Working as a driver for Uber or Lyft can be a great way to earn money as part of the gig economy. Whether your rideshare job is your main gig or just a side hustle, you may have questions about your tax liabilities and possible tax deductions.
Uber and Lyft drivers are considered independent contractors rather than full-time employees. This means you must file income taxes quarterly, using Internal Revenue Service (IRS) form 1099. Tax payments are not withheld by your employer from each paycheck. Instead, you need to set money aside in a savings account each pay period in order to save up for your quarterly tax bill.
One of the big advantages of this scenario is that your employment status grants you valuable tax deductions that allow you to decrease your taxable income. Play your cards right as a rideshare driver, and you can subtract the deductions below from your income before determining you total tax liability.
Uber and Lyft drivers are independent contractors
The terms employee and independent contractor tend to get tossed around rather loosely—especially when discussing the gig economy, and Uber and Lyft. When it comes to your taxes, however, these terms have very specific meanings. Lyft and Uber drivers are considered independent contractors (for now; California is trying to change that status). As a rideshare driver, you need to pay extra attention to how you handle your taxes, and you should take full advantage of tax deductions.
Employees and independent contractors may do similar or even the exact same work for a company. But when it comes to taxes, a business withholds income tax, Social Security contributions and Medicare taxes from the salary paid out to employees, but not for independent contractors. Employment and labor laws are applied differently to independent contractors and to employees. Independent contractors do their work without the same level of control there is with an employee.
Both Uber and Lyft provide online resources to help their drivers through the sometimes complicated process of figuring out taxes as an independent contractor. Lyft also has a promotional discount for drivers interested in using TurboTax.
Tax deductions for Uber and Lyft drivers
There are six major tax deductions that Lyft and Uber drivers should know about and take advantage of when doing their income taxes:
|Qualified business income deduction||Up to 20% of business income may be deducted from overall taxable income|
|Expenses from operating your vehicle||Costs including gas, repairs, insurance, lease payments, etc.|
|Standard mileage deduction||58 cents per mile driven for business use|
|Provisions for customers||Bottled water, snacks and other expenses used toward riders|
|Tolls and parking fees||Costs incurred for using roads and parking|
|Phone||Any phone charges for business reasons|
- Qualified business income deduction: Uber and Lyft drivers may claim a qualified business income deduction. Add up all your profits for the tax filing period and subtract your business expenses incurred over the same period from this total. The resulting figure is your total business income. You may deduct up to 20% of your business income from your overall taxable income. To claim the deduction as a rideshare driver, your taxable income can’t be more than $157,500, or $315,000 if you’re married and filing jointly. The line for the QBI deduction is line 9 on Form 1040.
- Expenses from operating your vehicle: Any expense related to the running of your business can be considered deductible. If you’re a Lyft or Uber driver, the most obvious qualifying expenses are those relating to your vehicle. There are two options to go about deducting expenses for your car — but keep in mind, you may choose one or the other, but not both. The first option is to deduct what are known as the “actual costs” of operating your vehicle for business purposes. That can include money for gas, oil, repairs, insurance, maintenance, lease payments, depreciation of the model or other costs associated with upkeep.
- Standard mileage deduction: The second option is to deduct expenses relating to the business operation of your vehicle via the standard mileage deduction. The 2019 standard mileage rate permitted by the IRS is 58 cents per mile driven for business use, an increase of 3.5 cents from the 2018 rate. You can use that rate to calculate how much of your spending on the vehicle can be deducted when doing your taxes.
- Provisions for customers: Your riders love it when they get into your and are offered free bottles of water, mints and the like. If you stock beverages and snacks in your car for customers, those expenses may be deducted.
- Tolls and parking fees: As long as you’re paying them in the course of operating your driving business, you can deduct tolls and parking fees.
- Phone expenses: Your smartphone is crucial to being a Lyft or Uber driver, since it connects you to not only the app you’re working with but also to customers riding in your vehicle. You can calculate the portion of your phone bill that is dedicated to business use and deduct that amount—personal phone use does not qualify as a business expense. It may also make sense to have a separate phone and phone plan dedicated to your business use.
How to file taxes as an Uber or Lyft driver
You’ll find that it’s more complicated to file your taxes when you’re an Uber or a Lyft driver. As an independent contractor, you need to track your own profits, losses and business expenses. At tax time, you’ll be juggling and filling out more forms than you may be used to as a regular employee.
Luckily, if you earn above certain thresholds Uber and Lyft are required to send you 1099 forms, which you use file your tax return. There are two versions of this form that you may receive:
- Form 1099-K covers the income generated from payment cards, such as debit cards, credit cards and gift cards. If you cleared more than 200 transactions and $20,000 in income a year for a single employer, they must send you a 1099-K.
- Form 1099-MISC tracks miscellaneous income, such as tips, cancellation fees, and bonus payments from Uber and Lyft. You should also receive a 1099-MISC if you received $600 or more in miscellaneous income.
In addition to these forms, Uber and Lyft should send you a tax summary. This is not part of your tax return and does not need to be filed with the IRS, but it can help you figure out your tax return if you earn below the thresholds listed above. The summary outlines your gross earnings, bonus earnings, total miles driven, and operating and vehicle expenses.
Fill out the correct tax forms
Once you have your 1099 forms, it’s time to fill out your tax return. You’ll need to fill out the following forms:
- Form 1040: This is your individual tax return, where you record all your annual income, including totals from W-2s and 1099s. With Form 1040, you either claim the standard deduction or chose to itemize deductions if you’re eligible.
- Schedule C to Form 1040: This is where you record your profits and losses. Profits include gross earnings, and losses are your business expenses, such as the depreciation of your car, total mileage. Losses can be deducted from your business profit.
- Schedule 1 to Form 1040: This is where you record all “additional income,” which includes all your rideshare profits even if driving for Uber and Lyft is your only source of income.
Take all the deductions you can
As an independent contractor, you need to embrace all the benefits of your status, especially when it comes to reducing your taxes. When you’re self-employed, the burden is on you to figure out what you need to have ready for tax time and what you can deduct from your taxable income.
Remember to keep thorough records for everything in case the IRS wants to check them in order for you to reap the full rewards of those deductions. And don’t be afraid to seek out help when needed from a tax professional.