Ridesharing apps such as Uber and Lyft have become incredibly popular alternatives to more conventional means of transportation, sometimes even making yellow cabs appear to be obsolete. Transportation is now cashless, convenient and less expensive—one might even say seamless. The drivers are people who may be in any life/work situation, and met the qualifications to drive and quite easily can become successful in their self-employment.
The term “self-employed” might not be how Uber drivers think of themselves, but they are. There are approximately 750,000 Uber drivers and 1.4 million Lyft drivers in the United States. There are financial implications to the self-employed status that many drivers may be blissfully unaware of.
Self-employed people are liable to report their earnings on a Schedule C, the bottom line of which will get reported on their individual income tax return. Uber drivers are responsible to pay income taxes, if applicable, as well as self-employment taxes (employer and employee contributions to Social Security and Medicare) on their return. The Schedule C income from driving can be reduced by expenses, minimizing income taxes, including the potential use of a method that reduces income by a standard rate per mile driven for business (54.5 cents per mile driven in 2018) instead of actual car and truck expenses.
Example: if a driver made $10,000 driving for Lyft in 2018 and drove 10,000 miles, under this method $5,450 of that income is nontaxable prior to any other expenses being taken on the Schedule C.
Since the direct deposits from Uber throughout the year may have felt like cash in their pocket to a driver, being able to take this expense in addition to any other business expenses and possible deductions (such as the new Qualified Business Income Deduction), can be a nice tax break.
Drivers Beware. You need to act like they are business owners and not employees, in their day-to-day operations, from the start of their self-employment. Primarily, this includes keeping track of their miles and expenses. When Uber issues a Form 1099-Misc to a driver for a tax year and furnishes it to the IRS (making the driver liable to report their earning), for instance, they are kind enough to include a schedule in the driver’s package that shows how many miles they drove when passengers were in their car. But those are the only miles they include: not distances driven prior to getting passengers, between passengers, and after having passengers, which can amount to most of the driving an Uber driver does on some days and are also deductible miles.
If you are an Uber or Lyft driver, my advice to you a few months before tax season is to keep a journal of all of your miles and expenses, save receipts, and take charge of your own business.
By Alexander Dixon, Davis & Hodgdon Associates CPAs
Davis & Hodgdon Associates CPAs has been assisting Vermont individuals and business owners with tax consulting and retirement planning for more than 25 years. Call our office in Williston 802.878.1963 or Rutland 802. 775-7132 to schedule a tax planning strategy session today.