The Friendly Guide To RideShare Taxes
The Friendly Guide To 2015 RideShare Taxes
We all know that feeling of dread when it comes to doing your taxes each year. Figuring out exactly what you can claim, where the legal loopholes are, and how to understand the system is a complicated business. However doing your taxes doesn’t have to be strenuous, and with our comprehensive Guide to Rideshare Taxes, you will find all the information you need to do your tax return accurately, discover the deductions you are entitled to, and the best software or CPA to choose to help make this a smooth and hassle-free process.
Disclaimer: Please note that this guide has been written for informational purposes only, and therefore cannot be taken as fact. The information in this guide, or any correspondence or comments relating to this guide in no way creates an advisory, or a personal service relationship. If you are unsure of anything relating to your taxes please seek advice from a tax professional.
Introduction to rideshare taxes
Uber, Lyft, Sidecar, Pace, Haxi, Zimride – commercial ride-sharing, ride-sourcing and taxi-cab alternatives have never had it so good. The business model is sufficiently self-sustaining, as a lucrative option to earn more for vehicle owners, while also adding essential convenience for smartphone savvy customers. Adoption hurdles still exist in form of insurance, regulations, licensure, training etc.
After several years of opposition from public transit units and metropolitan regulatory agencies, mainstream acceptance has arrived in form of new service categories introduced for “Transportation Network Companies”, an umbrella term to cover ride-share services. With the official bracket however, came the newest hurdle – How to estimate the taxes you owe on your ride-share earnings?
It’s New! And not everyone knows it right!
You heard that right. Plenty of Certified Public Accountants (CPAs) and tax personnel are still getting up to speed as the tax documents from ride-sharing services arrive. Add to it, the general ignorance about diversity of 1099, small businesses, sharing economy and massive overhead of tracking deductions and expenses and it quickly becomes a paper monster nightmare.
Fortunately, we have done the hard parts for you, consulting seasoned CPAs and professionals to find out all aspects of filing your ride-sharing taxes.
Filing your ride-share taxes
In the following sections we explain to you the different 1099 documents (at the time of compiling this, Uber, Lyft and Sidecar have already started sending out their 1099s), expenses, deductions, tax implications, tax filing softwares, and the most common tax mistakes.
Keep in mind, while we have had the best legal advice, this information is meant to assist you in filing taxes, and NOT as an alternative to professional tax personnel. It’s always fruitful to educate yourself on the finer points even if a CPA is assisting you.
Remember, no tax professional cares more about your hard-earned money than you do.
Armed with the information above, we look at the tax-filing process.
Sole Proprietorship, Third Party Payment Processors and 1099s
First and foremost, it is important to know what rideshare drivers are classified and how they are taxed. Most rideshare drivers are considered “independent contractors” and according to the letter of the law, operate their own business as a sole proprietorship.
Broadly speaking, ‘sole proprietorship’ refers to a business model there is no distinction between the owner and the business for all legal purposes. So whether you’re working as a carpenter for your friend, or driving your car as a ride-share – you’re the only person owning and operating the business.
Payments for rideshare services are often processed through intermediary payment engines which connect clients with sole proprietors. Google Wallet, Apple Pay, PayPal and Amazon Payments are some of the commonly known options. These are called third party payment processors.
1099-K vs 1099-MISC
The 1099-MISC was the original document which businesses needed to provide to all their suppliers who did $600 or more of business together. Given that several third party processors are tied to corporate credit cards of businesses, often these amounts were (incorrectly) reported twice if the threshold was met on both counts above.
Conversely many self-employed business owners assumed (incorrectly, again!) if they incurred sales of $20k per year via third party payment processors, they need not pay taxes at all.
The 1099-K came into being in 2008 to get rid of these ambiguities. It is now supplied by businesses to their suppliers when the $20,000/200 transaction threshold is met.
Since 2012, 1099-K payments can be noted on 1040 Schedule C on a separate revenue line if your employer/ processor didn’t issue you a 1099-K. Several online services like SherpaShare and Turbotax have dedicated tax filing options for independent contractors, single owner LLCs and sole proprietors.
