Are you one of the millions of Americans using a personal vehicle to make money as an Uber driver? It has become easy to earn some extra cash on the side – or even with full-time hours – working for car sharing services like Uber and Lyft. While seeing dollar signs in your eyes can be a reality, you certainly need to ensure you’re playing by all the IRS rules when generating this income.
Before you agree to your next fare, Consider these tax tips for Uber drivers:
Understand your status as a worker for Uber.
In most cases, Uber drivers and those who work for similar car services are not considered W-2 employees. Instead, they are classified as independent contractors who are self-employed sole proprietors, unless they have a separate business entity like an LLC or corporation set up. In any event, you’ll be on the hook for paying your own federal, state, and local income taxes, along with self-employment tax and Social Security and Medicare taxes. This is because Uber does not withhold these taxes from its drivers’ paychecks. When added up, your tax payments can easily exceed 30% of your total income, so be wise with your money and set aside a cut of each payment you receive.
Earners of at least $400 per year in 1099 net contract income must pay self-employment taxes. So, if you transport a large amount of Uber riders throughout a given year, you’ll likely owe this tax on the money you make.
In addition, you may be on the hook for making quarterly estimated tax payments throughout the year as well.
Be sure you use and file the proper tax forms for Uber work.
As an Uber driver and independent contractor, you should receive a copy of Form 1099-MISC from Uber. This form will contain all of your income from a specific year. You must report this taxable income under Schedule C of Form 1040 when you file your personal federal income tax return with Uncle Sam.
If you’re required to make estimated tax payments, use Form 1040-ES to do so. These payments should be made throughout the year on January 15th, April 15th, June 15th, and September 15th.
Take deductions on your personal vehicle.
Because you’re a 1099 independent contractor and not a formal W-2 employee, you are eligible to write off your expenses for driving your customers around town. Business use of your car is likely your biggest tax savings opportunity.
When taking a vehicle deduction, you can either deduct mileage or actual expenses. For tax year 2015, the IRS set the standard mileage rate at 57.5 cents per mile, meaning you can write off this amount on your income tax return for each mile you drive. If you claim actual expenses, you may include fuel, oil changes, vehicle repairs, insurance, and depreciation in your deduction amount.
Keep in mind that if you drive your car for both personal trips and Uber fares, you’re only allowed to take the vehicle deduction on expenses related to your Uber trips. You must also maintain thorough records, including a mileage log or expense receipts to prove your deductions to the IRS.
Consider additional tax deductions for Uber drivers.
Many on-demand car service companies require their drivers to pay a commission back to the company on any money the drivers earn. The good news is that this commission is considered deductible. Use of a smartphone is typically necessary to conduct this work as well, and any expenses you incur using your personal phone or a separate phone you purchase for your Uber work can be deducted. If you provide pretzels or bottled water to passengers, such expenditures also qualify for a write-off since they are business expenses.
Always report tip income on your return.
While Uber is predominantly a noncash business with passengers paying drivers via a credit or debit card that is connected to an online account, tips could still be a factor. Uber does not restrict its drivers from accepting cash tips from riders. However, like most tips, this money is considered income and should be reported on your tax return. There’s a common misconception that cash is tax-free income, but it should be reported based on longstanding IRS guidelines.