In a recent article we published about tax returns, we discussed everything to do with filling in forms and what is needed to complete a full tax return profile at the end of a year. In this article, we will look at what tax is and how it affects share-economy workers.
We will start by providing definitions to terms since there are a lot of definitions being flung about, it's time to make some order out of all the name slinging. With each definition, we will provide a more detailed paragraph describing the name, its meaning and the actions it levies from drivers.
Disclaimer: We are not a professional CFA or CPA service, and we do not offer professional advice. This article is only an explanation of the process and cannot be used as a professional tax service advice or financial management source of information.
Independent Contractor
Rideshare drivers are called "independent contractors," and this is a nice way of saying you are "self-employed" The IRS recognizes "self-employed" individuals as who meet the following requirements:
You have received
- at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;
-
at least $600 in:
- rents;
- services performed by someone who is not your employee;
- prizes and awards;
- other income payments;
- medical and health care payments;
- crop insurance proceeds;
- cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish;
- generally, the cash paid from a notional principal contract to an individual, partnership, or estate;
- payments to an attorney; or
- any fishing boat proceeds,
- In addition, use this form to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
The bold letters point out the two categories that Uber and Lyft drivers fall under, they receive over $600 a year from Uber or Lyft for driving for their customers, and they receive over $10 a year in tips from the passengers. There are advantages and disadvantages of being self-employed as averse to being employed.
Self-employed "independent contractor" can deduct expenses to their income and as such reduce the taxable income. Since ridesharing can be a heavy expense employment, the actual taxes paid at the end of the year might be less than expected.
The disadvantage of being "self-employed" is that you have to file your tax reports every year. Uber and Lyft will not do that for you, and they do not withhold taxes for you. They pay you a gross amount less their service fees; all the rest is on you.
Tax Deduction
A tax deduction is not taking a percentage of tax off your income. It is a calculation of your income fewer expenses. This means that you will pay fewer taxes if you manage your expenses properly. What this means to Uber and Lyft drivers is that while they will accumulate expenses that will drastically reduce their taxes. Although, to be honest, since Uber and Lyft drivers actually don't earn as much as people think, in reality, the expenses can sometimes meet the income and cancel each other out. This means that in some cases there will be no taxes to pay, which is sad because that means you didn't make enough money to live really.
What are Tax Deductibles?
To fully comprehend what can be deducted from your income and reduce your tax, we list here the comprehensive Uber and Lyft tax deductible list.
Mileage
Rideshare driving is a car based operation and as such the car is the key to the business. Therefore, all the expenses related to the car and the service it provides to Uber customers are tax deductible. The Mileage factor is best deducted from the Standard Mileage Rate rather than the Actual Expenses Method since the work is actually mileage based. The standard mileage rate is an IRS acceptable standard, and during 2017 the mile rate was set at 53.5 cents. All drivers need to do is multiply the total number of miles driven in the car from the start of a shift to the end of a shift as well as miles driven to car washes and other car mechanic related services related to the work.
Car Cleaning
This is straightforward, every time the driver cleaned the car and took a receipt, the car cleaning cost is tax deductible. Don't forget the miles driven to and from the car wash are also tax deductible.
Passenger Goodies
This includes a long list of items that the driver might decide to invest in for the passenger's comfort.
Cell Phone Accessories
Any cable or accessory that is used to hold, clean or connect to a smartphone, whether for the phone that holds the app or for passengers use is tax deductible. Even a protective screen is considered a viable item in this instance.
Cell Phone Purchase
When you purchase a phone, including the plan you purchase, the cost of the purchase is tax deductible. The phone is the "office" of your business since it holds the app as well as any third party apps you might use to help manage your driving work.
Cell Phone Service
The actual phone service and insurance you pay on a monthly basis is tax deductible.
This is an important "gadget" which provides safe driving as well as a clear line of view to the map that navigates you during work. It is tax deductible.
Inspections
All car inspections, whether by Uber or by anyone else for the sake of car safety is tax deductible. If you had to drive to the inspection, then the miles driven to and from the inspection are tax deductible.
Parking Fees
During the schedule you logged into the app to the moment you logged off are all tax-deductible moments, so if you parked and paid for it, you must retain your receipt for a tax deduction.
Tolls
While Uber does pay the driver for all tolls during a ride, if the driver had to pay for a toll while driving during periods 1 and 2, then the receipts should be collected since they are tax deductible. At least get the deduction, since Uber doesn't pay you for those periods.