1099 for Uber
- 2013: Uber began issuing 1099-MISC with the $20k gross fares as their benchmark, excluding several drivers who made between $600 and $20,000, erroneously. Those who didn’t receive their 1099s were confused, assuming that only those who did were liable for tax payments.
- 2014: Uber claimed their policy would be retained, but ended up mailing 1099-K to everyone, regardless of gross sales or number of transactions. It also issued additional 1099-MISC for people who earned bonuses, miscellaneous earnings etc. amounting to more than $600.
1099-K from Uber has the gross amount. It includes tolls, Uber fees, and processor taxes etc. The box in blue below indicates the needful.
1099-MISC has the additional income. The box in green below indicates the needful.
You add both to get total for “Gross Receipts and Sales” (to be entered in Line 1 of Schedule C). This is not your Total Earning!
1099 summary page records all your expenses. These would include everything from Uber Fee, Device Subscription, split fare fees, tolls, safe ride fees and any other mileage Uber charged deductions from your earnings for. This total goes in Line 10 of Schedule C as “Commissions and Fees”.
On-Trip Mileage recorded in the summary does not get deducted by Uber in your 1099-K or 1099-MISC. but it is still a deductible expense which can be accounted for “business miles” in Line 44a. Keep in mind that you’d need to only calculate the business miles and not the personal mileage on the same vehicle.
That’s it! Check Zen99’s breakdown for any further clarifications.
1099 for Lyft
- 2013: Lyft began issuing 1099-MISC with the $600 sales volume benchmark, much like Uber did a year later. But they also stuck to the $20k/200 transactions limit, which was to become a 1099-K standard. Hence, most of the drivers wouldn’t receive a 1099-K eventually.
- That does not mean that Lyft drivers were exempt from taxes!
From here on though, the process is identical to the Uber 1099-K process as mentioned above.
Pick your 1099-MISC earnings (if you got one) from bonuses, mentoring, referral fees etc. Add your gross ride earnings from either your 1099-K (if you made more than $20,000) or from your total earning reports, credit card bills or payment processor tallies. Deduct the ‘Commission and Fees’ amount which would be sum of Lyft’s commission, subscription fee etc. Trust and safety fee is not deductible.
A key difference for Lyft driver summary is that their Driver-mode mileage is the total miles accrued while driving for Lyft. You need to record it in the Line 44 a. as your business mileage, and is deductible.
That’s it! Check Zen99’s breakdown for any further clarifications.
Taxes when Driving for more than one Transportation Network Company
Now of course, we know that many drivers don’t work for a sole TNC. If so the process can be a little different. What you have to do is add up your income from all sources, so if you drive for both Lyft and Uber simply combine the figures, both your income, and Commission fees from each on your Schedule C, paying particular attention to accurately totting up the right figure for your expenses, as we have explained above.
The good news is you still only have to fill out one Schedule C for your rideshare taxation. However, be aware that additional income sources need to be reported on a separate Schedule C. For example,
However, if you’re earning from renting your cabin or farming, you need a separate Schedule C or a Schedule F, respectively.
Official tax policy for Ride-share services
The official policy for all these ride-share services state that you will receive a 1099-K if you meet the $20,000/200 transaction threshold. And you will receive a 1099-MISC if you make $600 or more from referrals, new city bonuses, mentoring etc. this is exactly similar to PayPal or other payment processors.
Beware of the ‘lying by omission’ bit though. Even if you don’t meet either of these, any earning of over $600 as a ride-share driver is akin to earning as an independent contractor, earning for lawn-mowing, painting a fence or babysitting. So keep your logs and pay your taxes. Period!
Once you wrap your head around how you are classified and how you will be taxed, rideshare drivers should then make sure they understand what deductions they are entitled to. Working out what you can and can’t report as a deduction is a tricky business, particularly when it comes to rideshare taxes.
Without having an expert knowledge on 1099 employment, or understanding the correct way to log your expenses, making sure you take full advantage of the deductions available is complicated. There are so many variations and specifications that are necessary to understand to ensure you complete all required forms accurately, and making sure you don’t miss out on deductions is hugely important in ensuring you aren’t paying too much tax.
