An Expert Explains: Avoiding Tax Problems if You’re a Rideshare Driver
November 9, 2018
Driving for a rideshare company, like Uber or Lyft, can be a great way to earn some cash and embrace your entrepreneurial attitude. It’s all part of the new “gig” economy, which is transforming the traditional taxi cab industry.
It’s important to know that if you’re considering driving for a rideshare company (or if you already are) there are a few things that you will need to handle on your own.
The first is insurance – you will need a special, relatively inexpensive addition to your car insurance to avoid coverage gaps. The second is taxes. And this is one you’ll need to plan for.
Rideshare Driver Tax Information
When you sign on to drive for a rideshare company, you’re technically categorized as an independent contractor by the Internal Revenue Service. That means you won’t receive a W-2 at the end of the year, like an employee of a corporation would.
Instead – and this is the most important piece of rideshare driver tax information – you’ll receive a Form 1099 that you’ll use to file your taxes.
The most significant difference for rideshare drivers is that you’re not considered employees and as such must complete the IRS Schedule C Form.
You will be on your own for filing and paying your taxes. The rideshare companies don’t withhold medicare, social security, state and federal taxes from your pay.
For new drivers who are not used to paying taxes for themselves, this can be both confusing and burdensome. It is important, though, to observe and comply with IRS regulations for independent contractors.
How do rideshare drivers file and pay taxes? Step One
The first step to accurately calculate taxes that you owe is to understand the deductions you’re entitled to.
Expenses for auto maintenance, gas, oil, parking fees, tolls or in some cases car repairs can be deducted based on IRS guidelines. Other expenses might be on the list such as mobile phone expenses related to the business, additional insurance, or even water, candy or gum that may be provided to passengers.
When deducting these as actual expenses, it is essential to keep careful records, proper documentation and all receipts.
Alternatively, rideshare drivers can use the standard mileage deduction. Rather than tracking individual costs, drivers can calculate the number of miles per trips multiplied by the annual IRS rate.
For 2018, the standard mileage rate for the use of a car (also vans, pickups or panel trucks) is $0.545 for every mile of business travel driven which is up one cent from 2017.
Adding tolls to the mileage provides you with the total deduction you can apply to your tax return under this process. In this instance, mileage logs provide you with proof of your expenses and ensure that you are able to take the full deduction available to you.
As an independent contractor, you will need to be prepared to pay (possibly substantial) amounts of money when filing tax returns. Again, this is because rideshare companies do not withhold anything on your behalf.
So, you need to pay estimated federal and state taxes (and consider multiple states if driving in more than one state) quarterly. Because you are classified as self-employed, you are required to prepay taxes on April 15, June 15, Sept. 15 and Jan. 15 of the following year if you expect to owe at least $1,000 in federal tax from your rideshare driving.
It’s Not Easy
The differences between being a W-2 employee or a 1099 independent contractor can be difficult to navigate, especially for first time rideshare drivers/entrepreneurs. The best thing to do is consult with a Certified Public Accountant to help you start off on the right path.