If you drive for Uber, Lyft, or other rideshare platforms, you’re responsible for tracking and paying your own taxes. Here’s what you need to know about rideshare driver taxes.
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Are you an employee? Do you get a W2 from Uber or Lyft?
Some states have passed laws or had lawsuits ruling that rideshare drivers are employees. If you’re in one of those states, you should receive a W-2.
If you’re an employee, stop reading. To file as an employee, simply add the wages from your W-2 to line 1 of your tax return. Effective in 2018, employees may not deduct unreimbursed expenses as itemized deductions.
What’s the difference between a W2, 1099-MISC, 1099-NEC, and 1099-K?
- IRS Form W2 reports employee wages.
- IRS Form 1099-NEC reports independent contractor income that the company you contracted with paid directly to you. This income used to be on Form 1099-MISC along with other types of income. The IRS now uses Form 1099-NEC instead for their tracking purposes.
- IRS Form 1099-K reports independent contractor income that you received from an electronic payment network such as PayPal, Stripe, or other system.
Form 1099-K is new, so some companies still erroneously report income that should go on Form 1099-K on Form 1099-MISC. Be on the lookout for this so you don’t have double reported income that could result in you mistakenly reporting that you owe more taxes or receiving a CP2000 notice because the IRS thought you made more than you did.
What’s your income?
Your income includes all the money you receive for your ridesharing services. This includes both cash and electronic payments whether or not you receive a 1099.
Tips are taxable self-employment income the same as your fares. Waiters and taxi drivers have previously tried to have tips taxed as non-taxable gifts and failed. Trying to say that tips are gifts could result in heavy fines or tax evasion charges for taking a frivolous or fraudulent position.
Cleaning fees, toll reimbursements, and similar payments are also part of your income. You can separately deduct the corresponding expenses. If the fee is greater than the expense, your taxable income increases. If the fee is equal to your taxable expense, your taxable income usually won’t change, but you still need to report the income and expense separately. If the fee is less than your expense, the loss on this item can reduce your other taxable income.
Can you deduct mileage?
You can generally take a deduction for all mileage while you are active on the platform. This includes when you have a fare in your car, driving to pick up a fare, and driving around trying to find a fare.
If you turn your app off to head home or don’t turn your app on as soon as you leave home, the miles between your home and where you start/finish working would be non-deductible commuting miles. Even when you have the app on, there is debate on whether mileage between your home and first or last fare counts as commuting or business miles.
Note that many ridesharing apps only track your miles while the meter is running. You should track miles on your own to account for the off-meter miles. You can either download a separate mileage tracking app or write down your odometer reading at the start and end of your shift.
What expenses does the standard mileage deduction cover?
The standard mileage deduction covers the expenses necessary to keep your car running. This includes:
- DMV fees
You can choose to track all of these expenses separately and claim that amount instead of taking the standard mileage deduction. This requires you to keep track of all of your receipts and why they were necessary business expenses. In addition to saving that hassle, most people with consumer cars come out ahead taking the standard mileage rate.
Can you deduct your meals while you’re working?
No. Stopping for lunch in the middle of your shift does not make it a business expense. You can typically only deduct meals while entertaining a client or on a multi-day trip away from home.
What else can you deduct?
The following items are generally allowed deductions.
- Fees to apply for a platform or for a background check.
- Water and candy you provide to your riders.
- Transaction fees (if your income was reported as the gross amount before fees instead of the net amount after fees).
- Signs or lighting to identify you as a rideshare driver.
The following items are generally not deductible because they are also for your own personal use.
- Cellphone bills.
- Phone chargers, cellphone mounts, and similar accessories.
- Dash cams.
- Floor mats and other improvements to your car.
Some of the above items could be partially deductible if you can prove to the IRS what portion of the expense was for business use. This is hard to do because so many people try to deduct personal expenses, and the IRS auditor will be very skeptical.
Are rideshare drivers eligible for the 20% Qualified Business Income deduction under Section 199A?
Yes, rideshare drivers are eligible for the new 20% deduction. This means that you will effectively pay income tax on 80% of your net profit instead of 100% of your net profit.
If your total income from all sources exceeds $157,500 as a single filer or $315,000 as a joint filer, your deduction may be reduced or eliminated.
How much do rideshare drivers pay In taxes?
Expect to pay at least a 25% tax rate. This includes 15.3% in self-employment taxes for Social Security and Medicare. It also includes your income tax rate depending on your tax bracket.
If you live in a state with income taxes, you’ll also need to file a state tax return.
Can rideshare drivers open a retirement account to lower their tax bill?
Your net profit counts as earned income. This allows you to contribute to a Traditional or Roth IRA even if you don’t have other income (e.g., students or retirees). As a Schedule C 1099 filer, you may also open a SEP IRA or Solo 401(k). These small business retirement plans allow you to contribute up to 20% of your profits on a tax-deductible basis.
SEP IRAs are usually the easiest to open and have the lowest (or no) fees. The advantage to a Solo 401(k) is being able to make up to $18,500 in employee contributions if you don’t have a 401(k) from a different job or if your main 401(k) has poor investment options.
How do rideshare drivers pay taxes?
Rideshare drivers should make estimated tax payments each quarter. If rideshare driving is a small portion of your income, you may be able to increase your income tax withholding at your day job instead.
If you wait until April to pay, you could have to pay a penalty if you owe more than $1,000.
What tax software should you use?
Read this guide to figure out the best tax software for a rideshare driver.