Deductions Vs Credits
Before we dive in too deep, it is important to understand the difference when it comes to deductions as opposed to credits. Credits are advantageous because this means you will receive the actual money. So whatever you get in credits, you get that in your pocket.
Deductions work differently because this is where you can deduct amounts such as expenses from your actual income. Any deductions you make, you don’t have to pay tax on, as long as they are in line with the IRS definition of what is reasonable and work-related.
Deductions are essentially amounts you’ve already spent during the course of your gross income, but are ‘ordinary and necessary for a business and its given industry’ (as IRS puts it!). So, firstly deductible amount times your tax bracket, are your net savings. And secondly, you can’t randomly deduct anything.
Credits, by contrast are flat amounts the IRS owes you and it would come back to you in full.
Understanding your tax bracket is also important. Tax bracket (or Marginal tax bracket) is the term which is the keyword which must have caught your eye in the section above. In the United States, our tax brackets are progressive, so for every $10,000 – $15,000 increase in gross income, you’re expected to pay 5% more in taxes. So while you belong to 22% federal tax bracket for, say $60,000 in earnings, if you have $5,000 in deductible amounts for start-up costs, business miles or SEP IRA, you save 22% times $5,000 = $1,100. Pretty rad!
Deductions are made off your marginal tax bracket. So, for example, if the amount you make means you are in the 25% tax bracket and you report deductions of $1000 that $1000 deduction will be 25% of $1000 therefore saving you $250. Rideshare drivers have many deductions they can take advantage of, and particularly if you are married and one person is earning a lot more than the other, the person on the lower income can end up paying a lot more tax they should due to the combined income. However as the deductions come off your marginal tax bracket, this is a great way to make savings.
When filling out rideshare taxes, it’s important to know exactly what deductions you are entitled to, and these can make a big difference come the end of the tax year.
Most of you will be aware that the miles you drive on the job can be deducted, and that there is a difference between the standard mileage rate, and the method you use for actual expenses. Let’s first consider the standard mileage rate. In 2014 the standard mileage rate, (which included all operational costs such as maintenance and repairs, gas, oil changes, and any decline in value) stood at 56 cents per mile. Uber helpfully details the number of miles driven in the 1099-K summary, while Lyft does this slightly differently, giving you the total number of miles, only including those undertaken when logged in driver mode.
For drivers who are unable to access these records, you need to ensure you keep a precise record of miles traveled. Keeping accurate records is so important, as the IRS will want to see documented evidence of these figures, so make sure before you set off on each trip you log the starting mileage, as well as the ending mileage when you return. If you don’t want to worry about tracking the mileage on your own, you can use a service like SherpaShare to automatically do it without having to worry about it.
Standard Mileage vs Actual Expenses
Okay, the big debate – what’s going to earn you the most deductions? Actual expenses are a big lot: oil changes, tolls, parking fees, maintenance, tires, license, depreciation and insurance – pretty much every expense which goes towards your ride-share business vehicle is accountable. If you’re meticulous about every log you could end up accounting for a sizeable deduction. However, any detail lost is money lost.
By contrast, Standard Mileage gives you a deduction of ¢56.5/ mile, which I’d think is way more generous. Think of it this way, for every 100 miles you drive, you make perhaps $100 from your ride-share business. But you’re effectively spending on $43.5 and rest is in savings. Let’s be honest – your entire maintenance wouldn’t cost you $56.5 per every $100. Personally, I’d always vote for standard mileage as a better saving option.
Additional deductions can also be logged. General expenses, for example if you wash you car, use your cell phone, or buy refreshments are perfectly reasonable items to log. Even listening to music through payable applications such as Spotify can be claimed. The IRS specifies that all deductions must be considered ‘ordinary and necessary’ – so as long as they are reasonable and work related then put them down.
For example if you have a separate work mobile from you personal use one you will be able to claim the work phone expenses. However if you use your personal phone as your work phone you can only claim back the percentage that you have used it for work related tasks. Any expense you incur during a trip can be logged as long as you keep an accurate record, and evidence such as receipts to prove them.