Music and Paid Apps
For the sake of passenger's enjoyment as well as the drivers need to relax, any and all media applications, streams and files bought are tax deductible.
Car Mat
This small item is a component of the car and part of the system that keeps it clean, so it is tax deductible.
Car Seat Cushion
While this could be considered a luxury item, it is, in fact, an important accessory for passengers and if orthopedic, for the driver too. All seat cushions are tax deductible.
Food and Drink
Apart from eating and drinking as part of working requirements, any food and beverage offered to passengers during a ride are all tax deductible. Just remember to accumulate all receipts and associate the expense to a specific ride.
Car Loan Interest
If you took a loan out to buy a car, the loan interest is tax deductible since it is part of the cars purchasing price.
Health Insurance
Any health insurance policy taken for work purposes is considered tax deductible.
Oil Change
All oil changes are tax deductible.
Gas
Apart from miles, you also get tax deducted from your gas, so every time you fill up for work purposes, keep the receipt. Do not try to add gas for out of state driving, since the IRS knows that Uber and Lyft do not let drivers drive out of State unless you have a fare that requests that.
Car Insurance
Apart from NYC, all rideshare drivers need rideshare insurance coverage. NYC requires commercial insurance coverage. Both are tax deductible.
Car Repairs
All visits to your mechanic are tax deductible since your car works for most of the time, it is reasonable that all car repairs will be work-related. Driving to the mechanic and back are deductible too.
Car Lease Payments
As with car loan interest, car lease payments are in fact car purchase fees and as such are tax deductible.
Car Depreciation
Make sure you know the car depreciation value. Make sure you don't just come up with any figure you like. You must use an IRS acceptable depreciation calculator for this figure.
Non-expenses related tax deductions include Uber service fees, bank fees for transactions, accountant fees if you decide to use an accountant and legal fees if you needed to use a lawyer as part of an action related to your driving.
Calculating the Personal vs. Business Car Time
If the car you use for Uber and Lyft is also for personal use, as is in many cases, then you have to calculate the schedules you work as a percentage of the total time you drive. This does not mean you calculate the percentage of work hours into total day hours; it means you calculate how many hours a day you used the car in total and calculated the percentage for personal and business use. This is actually easier then it sounds, all you need to do is register the starting mileage, deduct the miles you used during your shift and the remainder is personal.
However, if you drove your car to a car wash or to a mechanic, you would add those miles to work deductible miles. So, make sure you correctly associate mileage to work as well as to family.
Mileage and Expense Tracking Software
There are some interesting software apps for mile management, and here are a few that are very useful for tracking miles as well as linking expenses to them.
The Drivvo app is considered to be one of the leading apps available. It is global and has been downloaded over 1,5 million times. It is used in over 180 countries.
Drivvo enables the driver to follow fuel consumption including gas, gas premium, ethanol, diesel, and electric fuel. It allows care mileage input, managing maintenance records and gives analytics and statistical reports of car usage over set periods of time.
The ability to track expenses per mile based on user input will generate full expense reports for the driver to be used when processing P/L sheets on a monthly and yearly basis.
The cloud version of Drivvo gives the user data security since it backs up all information to their cloud and provides data synchronization as well as 24/7 support services.
If you prefer to manage a full account of your Uber/Lyft driving, then you might consider Quickbooks Self-Employed App. This interesting app provides a full bookkeeping system with a mileage calculator, so it is very easy to link resources and costs to the mileage driven every time you use your vehicle. This lovely app allows you to itemize and automate all your recurring expenses and only requires once a week is categorizing of miles. It also syncs with banks, automates bookkeeping and at the end of the year compare business miles to actual driving miles.
Another full option is Stride Drive which is a free app that gives you a full expense tracking service for your mileage. It also allows you to run it in the background, so every mile driven is recorded. Since it is an expense management system, you can add every resource and costs you spent on every trip. Stride is an easy app, not heavy on memory usage so that it won't interfere with your Uber app.
For the focused apps, you might consider mileage tracking apps that only record the miles you have driven. Recording only ride-share miles means that you will need to manage your business information separately. There are some very good dedicated mileage recorders, including:
Triplog 2.0 , which will allow you to estimate your gas usage and also best gas prices. What sets this app apart from the rest is its tracking versatility, you decide when to start tracking your trips. Triplog 2.0 is free, but for additional features such as cloud backup and AutoStart, you will need to pay a basic price. Another great feature is the IRS ready reports that Triplog 2.0 will produce.
