This year, thousands of people became drivers for Uber and Lyft. Are you one of them? If so, this may be your first time dealing with taxes as a self-employed individual.
Being an Uber or Lyft driver is not all about driving. Your IRS tax filing status as a self-employed worker is the same as that of a business. Whether you are doing ridesharing as a side gig or a full-time job, you need to be aware of the tax implications.
Tax season can be extremely stressful for rideshare drivers who are self-employed. As drivers have more income documents, expenses, and tax forms to keep track of than the average taxpayer, they have a lot of information to sort through before they can file their own taxes or have them prepared by an accountant.
With this comprehensive guide, you'll learn how much tax you'll have to pay, how to pay less, and how to file your taxes as a rideshare driver.
Do Uber and Lyft drivers need to pay taxes?
Yes - you must file a tax return and report your driving income to the IRS if you earn $400 or more through Uber or Lyft.
Drivers of Uber and Lyft report their income as sole proprietorships, which allows them to declare business income on their personal tax returns. In the event that you earn less than $400 from Uber or Lyft, you may still have to file and report your earnings.
The IRS does not consider Uber drivers or Lyft drivers to be employees. Rather, rideshare services treat them as independent contractors, which means they don't withhold taxes from their payments. Also, independent contractors receive 1099s at the end of the year instead of W-2s.
You should understand that you are probably not an employee of a ride-sharing service such as Uber, Lyft, or any other car-sharing service when you drive for one. Typically, the drivers employed by these companies are independent contractors, so there are tax implications both at filing time and year-round.
Regardless of whether you drive for Uber and Lyft full-time or part-time, independent contractors are small business owners in the eyes of the IRS. That means you owe taxes on the income you earn from ridesharing.
What taxes do Uber and Lyft drivers pay?
There are two kinds of taxes that Uber and Lyft drivers pay when they file their taxes:
Self-employment taxes are essentially Social Security or Medicare taxes for self-employed individuals. Self-employment taxes are due if your ridesharing income exceeds $400.
The self-employment tax rate for 2021 is 15.3% of the first 92.35% of your net earnings from self-employment. The emphasis here is on net earnings. Expenses for your business can therefore be deducted to reduce the amount of tax you have to pay.
Which forms do you use to file self-employment taxes?
Your profit will be reported to the IRS on Schedule C. The form asks you to report all of your business income (Uber or Lyft income) and business tax deductions (expenses). The amount of taxes you pay depends on your net income, which is the amount of income minus any business tax deductions.
In addition to self-employment taxes, independent contractors must pay regular income taxes. In contrast to self-employment taxes, income taxes do not have a standard rate. Your tax bill will vary depending on your other income, your filing status, your tax deductions and tax credits, and your tax bracket.
In general, you should set aside 25-30% of your net income to cover self-employment and income taxes.
Which forms do you use to file income taxes?
To report your earnings, you will use IRS Form 1040.
In Schedule C, you'll keep track of your profits, expenses, and losses, including all your business deductions.
On Schedule 1, you will list the final amount of your business income, even if that was your only source of earnings for the year. You can also deduct all of your income on your Form 1040 using your standard deduction or itemized deductions.
Your taxes will be paid directly to the IRS as an independent contractor. In order to avoid a big tax bill at year's end and meet IRS regulations, you can pay these taxes quarterly.
How to file taxes as an Uber or Lyft driver
As a rideshare driver, there are four key steps to filing your taxes.
- Learn how self-employment taxes work. You have to pay self-employment taxes in addition to income taxes. As a result, you may have a higher tax bill.
- Keep track of your tax deductions. Tax deductions are available for business expenses, which can reduce your tax burden. Keeping a mileage log and compiling a list of these tax deductions will ensure that you are prepared to file.
- Taxes should be paid all year round. Your taxes are not deducted from your income automatically. You should make estimated tax payments throughout the year to avoid penalties.
- Make sure you file your taxes. Schedule C and Schedule SE should be attached to Form 1040. On your driver dashboard, you'll see the rideshare income needed for these forms.
Uber and Lyft, unlike other employers, do not provide benefits such as sick leave or health insurance. You do not need to fill out a W-4 form for withholding taxes throughout the year when you sign up with the company. Furthermore, Uber and Lyft won't pay a portion of your taxes for you.
Understanding your Uber 1099s
As far as Uber is concerned, you're an independent contractor providing a service, and not an employee. As a result, Uber does not withhold taxes from your payments. In addition, your earnings are reported on 1099 forms rather than W-2 forms.
Uber driver-partners may receive two Uber 1099s:
The form 1099-K reflects the total amount your passengers have paid you for rides. Included in this amount is all the money you collected from passengers, including the Uber commission. Therefore, the amount shown on Box 1a of the form is greater than what you actually received. As a result, you pay taxes only on what you earned, not the additional fees.
You may use Form 1099-NEC (formerly 1099-MISC) to report any other income you receive, such as referrals and bonuses other than those related to driving.