Business start-up costs can also be deducted up to the amount of $5,000 during your first year. This amount is reduced by the figure that the start-up costs exceed $50,000, and all additional costs on top of this must be gradually written off over a period of time. A great example of this would be when you first get your car inspected -if you need to purchase new tyres to comply with the inspection you can log this as a start-up cost expense and it will therefore be deductible.
Bank Fees are another expense that you should be aware of. Incurring credit card charges, and bank fees are common, particularly when trying to understand the T & C’s and trying to always keep the minimum balances. Annual fees for business cards are another good example, the Chase Ink Business card charges a $95 annual fee, and, because it is a card used solely for business purposes this fee is considered deductible. In fact the good news is that if you are charged any bank or card fees, you can log these fees and deduct them from your income, as long as the charges were made due to business related transactions.
Tax preparation fees
Tax Preparation Fees are worth accounting for if you do decide to hire a CPA or even if you invest in a tax software system to help you with your tax return. These fees can be deducted from your earnings and a great way to save money. A great little website which breaks down exactly how to take advantage of this can be found at The Shared Economy’s CPA website.
SEP IRA contributions
SEP IRA Contributions are also worth considering. Drivers who are self employed can benefit from making payments into a SEP in order to keep savings for retirement, This is advisable as working for yourself means you won’t have the same employer sponsored retirement plans as those working for established companies. Contributions into a SEP are deductible so it’s a win win situation where you end up paying less tax, and saving for your future too.
Self employed business owners also need to pay for their own healthcare insurance. While this is a bugbear for many, it does have its own advantages. Medical, dental and long-term care insurance premiums that you pay out for not only yourself, but also your spouse and dependants can also be deducted, and can save you a lot of money.
How to ensure you take advantage of your deductions
Actual expenses work slightly differently in that these would be defined as costs you undertake to keep your car running. Repairs, oil changes, insurance, the lease fee, registration fee, parking fees, tolls and any decline in value of your vehicle can all be included. The tricky part is that you can only claim for one or the other, so working out which will give you the maximum amount of deductions at the end of the year is vital. The most advisable thing to do is keep a record of both the miles you drive, and your actual expenses.
Whichever totals the most at the end of the year will give you the higher deduction. As an aside, in our experience it is almost always the standard mileage rate that wins out, because it is very unlikely that it is costing you more than 56 cents a mile to operate your vehicle. Remember if you use your car for both work and personal use, you can only claim for the miles driven or the actual expenses paid while you are using your vehicle for work-related purposes.Keeping accurate records is so important, as the IRS will want to see documented evidence of these figures, so make sure before you set off on each trip you log the starting mileage, as well as the ending mileage when you return.
Logging mileage is another interesting topic, particularly if you are using your vehicle for both business and personal trips, as there are many grey areas where you could be left uncertain if it’s OK to log the mileage as a work-related expense. The simple answer is that you could just report the miles you travel whenever you use your vehicle working for Uber and/or Lyft. Both send daily summaries of the miles you have travelled therefore keeping track of this is easy and hassle free.
However, they will only include the miles from when you pick up a passenger, to where you drop them off. What about the miles you drive when you are going to collect them, or the miles you drive when you return? To take full advantage of your deductions it is reasonable to say that as soon as you leave your house you are working, therefore those miles should be included. If you are driving looking for passengers to pick up, you are working, and therefore these miles should be included too.
It gets more complicated if you are using your car for personal use, say you are visiting a rental property you own elsewhere, but during that journey you decide to work, or take a detour to a large city where you know you can get lots of business. Can you deduct these miles? The answer is, it depends how aggressive you want to be. If you feel you can reasonably justify that you were travelling those miles to improve your business i.e. create more income for yourself, then these should be deductible, and the IRS should not challenge you on this – you just have to be prepared to explain yourself if they do.
Lyft and Uber’s tax deduction policies – how do they work?
