If you’ve ever thought about becoming a driver for Uber and/or Lyft, it can be an easy, convenient and flexible outlet for earning a little bit of extra cash or can even turn into a full-time job. But before you fire up your phone and put the pedal to the metal (safely), it’s vital to know what you can and should do as an independent contractor when tax season arrives. Here are a few tips to help you properly file your taxes and potentially save you money when you’re self-employed.
Keep in Mind: You’re an Independent Contractor
According to the Internal Revenue Service, if a company controls an individual’s work hours, provides equipment and supplies, and offers benefits such as paid-time off and insurance, then you are labeled an employee.
On the contrary, you would be considered an independent contractor if the company allows you to set your own hours, provides no training or supervision, and requires the use of your own equipment and tools. For these reasons, Uber and Lyft drivers fall under this category.
Why does this matter? Uber, Lyft and any other ride-sharing services do not withhold your taxes. Instead, you’re responsible for paying estimated taxes to Uncle Sam.
You’ll also be hit with the self-employment tax, which consists of Social Security and Medicare taxes. When you’re an employee, you pay 7.65% of your net income to Social Security and Medicare, while your employer pays the other half. Unfortunately for contractors, you’re required to pay both halves, which equals 15.3%.
Track Your Mileage/Expenses
If you want to write off automotive costs on your taxes, the importance of keeping a detailed log cannot be stressed enough. Without giving documentation or proof to the IRS, you can kiss that vehicle tax deduction goodbye.
To properly deduct expenses for Uber and/or Lyft driving, the IRS provides two methods to keep track of your records: standard mileage and actual costs. For standard mileage, you log your car’s work-related mileage for the year. This mileage isn’t solely limited to driving passengers, either. Other business-related travel includes:
- Driving around waiting for ride requests
- Driving to pick up a passenger
- Driving to the bank, gas station, or any other business-related locations
The IRS establishes a standard mileage rate based on the fixed and variable costs of operating a vehicle. In 2017, you can deduct 53.5 cents per mile driven. So, if you drive 20,000 miles for Uber and/or Lyft this year, you’ll receive a deduction of $10,700. The formula for calculating this amount is: total business miles (20,000) times standard mileage rate (.535).
To deduct actual costs, you will need to document all of your actual vehicle expenses including:
- Lease payments
Since Uber and Lyft operate through mobile apps, you could also write off other expenses such as the cost of your cell phone, data services, and accessories – i.e. mounts, chargers, etc. To find out what business expenses you can deduct, refer to your Schedule C (Form 1040).
Once you tally your total annual expenses – let’s say $12,000 – you need to estimate the percentage of time your vehicle is used for Uber and/or Lyft. The formula is: Uber/Lyft miles divided by total yearly miles. If you drove 24,000 Uber and/or Lyft miles and 30,000 total miles, your percentage would be 80%.
Then, plug your numbers into this equation to find out your deduction: total expenses ($12,000) times business-use percentage (.80). Your deduction would be $9,600.
Which tracking system should you choose? If you drive considerably and carry few expenses, standard mileage is the way to go. On the other hand, the higher your operating costs, the higher your deduction. So, in this case, pick the actual costs method.
Whether you choose a Limited Liability Company (LLC) or an S-corporation, incorporating yourself as an independent contractor comes with several perks. It reduces your chances of a tax audit, boosts credibility and guarantees additional tax deductions.
The most crucial reason to incorporate, though, is protection. Let’s say you get into an accident while driving a passenger to his or her destination. If the passenger received any injuries, court will most likely be the next time you see him or her. However, if you’re incorporated, the injured passenger would be suing you as a corporation, not as an individual. Incorporating yourself acts a safeguard for your personal assets, which includes tangibles such as your home and savings account.