimidating. However, as you can now see, it doesn’t have to be as complicated as you think. There are plenty of straightforward deductions available to you as a self-employed person that someone with a salaried job would never be able to take advantage of.
In particular, you should now know how powerful it can be to deduct business miles (and how much simpler it is than tracking your actual expenses).
As in all matters related to taxes, don’t take this post as definitive. You should always consult a professional when it comes to tax advice.