Having your own schedule seems to be the way to go now-a-days, but what is the off-set for that freedom? Our Uber and Lyft drivers are able to turn the apps on and off whenever they are ready, but are they prepared to take on that tax burden? Let's dig in...
On-demand drivers for ridesharing companies, such as Uber or Lyft, are not employees and are instead considered independent contractors for tax purposes.
Being an independent contractor means you are self-employed. This means that the company is not withholding any taxes from your pay and you will be responsible for paying your own federal income tax (and state income tax, if applicable), and Social Security and Medicare (FICA) taxes (self-employment tax) on your net profit as well as 100% of any associated costs.
You can deduct car expenses associated with your on-demand driving business. You generally can use either the standard mileage rate or your actual car expenses to figure your deductible car expenses. If you qualify to use both methods, you may want to figure your deduction both ways to see which gives you a larger deduction. Regardless of which method you use, you should note your odometer reading at the beginning and end of the year and all business-related mileage. Ridesharing companies generally only keep track of the mileage for your actual fares, not the additional miles you may spend driving around waiting to pick up fares and driving to and from fares.
In addition to car expenses, you may incur some other common operating expenses you can deduct to offset your income. You can deduct an expense if it is both ordinary and necessary. An ordinary expense is common and accepted in your particular line of work. A necessary expense is helpful and appropriate for work. An expense need not be required to be considered necessary. Even though an expense may be ordinary and necessary, the cost may not be deductible.
Example: Jessica is a part-time driver for Uber who uses the standard mileage rate. In 2019, her total fare trip mileage is 420 miles, but she actually drives 525 total miles related to her business. She pays $50 in tolls while driving. The business percentage of her annual cell phone expense is $198. Jessica provides refreshments (bottled water,soda, snacks) to her riders for a total cost of $100. She receives Form 1099-K, which shows her total income (fares/fees) as $2,112. She also receives $85 in referral bonuses from Uber and pays Uber service fees totaling $375.
There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves summarizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please book us in advance if you have questions about the tax effects of a transaction or event.
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