MileIQ will cost you $6 per month, since it is free only for 40 rides, as most Uber drivers tend to drive more, expect to pay. This app is quite simple, it has two categories; personal and professional, and it gives a secure cloud sync. The only issue with MileIQ is that it is very heavy on the battery and mobile data.
Hurdlr is a very good mileage tracking app that offers expense allocation to rides. It also has a few interesting functions, such as graph displays to show you net earnings and expenses in a time frame. Hurdler connects to your cars Bluetooth and starts when the Bluetooth connects, which is a nice auto-start feature.
Everlance is another nice app, although the free version is limited to 30 trips and then it costs either $7.99 a month or $59.99 yearly. (Don't you just love the use of 99) It also allows expense tracking and has a very friendly GUI.
Finally but not last, Milecatcher , which is a nice easy app that automatically tracks and categorizes tax-deductible mileage and also creates expenditure reports. This app runs in the background and is not heavy in the system memory or resources. Whats good about this app is that over time it automatically classifies trips based on your driving history. Milecatcher costs $3.99 a month or $48 per annum.
Standard Mileage Deduction
The IRS is aware that most people are not fastidious and particular about keeping records, not because they try to hide anything but because most people do not fully comprehend the importance of documenting every receipt they receive or even request a receipt for what they buy.
Therefore, the IRS calculates an average mile expense deduction rate, and in 2017 it was around 53.5 cents per mile. This means that for every mile you cannot account for you will receive a 53.5 cent deduction for taxation purposes.
This deduction is set for all your miles, that means the moment you start a shift to the moment you finish it you will receive a tax deduction of 53.5 cents per mile from the IRS. If you managed to save up all your receipts and provide proof for all of your expenses, you might actually provide a higher deduction rate and as such, even surpass the income. In that case, you are working at a loss, and won't have to pay tax. On the other hand, it means you are losing money and working for Uber or Lyft's profit alone.
There is one rule that the IRS adheres to, you cannot use both deduction methods when it suits you. You have to decide whether you accept the standard rate (53.5 cents per mile) or use your expenses, which in some cases can be more or less than the standard rate. How do you calculate the two? Simple, for the standard mile deduction rate you multiply the number of work-related miles by the rate and get your tax deduction amount. For expenses, you calculate all your expenses and then decide which is higher, and you use the higher of the two.
For drivers with a new car, either leased or bought, you will most probably prefer to use the expense approach since your car will factor into the calculation in favor of expenses. If you bought or leased a second-hand car, so long as it is not a "chugger-banger" your will also most probably consider using that as your expense rate. If you have only one car and it is a family and business car, then you should approach the standard mileage rate with more respect. Although, if your car is an UberBlack or SUV, the depreciation alone could mark up your expenses.
Ordinary and Necessary
You will see the IRS using this term to define your expenses. What this means is that there are two kinds of expenses that the IRS will consider. The ordinary expenses that are accepted by all industries as a standard expense, such as gas. A necessary expense is an expense that is defined by your specific industry and considered to be useful for increasing your income or safety, such as a dash cam, or vomit bags.
Tax Filing Requirements
Tax filing is a mandatory practice for self-employed" independent contractors. You cannot shirk this duty, and if you don't pass it onto a CFA or CPA, then you must do it yourself.
Basically, if you earn more than $400 per annum, you must file a tax return. You can file your return by October 15th of the year and can get an extension to April 15th of the following year. Take into account that when you request an extension, the IRS official will ask why. It's best to employ a certified tax accountant (CTA), especially if you work for more than one rideshare company.
Quarterly Estimated Taxes
One of the mandatory requirements of any self-employed driver is to file quarterly tax estimates. These are based on the previous year's performance divided by four. Since you are an independent contractor and since Uber/Lyft will not do this for you, you must be prepared to have these documents filed on time.
The IRS https://www.irs.gov/forms-pubs/form-1040-es-estimated-tax-for-individuals state on their site "Estimated tax is the method used to pay tax on income that is not subject to withholding (for example, earnings from self-employment, interest, dividends, rents, alimony, etc.). In addition, if you do not elect voluntary withholding, you should make estimated tax payments on other taxable income, such as unemployment compensation and the taxable part of your social security benefits."
Estimated taxes, when paid into the system, will actually help you at the end of the year, even if you pay a small amount due to large expenses. At the end of the year, if you have small credit to your name you will receive a refund, and if you owe anything, you will have to pay it. However, it is better to pay a small amount than to get a shock and pay cash when you didn't save up any during the year. (Which happens to a lot of people).
