Continuing with our previous post on Ridesharing 101, we have prepared a comprehensive tax guide for rideshare drivers. You will get to know all about applicable taxes and the rates for the current year. Our discussion will also cover how to file your taxes with the IRS and maximize tax savings through deductions.
We will begin by taking a look at the taxes the IRS charges on your income from rideshare business.
Taxes Payable for Rideshare Drivers
You don’t need to register when you drive for on-demand cab services like Uber and Lyft- except California. There, you are considered as individual contractors. As a result, the IRS considers you as a sole proprietor, with no requirements for legal documentation. In California, you will have to make your business official under Bill AB-5.
Operating as an only owner is the simplest way to manage your business. However, registering yourself as an LLC or S corp may have some legal and tax benefits.
In that case, you will have to get your business in the books of government at various levels.
You are not entitled to pay any taxes if your earnings are below $400 in a fiscal year. After that, your income attracts-
- Self-employment tax
- Income tax
self-employment income. You must pay a 15.3% self-employment tax on your the first $137,700 of your net income. However, this applies to only 92.35% of your earnings because you can deduct half of your self-employment tax.
The self-employment tax consists of two components-
- Social Security tax at 12.4%
- Medicare tax at 2.9%
Both of the above make up the Federal Insurance Contributions Act (FICA) taxes.
Any income in the United States is applicable to income tax. You have to pay a specific income tax that increases with your income. IRS is the right place to find out what you have to pay, and our table below will also help you out-
Now comes the tricky part of paying your actual tax, using something called estimated taxes.
Do Rideshare Drivers Pay Quarterly Taxes?
You don’t come to know about your annual earnings unless the year ends. However, the IRS mandates you to pay taxes every quarter annually. You have to pay taxes once from January to March, then again from April to May, and so on.
For this, you have to estimate your earnings and pay taxes four times each year. The deadlines set by the IRS are-
- 1st quarter: April 15
- 2nd quarter: June 15
- 3rd quarter: September 15
- 4th quarter: January 15
How to calculate estimated taxes payable quarterly
Here’s how to calculate what to pay per quarter-
Step 1. Think about how much net income you will earn in the present year. Net income is calculated after subtracting business expenses from your earnings.
- Consider your net income for the last tax year
- Factor in current growth or risk factors
- Adjust your income accordingly
Use online resources to make your estimate if you are a new rideshare driver.
Step 2. Now, find out your self-employment and income tax. Use the table and details in previous sections to make your calculations. This will be your annual estimated taxes.
Step 3. Now just split the total tax into 4 parts for each quarter. Pay your tax within deadlines to avoid penalties or coercive actions.
IRS makes it really easy to send your taxes. You can either use-
- IRS Payments Gateway
- Fill in Form 1040-ES, attach your check, and mail it to IRS
- Electronic Federal Tax Payment System for corporations
How to stay on the safe side
Your estimated income may not always be accurate. That means you can overpay or underpay your taxes, attracting penalties from the IRS.
You can avoid penalties by-
- Paying exactly your previous year’s tax (aka, the safe harbor rule)
- Paying 110% more (if you make over $150,000 yearly)
- Not missing due dates
What Documents Will I Get From My Rideshare Partner?
Uber, Lyft, and other rideshare partners will mail official documents when a year ends, typically before January ends next year. You may also get an online link to download your documents that will include-
- Form 1099 (s)
- Tax summary
A Closer Look At Form 1099
1099-K and 1099-MISC are meant for independent contractors and provide a summary of yearly earnings. In the case of ridesharing, these tax documents show the amount you earned based on your actual trips.
You will get form 1099K if you-
- Generated revenues more than $20,000
- Made upward of 200 trips
Form 1099-MISC is for miscellaneous earnings, like incentives and bonuses. You will get this form if your non-ride income crossed $600.
What Form 1099 looks like
- 1A shows your annual income from trips
- 5 shows the total number of rides that generated income
- 5a to 5l shows your monthly incomes
- The amount in field 7 is your additional income from your rideshare business.
What Happens if I Earned Below 1099 Threshold?
Your rideshare partner will not send form 1099 if you earned less than the minimum thresholds-
- $20,000 and 200 rides for 1099-K
- $600 for 1099-MISC
But that doesn’t mean you don’t need to file your income with the IRS. Use the earnings history section of your rideshare app to make your calculations.
What’s Contained in my Tax Summary?
Your tax summary provides a detailed breakdown of what you earned and paid. These will include-
- Gross earnings breakdown
- Additional business earnings (like in-app tips)
- Commissions charged by Uber or Lyft
- Business expenses like taxes (gas, maintenance, and similar expenses are excluded)
How to Save Taxes Like a Pro
Deductions and business expenses give you the opportunity to bring down the total tax payable. If you are a freelance copywriter, your business expenses will include internet charges, electricity bills, cost or subscription of editing and proofreading software, and so on.