In this section we also want to address some frequently asked questions that many drivers put to Lyft and Uber, or more general questions about tax deduction. All drivers working for either of these companies get paid with a 1099, but what does this mean exactly? What is the difference between actual milage and total expenses? How do you know what you can deduct, and perhaps, sometime more importantly, how do you know what you can’t?
Trying to talk directly to Lyft and Uber about their policies on tax is like drawing blood from a stone. Probably catalysed by a fear of advising you incorrectly, their standard answer to most tax queries to to contact a tax professional. While its understandable that they don’t want to put themselves in a dangerous position i.e. providing tax advice that could land them with a lawsuit, it is often frustrating that so little information is provided.
As we previously mentioned working as a Rideshare driver for Lyft or Uber means you get paid with a 1099. This can be confusing as with the majority of other jobs employers use W-2 and your tax is simply deducted every week/ month when your pay-check comes through. While it can be disappointing to receive a lower income than you were perhaps expecting, getting paid W-2 is a lot simpler as you don’t have to worry about doing a tax return at the end of the year, and things like state healthcare payments are also taken care of.
Getting paid 1099 however means you get the total amount your earned in that period, and it is your own responsibility, come the end of the financial year to fill out the appropriate forms and pay tax. It comes out in one lump sum and therefore you need to make sure you are putting money aside so you are not left unable to pay. Self employed workers commonly need to fill out a Schedule C in order to report how much income they have gained or money they have lost to the IRS. Put simply, a Schedule C will show the details of your profit and loss for the year.
Remember, if you work for Lyft or Uber you are considered a sole proprietorship, which means you are the exclusive owner of your own business, and therefore you look after your own income and taxes, regardless of how much or little you earn through them. For further clarification the IRS state that you are a sole proprietor if you are ‘engaging in an activity for income or profit and you are involved in that activity with continuity and regularity.’
Tax Filing Software
Tax filing software can be a lifeline when it comes to organising your tax return, and there are some great programmes out there which can help simplify the process. There are a couple of programmes that we would recommend:
Intuit’s TurboTax is a great program with some extremely helpful features such as the auto import which can pull in your previous years tax return as well as your W2 information and 1099’s. Once you have done this, simply following their steps will ensure a smooth and easy ride.
Being tax-savvy will obviously help but the system works in a way that is pretty fool-proof so all you need to do is double check the figures are accurate. Make sure you get the home and business version – it is pricey but worth it, and if you get stuck they have a great team of people who are experts in taxation who are there to answer any questions you might have.
H&R Block online Software
H&R Block’s online tax software is a great little package that basically works the same as Turbo Tax and is a lot less expensive too. It admittedly is not as well established as Turbo Tax but just taking a look at the online reviews should put your mind at ease,. As an added benefit you can actually begin the process for free, so you can see if it works for you without paying a penny.
Expensify is a brilliant piece of software that allows you to log and keep track of all of your expenses in one place. You can take pictures and upload your receipts, you can use GPS tracking to log your mileage, or if you prefer, your odometer, or simply enter the figures manually.
You can also add any other expenses manually and Expensify will turn all this information into a helpful report. All of this is available for free, though there is a version you pay for with more extensive reporting facilities.
Certified Public Accountants (CPA’s) -are they worth it?
However they also cost money, and whether they are going to ensure they find every single possible deduction is questionable. Also often different CPA’s give you different answers to the same question, and it leaves you confused as to know what is best, for example the question of what you can and can’t report as mileage.
Let’s face if, you as a self-employed business owner are the person that has your best interests at heart, so if you can take the time to learn the basics of tax, doing it yourself can be the optimum way to save money. Often people are scared of the IRS, worried that they might come after them if they make a mistake, or are too aggressive when it comes to logging expenses and reductions. While this is a possibility, the likelihood of you getting audited is low.
Also don’t confuse CPA’s with local tax preparers either -they aren’t experts and basically will just use the software that you could use in order to file your information, so aren’t really worth the bother. However CPA’s that have authoritative knowledge on 1099 employment, the sharing economy, small business owners or entrepreneurs are likely to be worth their fee as they will know exactly how the tax system works for these areas which can save you a lot of time, hassle and money.