Uber does not have to issue a 1099-K if you processed fewer than 200 transactions or earned less than $20,000. Similarly, Uber isn't required to provide a 1099-NEC if you weren't paid more than $600.
Using Schedule C
Your 1099 income will likely be reported on Schedule C, Profit or Loss from Business. You do not have to include the 1099 forms with your tax return since Uber reports this information directly to the IRS. You can also claim business expenses on Schedule C.
You will enter the difference - known as the business income or loss - on line 3 of Schedule 1 for Form 1040 after deducting your business expenses.
Schedule SE also uses this income amount to calculate your self-employment taxes (for Medicare and Social Security).
Uber provides you with a tax summary that breaks down the totals of your 1099-K and 1099-NEC so you can get a solid start on your business tax deductions. In addition to Uber booking fees, the tax summary displays other fees, such as tolls, other booking fees, and split fare fees. These fees can be deducted as business expenses on Schedule C, so you don't have to pay taxes on them.
Paying Quarterly Estimated Taxes
As independent contractors, rideshare drivers need to make sure they pay their taxes on time.
An employer withholds medicare and social security taxes from their payrolls. Since self-employed workers do not have withholding, they must pay their own taxes during the tax year.
Drivers must pay their estimated tax payments two weeks after the end of each quarter, just like all other business owners. Accounting software, a tool, or a tax professional can help you calculate your estimated tax payment.
Helpful Resource: Complete Guide to Estimated Taxes
You must pay estimated taxes if you expect to owe more than $1,000 in taxes (roughly $5,000 in self-employment income). The IRS may charge you a penalty if you fail to make estimated tax payments.
If you owe taxes for last year, you must pay 100 percent of that tax or 90 percent of the estimated taxes for this year. Self-employment income over $150,000 is subject to a 110 percent tax rate. To estimate your yearly salary if you're a new driver, multiply your weekly earnings by 12.
Self-employed individuals usually pay estimated taxes quarterly, but you can tailor your schedule to fit your needs. Taxes on self-employment, for example, can be treated as a bill, and a portion of it can be paid every month when other bills are due.
Payments are due four times a year on the following dates:
|Quarterly Estimated Taxes Due
|January 1 - March 1
|April 1 - May 31
|June 1 - August 31
|September 1 - December 31
|January 15 of the next year
Tax Deductions for Uber and Lyft Drivers
Tax deductions are available for rideshare drivers to use for both business and personal purposes. You can deduct the entire cost of owning and operating your car if you use it only for business purposes. In the event that you use your vehicle both for business and for personal reasons, you can only deduct the business use costs.
Deductions for mileage and the business use of your car
The Uber tax summary includes online miles for all trips, including trips waiting for a rider, en-route to a rider, and while on a ride.
Additionally, you can claim any other business-related mileage, like the mileage you drove to ride requests, the mileage you drove after dropping off passengers and before rides were canceled. You must keep accurate records of this mileage.
You can calculate the business use of your car in two ways:
- The actual cost method. You are allowed to deduct the costs of operating the vehicle, including gasoline, oil, insurance, registration, repairs, maintenance, and lease payments.
- The standard method. You can also use the standard mileage deduction provided by the IRS. This rate is 56 cents/mile of business use for the 2021 tax year.
It's definitely easier to utilize the standard IRS mileage deduction, which usually results in a higher deduction. All you have to do is multiply your business miles by the IRS rate.
In the event that you use the same vehicle for your ridesharing business and for personal transportation, you must keep accurate records to ensure that the two are distinct. You can deduct only the expenses related to the use of your car for business purposes. Unless you have mileage logs, receipts, or other documentation, the IRS may disallow any business expenses.
Deductions for mobile phone expenses
Smartphone expenses are deductible because they are essential to your business. Examples include:
- Cost of the phone itself
- Your carrier's billing charges
- Accessories that are essential to your business, such as chargers, mounts, and cradles
In the same way as your car, you can deduct only those smartphone expenses that are directly related to your business. Therefore, many Uber drivers purchase a brand new phone that is exclusively used for Uber business. In that case, all costs associated with the phone would be deductible from their taxes.
Almost any expense incurred for your ridesharing business can be deducted from your taxes. Your car and mobile phone are included in this, but also:
- Bottled water, snacks and amenities for customers
- Business taxes and licenses
- City and airport fees
- Freeway, highway, and bridge tolls
- Car tool kit and first aid kit
- Tire inflator and pressure gauge
- Portable battery jump pack
- Flashlights and flares
- Roadside assistance plans
Get help with Uber taxes
Uber drivers, regardless of how long they have been in the business or how recently they entered it, have one disadvantage amongst its many self-employment benefits: taxes.
If you aren't familiar with self-employment taxes, it can be difficult to deal with them. However, there's no need to worry. It is essential to understand what income taxes you are liable for as soon as possible.
Taxes for Uber and Lyft can be complicated. To be sure you claim all of the deductions you are entitled to, it is important to work with an experienced accountant.
Do you need help with your taxes?
Finding the right accountant has never been easier. In just 5 minutes, we'll get to know you and the kind of help you're looking for.