As a rideshare driver, you are considered self-employed and treated as a business by the IRS. However, this may change if local or state laws require Uber or Lyft to employ drivers directly.
Tax obligations can be incredibly complicated for Uber and Lyft drivers. You don’t have an employer handling many tax compliance concerns for you, so it’s up to you. If you manage your taxes well, the process will be easy, and you should keep your tax burden relatively low.
However, if you’re not careful or uncertain of what you have to do, you could very quickly pay more or less than is strictly required, which will either mean forgoing hard-earned money or risking a potential audit.
Use this guide to determine what you need to know and ensure you’re complying with your legal requirements as an independent contractor.
Do Uber and Lyft Drivers Pay Taxes?
Rideshare drivers pay federal income tax on all net profits. You pay taxes just like any other private individual in the United States, with the added complication of being self-employed. A self-employed person is considered the employer and employee of the business because you work for yourself.
Being self-employed as a rideshare driver means you are subject to self-employment (SE) tax. SE Tax is composed of Social Security and Medicare taxes. When you work as a W-2 employee, you pay part of the Social Security and Medicare taxes, and your employer pays the other half. Rideshare drivers must pay the full 15.3 percent SE tax rate by themselves.
Unlike an employee earning W-2 wages, you have to keep track of your expenses so you can claim them as tax deductions. Since no taxes are being withheld, you must pay taxes throughout the year. You must report your income on your IRS return at tax time, but the bulk of your income tax should be paid as you earn income throughout the year.
Rideshare drivers may also be subject to state and local taxes, depending on their locality.
How Do Rideshare Drivers Pay Taxes?
Come tax time, when it’s time to file IRS form 1040, you will file form Schedule C. At the end of the financial year, the rideshare company should send you IRS form 1099, which reports the income you have received from them.
However, you don’t get to wait until you file your tax return to pay your taxes. Rideshare drivers should pay estimated taxes throughout the year at the end of each quarter. If you don’t pay estimated taxes as you go or don’t pay enough, you may face additional fines as a penalty for underpayment.
Here are the estimated tax payment deadlines each year:
- First quarter deadline: April 15.
- Second quarter deadline: June 15.
- Third quarter deadline: September 15
- Fourth quarter deadline: January 15 of the following year
You can calculate your estimated tax payments with Form 1040-ES or by consulting an accountant. Paying your taxes online can be done by credit card or bank account transfer.
Understanding Your 1099
Rideshare companies may provide you with multiple 1099 tax forms. Together these represent your primary income through the rideshare platforms.
Form 1099-K reports payment card and third-party network transaction. This includes virtually all of the income you earned by accepting credit card payments. This form also includes the income earned for each month of the year and the number of total transactions.
Your 1099 does not include any tolls or commissions charged by the rideshare company.
If you met specific criteria for a promotion, bonus, or if you referred multiple new people to work for the rideshare company, you may receive form 1099-NEC for nonemployee compensation (Although in the past, this would’ve been form 1099-MISC).
If you earned $600 or more this way, you will receive form 1099-NEC. Whether or not you receive form 1099-NEC or form 1099-MISC, you should compile all income received and combine it with form 1099-K for income tax reporting purposes.
IRS form 1040 is your personal tax return. Schedule C is an accompanying piece of that form in which you report your profit or loss from your rideshare business.
You use Schedule C to report your independent business activity as a part of your larger return. The 1099 forms you receive from rideshare companies should give you most of the information you need.
Filing Out Your Rideshare Tax Return
When it comes time to file your personal income tax return by the IRS deadline each April, make sure you go carefully through each step. Follow these steps to help you complete your paperwork:
Calculate Your Gross Income from Rideshare
Your first step is to simply find your gross rideshare income for the tax year in question. This is your total amount of revenue without anything adjusted or deducted.
If you worked for multiple rideshare companies, you might receive various forms reporting these streams of income. You will add together the income listed on each form 1099-K and form 1099-NEC, and then you should report this total as your gross income.
Your next step is a potentially complicated but significant one. As a self-employed individual, you can claim business expenses as tax deductions from your income. Less of your income will be subject to taxes, so you’ll owe less in taxes.
Many different expenses are eligible to be deducted from your taxable income. As you get started in claiming deductions, it is highly recommended that you login into your account with the rideshare company and obtain the information on any tip income you received, as well as tolls and commissions you paid.
You can also deduct income for car expenses based on the miles you drove for your job. However, you must maintain a mileage log to claim the standard mileage deduction. The standard mileage rate for 2020 is $0.575 per mile. That means that if you drove for 1,000 miles for business purposes, you may be able to claim $575 as a deduction.
If you purchased a new vehicle, you might be able to claim a depreciation expense. This is a tax write-off for the wear and tear sustained on your vehicle while using it for business purposes.
If you maintain a separate area in your home where you conduct business activities or keep records together, you may be able to claim the Home Office Deduction as well.
Here are some of the most important rideshare driver tax deductions you should claim if possible:
- Business mileage
- Lease payments
- Vehicle registration fees
- Parking costs
- Toll fees
- Mobile phone costs
- Other rideshare platform-related charges
Calculate Net Profit
Once you have put together all of your deductions, you can calculate your net profit, which is your taxable income. Reduce your gross income by your expenses and find out what your actual profit was as a business. Then you can report this on your tax return, and your primary income tax amount due will be calculated based on your net profits and your income tax bracket.
Calculate Self-Employment Tax
Rideshare drivers are also subject to self-employment taxes. These are calculated separately from income taxes, but they are similarly counted according to your net profits. These are taxes that you would split with an employer if you were not self-employed.
Generally, only 92.35 percent of your net profits from self-employment income are subject to SE tax. This is a benefit meant to mirror deductions employers receive when they pay withholding for their employees.
The SE tax rate is 15.3 percent, including 12.4 percent for Social Security and 2.9 percent for Medicare. To calculate an estimate of your self-employment tax, you’ll want to find 92.35% of your net profits and then apply the 15.3 percent tax rate.
Consider Working with an Accountant
There’s a lot to remember and so many moving parts, but filing your taxes doesn’t have to be a painful ordeal. If you’re worried about leaving money on the table or not fully compiling with your legal requirements, don’t hesitate to seek help.
If you own your own business or are self-employed as a rideshare driver, an accountant can help you file your taxes correctly and keep you from making any mistakes. Your accountant can also help determine how much you should pay for your quarterly ES Tax payments.
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.