Likewise, your business expenses for your rideshare business will include the cost of gas, dashboard cams, insurance, and so on. These expenses are not included in your tax summary.
Track your business expenses and make your deductions to pay the least tax. Below are some typical expenses for cab businesses-
Tracking Your Mileage
We already told you how important it is to know your total miles for calculating mileage. Surely, this is going to be your biggest expense.
Your rideshare partner will detail the distance you drove for business purposes in the documents you get. But you will need to track the miles not tracked by your rideshare partner separately.
Any distance you drive for business purposes should be tracked, like going for car wash, gas stations, and so on.
How to calculate mileage
The simplest and easiest way t calculate mileage expenses is to use the current tax year’s announced mileage rate. For 2020, the IRS allowed drivers to charge 57.5 cents per mile.
You can also track the actual costs to operate your vehicle to make your mileage deduction. For this, you need to-
- Determine the percentage of miles driven for business
- Divide by total miles
- Multiply the result with total vehicle expenses
Needless to say, you will need to keep a record of every business expense. Going for the standard rate makes things easy. However, choose the one that brings you the most tax benefits.
Service Fees. Your rideshare partner will charge fees from your gross income. You can check out the details in your summary.
Tolls And Parking Fees. Any money you paid for parking or tolls will be treated as business expenses and features as deductions.
Mobile Charges. You can deduct the bill for the phone you use for your rideshare business. If you don’t have a dedicated business phone, you can subtract the amount used for business.
So, if 20% of the bill is for business, then you can deduct 20%.
Equipment And Accessories. Any accessory or equipment used for your car will form tax deductibles. Examples include seat covers, steering grips, medical kits, and so on.
Maintenance And Running Expenses. Repairs, car washes, parts replacements- all add up as your business expenses to lower your taxes.
Passenger Service. Most cab drivers keep a bottle of water for the passengers. You can add such costs as business expenses. Additionally, even entertainment costs like streaming subscriptions are allowed by the IRS as tax deductibles.
Training And Development. You can deduct expenses made for training material, books, or courses you used to improve your services from your tax return.
Here is a detailed resource you can use to learn more about eligible expenses.
20% Tax Cut for Rideshare Drivers
The IRS keeps on encouraging economic boosts by offering attractive tax cuts for small to medium-scale businesses. Rideshare drivers are eligible for the 20% pass-through deduction on your final taxable income.
You could claim this deduction if you earned less than-
- $157,500 as an individual taxpayer in 2019, or
- $315,000 as a joint taxpayer with your spouse
Before you can deduct your pass-through, you have to subtract 50% to account for self-employment tax. After that, just multiply the result by 20% to arrive at the final deductible amount.
Let’s say your net income from your cab-driving is $50,000. This is the amount of profit after taking away business expenses from your revenue.
Next, you will have to subtract 50% of the applicable self-employment tax, which is 15.3% of your first 92.35% income.
So, the amount comes to $50,000 (multiply) 92.35% (multiply) 15.3% = $3,532.
So, your 20% pass-through deduction will be-
20% of $50,000 (minus) $3,532 = 20% of $46,468 = $9,294.
For 202, the IRS has decided the following thresholds for the pass-through deduction-
- Individual filing – $163,300
- Joint filings – $326,600
The Tax Filing Process
File Your Tax Yourself
You can file your taxes yourself when your business transactions are simple. Another use case would be when your business remains the same over the past few years.
IRS lets you submit taxes online or through physical mail. Needless to say, filing online can save you a lot of time and effort.
You can just head over to the IRS website and use your bank account to pay your tax.
- Check out our step-by-step guide on completing your tax forms
- Use a digital tax solution to improve accuracy and efficiency
Filing by mail
You will first need to place a request for the necessary forms to file your taxes. Then fill up the forms and mail them back to your local IRS office with your check or money order.
Seek Professional Assistance From an Accountant
New business owners might find it difficult to file their rideshare taxes without any guidance. A CPA can be the right choice to file your taxes efficiently without attracting penalties.
CPAs are also trained and qualified to identify opportunities for tax savings. You may be able to save more tax working with a CPA compared to relying on your own expertise. A professional accountant also knows the tax laws and regulations thoroughly to provide adept consultation. They can help you file taxes with fewer errors and even set you up for any IRS audits.
Start saving today on your tax by hiring an expert accountant. You can expect to pay around $150 – $300 for the services of a registered accountant. If that lets you to more tax savings, we say it’s always a good idea to go for an accountant.