Each Lyft and Uber driver has to file their own tax return as an independent, self-employed individual. Some recent California laws have mandated that rideshare companies employ drivers directly. However, until other states do so as well, individual rideshare drivers are independent contractors.
That means each Uber driver essentially represents their own small business. This can make tax preparation and reporting business income more difficult, but it also gives drivers extra opportunities for tax deductions.
As a self-employed worker, tax deductions for business expenses are an important and effective way to lower your taxes and make your tax return precise and accurate. You can deduct everyday driving expenses, including fees and tolls that Uber and Lyft take out of your pay. Your most significant tax deductions will be costs related to your car.
You may also want to deduct other expenses like snacks for passengers, USB chargers/cables, or separate cell phones for driving. If you don’t take these deductions, more of your income will be subject to income and self-employment taxes.
How Do Rideshare Drivers Pay Taxes?
Handling taxes for rideshare drivers means paying estimated taxes throughout the year and then reporting income on your income tax return like any other private individual.
As an independent contractor driving for Uber or Lyft, you must make estimated tax payments each quarter as your down payment on your income tax for the year.
You can calculate your estimated tax rate each quarter with form 1040-ES, and then you’ll use the complete form 1040 to report your income on your final yearly return. You’ll specifically use 1040 Schedule C to report the profit or loss from your rideshare business activity.
To fill out Schedule C, you’ll need to consult each 1099 form you receive from rideshare companies. Form 1099-K is the form you’ll receive from Uber or Lyft that should report the income you received through your rideshare work.
Rideshare Driver Tax Deductions
Any necessary business expense you had to pay to do your job may be eligible as a deduction. Although the specific IRS rules control when and how you can claim certain assumptions, there are many options.
Rideshare drivers should be able to claim unavoidable costs such as auto expenses, rideshare platform fees, and any costs associated with parking and tolls while you’re working.
The IRS allows you to report and claim all of the specific fuel and maintenance costs associated with running your vehicle, but this will require extensive record-keeping. Instead of claiming specific vehicle use expenses, however, you have the option of instead claiming a standard preset rate based on your business mileage.
You have to carefully track the miles because the IRS requires a mileage log, but you won’t have to record all other costs. Make sure to keep your personal and driving logs separate to avoid confusion about the mileage.
If you want to claim a deduction based on the standard mileage rate, you must do so in the first year you use your car for business. In later years you can choose to switch back and forth between the methods from year-to-year without penalty. You might decide to itemize specific costs in later years if your vehicle costs get unusually high.
Standard Mileage rate
The standard mileage rates for the use of a car, van, pickup, or panel truck is 57.5 cents per mile for 2020, and it will be 56 cents per mile for the tax year 2021. For each mile you drive for business purposes, you accumulate a vehicle-based tax deduction according to this rate.
Calculating Your Mileage
Keep a running log of all the miles you drive for your rideshare. To calculate your total auto expenses deduction based on the standard rate, simply multiply your total business miles by the tax year’s mileage rate.
Mobile Phone Expenses
As a rideshare driver, your cell phone is critically important to your access to the rideshare platform and all of your work. You can deduct your phone plan’s cost as a business expense, but only for its business use.
If you only use the phone for work, then you can deduct the entire bill. Otherwise, you will need to divide the bill according to your personal and business use. One place to start will be to see how and when you used wireless data for the rideshare app or other work-related purposes. An accountant can help you with this process as well.
Maintenance and Repair
If you decide not to claim a deduction using the standard mileage rate method, you can report many different vehicle costs. An Uber or Lyft driver can claim deductions for routine repairs and maintenance. Small maintenance costs like inspections, tire rotations, and oil changes are all standard, expected costs required for your vehicle’s safe operation.
You can deduct larger, more expensive repairs, but they are treated differently as deductions.
Car insurance is another required vehicle cost you can claim if you take the route of itemizing your vehicle costs. While the rideshare platform’s insurance should take precedence when you are on the job, you don’t want to leave yourself defenseless if their insurance falls through or doesn’t cover enough costs.
Vehicle Registration Fees
Registration fees are some of the regular costs you have no choice but to pay if you want to continue using your vehicle. Because your daily work requires the use of your vehicle, you can deduct at least a portion of your vehicle registration fees as a business expense.
If you’re still paying off your car purchase or only leasing it for non-permanent use, you can claim a portion of those payments as a business expense. You need the car for your work, so you can write off a portion of those costs in proportion to your business use of the car as you drive for uber.
With depreciation, you can deduce the wear and tear your car receives over time. Depreciation recognizes that your investment in the car is losing value over time. However, you can’t claim the depreciation deduction if you claim a deduction for your business mileage.
Everything you do to keep your car in good shape and impress your customers can be included as a business expense. Make sure you keep the receipts and make a record of every time you take your car to the car wash or get the interior cleaned out. Those costs are deductible.
Consult a Tax Professional to Maximize Your Rideshare Deductions
Before you submit your final tax return, consider consulting a professional tax preparer to help you go over your records and ensure you’re making the best possible choice. It can be an ordeal to gather all of your receipts and add up deductions, but it’s all for your benefit in the end.
A tax accountant can help you report your income and file your tax return accurately and efficiently, saving you both time and savings in after-tax income.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.