Tag Archives: Independent Contractor

Uber, Lyft and Filing Your Income Taxes

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.

Worker Status
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.

Tax Considerations
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:

  1. Interest expense for a self-employed individual
  2. Personal property taxes
  3. 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
  • Licenses
  • Gas
  • Oil
  • Insurance
  • Repairs
  • Tires
  • Garage rent
  • Tolls
  • 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
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?

Need a Lyft?

Need a Lyft?

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 $16,000 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 6, 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 $13,000 (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 ($0.56 in 2014) and multiply in by the business mileage, you get a deduction of around $15,000.  Since that is larger than the actual expense deduction of $13,000, 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 $45,000 (i.e. $63,000 in revenue less $18,000 in expenses).  As Mr. Raines is single, he has very little other deductions.  He takes the standard deduction and receives one exemption.  This leaves him with taxable income of around $32,000.  On this income, he has to pay $4,335 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 $6,400 in taxes!  So Memphis winds up with a whopping tax bill of around $11,000.  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 $11,000 in taxes.  So net, he took home around $41,000 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.

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?  We’d be happy to help make sure that you stay on Uncle Sam’s good side!

Who do I issue a 1099-Misc to?

****UPDATE as of 01/01/21****

The information below was originally written when money paid to independent contractors was reported on Form 1099-MISC.  As a result of the The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), independent contractor payments are now reported via Form 1099-NEC effective tax year 2020 (being filed in 2021). The deadline for filing remains January 31st.

While most of the information below for Form 1099-MISC applies to Form 1099-NEC and generally is still relevant, please refer to the YouTube video below for instructions on how to complete Form 1099-NEC.

******** Original Post Begins Below **********

If you employ an independent contractor in your trade or business, you are obligated to report their earnings to them and the IRS.  This is typically done via the IRS form 1099-MISC.  But just who is supposed to receive this form, when is it due and what are the penalties if it’s not filed on time?

Who Receives Form 1099-MISC

Form 1099 goes out to independent contractors if you pay them $600 or more to do work for your company during the tax year.  Additionally, those whom you pay at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest should also receive a 1099.

Taxpayers should note that if you earned less than $600 and you don’t get a 1099, this doesn’t mean you don’t have to report the income.  All income (it doesn’t matter if it’s $1) is taxable and should/must be reported.

In addition to individuals, you must also send a 1099 to the following if you paid them for doing work:

  • Businesses that file on form 1040 Schedule C (i.e. sole proprietors/self employed)
  • Single member LLCs, as they are considered disregarded entities (DREs) and also file on Sch C
  • Partnerships or Multimember LLCs as they essentially file the same return as a partnership

However, there are some instances in which you don’t need to issue a 1099-MISC.  These exceptions include:

  • Suppliers of merchandise, telegrams, telephone, freight, storage, and similar items, with the exception of those who deal in fish or other aquatic life
  • Corporations (e.g. those who’s names contain Corporation, Company, Incorporated, Limited, Corp., Co., Inc. or Ltd.) are also exempt from 1099 requirements, with the exception of those you pay for medical or health care, or law firms that you’ve hired for legal services
  • Those corporations that have filed a S-Corp election with the IRS
  • Tax-exempt organizations or to American or foreign governments

Need the specifics on who is exempt and who isn’t and don’t mind reading the Internal Revenue Code?  Check out section Treasury Regulations, Subchapter A, Sec. 1.6049-4(c)(1)(ii) where it talks about a corporation, as defined in section 7701(a)(3).

When Is Form 1099 Due?

Generally you must furnish a copy of form 1099-MISC to the recipient by January 31st of the year following when the payments were made.   If you are reporting payments in boxes 8 or 14, then you have until February 15th of the year following when the payments were made.

In addition to the recipient, you must also send a copy to the IRS (along with Form 1096) by January 31st IF you are reporting amounts in Box 7 for Nonemployee Compensation.  If you are reporting amounts in any other box:

  • You must submit it by February 28th of the year following when the payments were made if you are sending it via paper
  • If you are submitting everything electronically, then you have until March 31st of the year following payment.

What are the penalties for filing late?

If you fail to file a correct information return by the due date and you cannot show reasonable cause, you may be subject to a penalty. The amount of the penalty is based on when you file the correct information return. Currently, the penalty is:

  • $50 per information return if you correctly file within 30 days; maximum penalty $532,000 per year ($186,000 for small businesses)
  • $100 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $1,596,500 per year ($532,000 for small businesses)
  • $260 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,193,000 per year ($1,064,000 for small businesses)

Obtaining the information needed to file Form 1099

To ensure that you issue a correct 1099 to the recipient, complete Form W-9, Request for Taxpayer Identification and Certification.  The W-9 includes the individual or businesses legal name, tax ID number, address and their signature attesting to the correctness of the content. You will then use this information to create the 1099 and send it to the IRS.

Do you have 1099s that you need to file?  Shoot us an email at the address below or give us a call at 773-239-8850.  Our filing services are extremely affordable (as low as $10/form) and not only will your documents be filed with the IRS, SSA and state, they can also be mailed to the recipient!