Social Security and Medicare Taxes
There are two types of tax, income tax which is paid to the IRS as a tax on your net earnings and "self-employment tax" which is your payment to social security and Medicare. You pay 12.4% for social security and 29% for Medicare.
Here is a table for self-employment tax payable in 2016:
| If your net self-employment income is | This is your self-employment tax rate | You pay self-employment taxes on |
|---|---|---|
| Under $400 | You don't have to pay self-employment tax | You don't have to pay self-employment tax |
| $400-$200K - single filers |
$400-$250K - married joint filers
$400-$125K - married filing separate | 15.3% of net self-employment income. Here is the breakdown:
(12.4% for social security (up to a max of $118.500) + 2.9% for Medicare tax) | Pay self-employment taxes on 92.35 % of your income. |
| Above $200K - single filers
Above $250K - married joint filers
Above $125K - married filing separately | 16.2% of net self-employment income. Here is the breakdown:
(12.4% for social security up to $118,500 in income + 3.8% for Medicare tax) | Pay self-employment taxes on 92.35 % of your income |
Source: https://fitsmallbusiness.com/self-employment-tax-rates/
Forms 1040 schedule C and SE
There are three basic 1040 forms you will fill and file.
Form 1040
https://www.irs.gov/pub/irs-pdf/f1040.pdf
The 1040 form is the IRS official Individual Income Tax Return form and after you have completed filling in forms 1040 C and SE you fill this form out and can get help online from the IRS site if you have issues filling out specific areas of the form.
Form 1040 Schedule C
According to the IRS, https://www.irs.gov/forms-pubs/schedule-c-form-1040-profit-or-loss-from-business Schedule C Use this schedule to report income or loss from a business you operated or profession you practiced as a sole proprietor. An activity qualifies as a business if:
- your primary purpose for engaging in the activity is for income or profit, and
- you are involved in the activity with continuity and regularity.
Since you are an independent contractor and business owner, you must ensure that all your income and expenses are recorded properly and labeled as "self-employed." You then take the data you received in Form's 1099/1099MISC and 1099K and use that to fill in Schedule C form.
Form 1040 Schedule SE
According to the IRS https://www.irs.gov/forms-pubs/about-schedule-se-form-1040 "Use Schedule SE (Form 1040) to figure the tax due on net earnings from self-employment. The Social Security Administration uses the information from Schedule SE to figure your benefits under the social security program. This tax applies no matter how old you are and even if you are already getting social security or Medicare benefits."
This form calculates how much of your income is taxable. You do this by taking your list of expenses and deducting them from Schedule C form.
Form 1099
You will either receive this form or the 1099MISC version from Uber and Lyft once you earn more than $600 from Uber for services performed as an independent contractor you will need this form that shows you how much money Uber paid you as well as taken from you during the year.
According to the IRS ( https://www.irs.gov/forms-pubs/about-form-1099-misc-miscellaneous-income ) is:
File this form for each person to whom you have paid during the year:
- at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest;
-
at least $600 in:
- rents;
- services performed by someone who is not your employee;
- prizes and awards;
- other income payments;
- medical and health care payments;
- crop insurance proceeds;
- cash payments for fish (or other aquatic life) you purchase from anyone engaged in the trade or business of catching fish;
- generally, the cash paid from a notional principal contract to an individual, partnership, or estate;
- payments to an attorney; or
- any fishing boat proceeds,
- In addition, use this form to report that you made direct sales of at least $5,000 of consumer products to a buyer for resale anywhere other than a permanent retail establishment.
Make sure you download your form from their site since Uber and Lyft will not mail it to you.
##Electronic Filing
The internet age brought with it the digital government gateway. This is the way you file tax reports. You file your quarterly estimates as well as pay online, and you file your yearly tax report and pay or receive a refund online.
If you decide to do it yourself, then go to the IRS page https://www.irs.gov/individuals and follow the directions there. If you are using a third-party app to help fill in the forms, then you should check the IRS page https://www.irs.gov/payments
Link to Form 1040 – https://www.irs.gov/pub/irs-pdf/i1040gi.pdf
Link to Form 1040 ES – https://www.irs.gov/pub/irs-pdf/f1040es.pdf
Link to Form 1040 Schedule SE – https://www.irs.gov/pub/irs-pdf/f1040sse.pdf
Link to Form 1040 Schedule C- https://www.irs.gov/pub/irs-pdf/f1040sc.pdf