We’ve all been there. The thought of being your own boss and leaving the 9-to-5, Monday-through-Friday grind to someone else. Some of us take that jump and for others, the confines of a nice cubicle and a predictable deposit into their bank account are more than enough. But what if you are thinking of striking out on your own and joining one of those ride share companies? Well, we strongly urge you to read this post as it has a LOT of information in it for you to consider before you take the plunge.
The first thing to know is that when you work for Uber or Lyft, you are not doing so as an “employee.” Instead, you will be classified as an independent contractor. As presented on Uber’s website:
“All Uber partners are independent contractors, so we do not withhold any taxes and partners are entirely responsible for their own tax obligations. If you’re a partner based in the United States, you will receive a 1099-K and/or 1099-MISC form to report income you earned with Uber. You’ll receive one or both depending on the type of payment you earned in the calendar year.”
In this post we discuss the implications of being paid as an independent contractor versus an employee. The big difference comes down to the fact that as an independent contractor 1) no taxes are taken out of the pay received and 2) the fact that the individual has to pay self-employment taxes in addition to income taxes.
In this post we talk about how those who are “self-employed” typically file their taxes and some of the issues they face. What we’ll now discuss are those items specific to “drivers for hire” like taxi, livery and ride share operators.
Income This one is pretty straightforward. You report all of the money that you received while operating, including tip income. Where we see people get into trouble is when they under report. What do we mean? Well, the IRS is going to get a copy of that 1099-K or 1099-MISC that you received. If you report at least the amount that is shown on the document then you probably won’t hear anything from the IRS. But if you report an amount that is LESS than what is shown, expect the IRS to come a knocking. Why? Well the IRS is going to ask you ” why did you only report $4,000 of income but Uber says you made $8,000? We think you made at least that much but your return doesn’t reflect that.”
Now what if you say “I didn’t get a form so the IRS doesn’t know what I made!” Can we say tax evasion? So make sure you report every red cent that you made to stay out of trouble okay?
Operating Expenses This one is the complicated one. A taxpayer who uses an automobile for business purposes can figure their deduction by comparing the standard mileage rate with actual expenses and choosing the larger amount. One would perform this analysis in every year and take the larger amount. However, if the actual expense method is chosen in the first year, it must be used in all subsequent years until the vehicle is no longer used for business.
If the standard mileage rate method is used, the deduction is calculated by multiplying the number of business miles driven by the applicable standard mileage rate. The standard mileage rate eliminates the need to keep track of actual costs. It is used to replace the “actual” cost of depreciation, lease payments, maintenance and repairs, gasoline, oil, insurance, and vehicle registration fees. It does not include:
- Interest expense for a self-employed individual
- Personal property taxes
- Parking fees and tolls
The expense above would (depending on the circumstances) be claimed in addition to the amount calculated via the standard mileage rate. Now, sometimes people (and tax practitioners) wonder if a “driver for hire” can use the standard mileage rate. Well back in 2010, the IRS issued Rev Proc 2010-51 and within it you can find that Rev Proc 2009-54 was modified as follows:
“Section 4.05(1) is modified to allow taxpayers to use the business standard mileage rate to calculate the amount of deductions for automobiles used for hire, such as taxicabs.”
You can also find language under the standard mileage discussion of Publication 463 that reads that “you can elect to use the standard mileage rate if you used a car for hire (such as a taxi) unless the standard mileage rate is otherwise not allowed, as discussed above.”
Now, If you decide to base your deduction on your actual expenses, note that you should keep track of the following:
- Business Percentage: The taxpayer must calculate the business percentage of vehicle expenses. Keep track of business miles driven for the year and divide that amount by the total miles driven for the year.
- Cost of depreciation (leave this to your tax software or gal/guy)
- Lease payments
- Registration fees
- Garage rent
- Parking fees
- Sales tax paid on the purchase of a car is added to the basis of the car and deducted through depreciation.
- Fines for traffic violations are never deductible, even if incurred while driving for business.
Business Expenses This is for all of the items that aren’t directly related to the cost of vehicle operations, but are allowed. Buy bottles of water for your riders? Have to pay a monthly cell phone bill so that riders can hail you? Both are deductible expenses. We suggest that you consult Publication 535 to see what is allowed. The one thing to keep in mind is that if an item is used for both business and personal use, you should keep track of your business use as that is the percentage of the expense that you may deduct.
Comprehensive Example & Sample Tax Return
*** Note: This example was originally posted in 2015. It has been updated to reflect numbers applicable to 2022 and the associated tax returns.***
If you click this link, you will be able to download the sample tax return that is used in this example. Having it handy will help you quickly follow along with what we’re about to discuss. Disclaimer: This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. Okay, the lawyers are happy now. Shall we begin?
So, our good friend Memphis Raines has decided to earn some extra cash with one of the ride share companies. He’s pretty good at what he does, get’s passengers to their place really fast and makes sure that he keeps and IRS Compliant Mileage Log (he doesn’t want the tax court disallowing his deduction). During the year he raked in close to $63,000 in income for all that driving. So what does Memphis’ tax return look like? Let’s examine it.
Page 3 shows Mr. Raines’ Schedule C or Profit or Loss From Business. He completes the top section listing all the pertinent information for his business. If you look at the form, you will see that it contains very little information. Looks like he spent close to $17,000 on car expense, another $143 on meals (drinks for his passengers) and another $2,000 for his business cell phone. But let’s look a little closer at the car expense.
As indicated above, Memphis is allowed to take the larger of his actual expenses OR the amount calculated by using the standard mileage rate. If you look at page 11, you can see all of the expense that Memphis spent to make that $63,000 in revenue. But the thing to note is that he used his car 80.4% for business. The rest of those miles? Well, let’s just say they were spent with his kid brother Kip and some girl named Sway! Anyway, looks like he spent $13,500 (ignoring the fact depreciation isn’t a cash expense) to make all that money. It also looks like he drove about 27,000 miles in a year – ouch! So if you take the standard mileage deduction ($0.605 in 2022 when you factor that the rate changed mid year) and multiply in by the business mileage, you get a deduction of around $16,700. Since that is larger than the actual expense deduction of $13,500, which do you think he will take?
Was it worth it?
So Memphis had fun driving around all year. But was it worth it? Only he knows the answer to that, but what we can analyze is the financial impact. Page 1 shows that Memphis had a net profit from business of around $44,100 (i.e. $63,000 in revenue less $18,900 in expenses). As Mr. Raines is single, he has very little other deductions. He takes the standard deduction and receives the 20% qualified business income deduction granted to those who are in business for themselves.
This leaves him with taxable income of around $22,400. On this income, he has to pay $2,486 in income taxes. But wait, Memphis is his own boss right? Well, that means that he has to pick up the share of Social Security and Medicare taxes that an employer usually has to pay for each employee it has. The bill? Another $6,200 in taxes! So Memphis winds up with a whopping tax bill of around $9,000. As he did not make estimated tax payments he’ll need to come up with a way to pay the IRS.
So in looking at this from another angle, Memphis took in $63,000. He spent another $11,000 in real cash to make all that money. He also has to pay the IRS around $9,000 in taxes. So net, he took home around $43,000 when it’s all said and done. Not bad for being your own boss. But he did put about 27,000 miles on that sweet car of his, which will make selling it harder once it’s days as a ride share vehicle are done and it’s just hanging out in videos by The Cult.
Need Tax help? Well, if all of this sounds like way too much to handle on your own and you’d rather let a professional deal with it, why not give us a call or shoot us an email? Our information can be found at the bottom of this page and we’d be happy to help make sure that you stay on Uncle Sam’s good side!