Tax Impact of being 1099 vs. a W2 Employee

So back in this post we reviewed how an employer goes about classifying a worker as either an employee or an independent contractor.  However, what if you are on the receiving end of that classification?  What is the financial and tax impact of receiving your pay either via W2 or 1099?  In this post will follow the exploits of two workers, Suzy Salary and Contractor Chuck.  To keep this example simple and straightforward, we’ll assume the following about both Suzy and Chuck:

  • Work similar jobs (with different companies)
  • Don’t have any pretax contributions coming out of their checks
  • Each  make $100,000 per year
  • Are both single without any dependents and take the standard deduction
  • Didn’t have any Federal income taxes withheld from their checks (i.e. Suzy didn’t have these deducted from her check, but we’ll assume Social Security and Medicare were withheld)
  • IRS penalties don’t apply
  • We’ll ignore the whole 2% payroll holiday that has been in effect the past few years

Amount Earned The easiest difference to spot will be in the amount of their checks.  Suzy will take home about $93,800 (due to combined 7.65% withholding of Social Security and Medicare) while Chuck will take home the full $100,000.  However, it gets interesting when the two actually go to file their tax returns.

Self Employment Taxes The basic concept to remember with this is that when you work for someone, you and they split the Social Security and Medicare taxes equally (i.e. 7.65% for each of you).  However, when you are self employed, you have to foot the whole bill or 13.3% up to income of $106,800.  True you will see an adjustment on the 1st page of your tax return (it’s labeled “Deductible part of self-employment tax”), however due to the nature of the calculations, it doesn’t yield you a true 50% benefit.

Bottom Line Tax Impact  At the end of it all, Suzy will wind up paying about $18,957 in income taxes and $6,200 in Social Security and Medicare for a total of $25,157.  Chuck on the other hand will pay $16,979 in income taxes and $12,283 in self employment for a total of $29,262.  Total tax bill difference winds up costing about $4,105.

Why Bother Being 1099?  If your employer gives you the option between the two, the W2 option will more than likely put you at ease.  You won’t have to worry about setting cash aside for your taxes bills as your boss will simply withhold them.  However, the truth of the matter is that most individuals who are “truly” considered contractors actually may pay a lower tax bill due to having expenses associated with earning their income.  For example, a cable installer will typically have the cost of keeping up their vehicle, supplies necessary to perform the work as well possible office related expenses.  In the end, they can deduct these allowable expenses on their return whereas an employee cannot.

So if faced with a choice of which type of way you would like to be paid, take the time to consult with your tax practitioner as they can advise you on the possible ramifications of your particular situation.

Hiring Your First Employee & Payroll Taxes

So, in this post we discussed the trials and tribulations of finding the perfect employee for your company.  Now we’ll take a look at the tax implications so you keep yourself out of hot water with the regulators, or said another way, what ever employer should know BEFORE they hire their first employee.

Eligibility to Work in the United States.  Every employer must verify that each new employee is legally eligible to work in the United States. You don’t want to run into problems later so have the employees you hire fill out Form I-9, Employment Eligibility Verification.  You can also get their SSN at this stage.

Employee vs. Independent contractor.  While you may want to classify a person as independent contractor to avoid the hassle of dealing with payroll taxes, make sure the classification is proper.   Generally speaking, an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done.  Not sure what your new hire will be?  Check out this site for a little assistance.

Independent Contractors Agreement.  If you do determine that the person who’ll work for you does qualify to be classified as an independent contractor, it’s a good idea to draft an agreement.  This document should outline the duties they will/won’t perform, how they are compensated and the responsibilities with reporting their earnings to the IRS.  This way you are protected in case the employee disagrees that they were an independent contractor or worse files a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.

Fill out Form W4.  To know how much income tax to withhold from an employees’ wages, you should have them complete Form W-4, Employee’s Withholding Allowance Certificate.  Ask all new employees to give you a signed Form W-4 when they start work. Make the form effective with the first wage payment.  If the employee claims exemption from income tax withholding, they must indicate this on their W-4. The amount of income tax withholding must be based on filing status and withholding allowances as indicated on the form. If a new employee does not give you a completed Form W-4, the IRS recommends that you withhold tax as if he or she is single, with no withholding allowances.

Withholding & Matching Taxes.  So as an employer you will act as a collector and depositor of taxes.  You should withhold the proper amount of federal income tax based on the employees Form W4.  Additionally, you are required to withhold social security and Medicare taxes from your employees’ wages and pay the employer’s share of these taxes.  Generally speaking the employee AND employer tax rate for social security is 6.2% on wages while the tax rate for Medicare is 1.45% each for the employee and employer (2.9% total).  All of the above is deposited via a system called EFTPS by the employer.

Reporting.  In addition to withholding and depositing payroll taxes, employers must periodically report these amounts to the government.  These are done via Form 940, 941 or 944.  You may be asking yourself “What is the difference between Federal 940, 941 and 944 taxes?”  941 tax filings are submitted each quarter. 944 tax is the same as the 941, but is filed and paid on an annual basis.  The IRS makes the determination on which tax form you will file and how often you need to deposit your tax withholdings depending on the size of your payroll.  940 tax is Federal Unemployment. Unless you are exempt, you are required to report/pay this tax on an annual basis in addition to your 941 or 944 taxes.