To understand ridesharing taxes, the first thing is to know that Uber drivers are independent contractors. Hence, the tax deducted is of two classes; self-employment tax and income tax. Self-employment deals primarily with the net income of the driver. Whereas Income tax dives into a person’s other income, credits he has to pay, etc. A detailed explanation is given below to comprehend how these taxes work for ridesharing.
Are Uber/ Lyft drivers Independent Contractors?
Uber/ Lyft drivers are considered self-employed by the IRS. IRS is the International Reporting Standard that directs the accounting rules in some countries including the US. IRS classifies these drivers as individual contractors and deducts their taxes on a self-employment basis.
Drivers associated with these companies are required to fill two taxes; self-employment and income tax
Self-Employment Taxes
Self-employment taxes are deducted from people who earn $400 or more from driving for Uber or Lyft. These taxes are usually invested in Social security funds or Medicare, therefore, the income generated from this category is a great asset for the government.
A certain percentage that is approximately around 15% (as of 2021) is deducted from the net income for people who earn through ridesharing. “Net income” here signifies the amount of money that you get after deducting your expenses for the month.
Income Taxes:
Income taxes are similar to what any other employee of an organization will pay. It depends on your property, other income, credits, etc. Using this a person will be allotted to a certain tax bracket and will have to pay their income tax along with self-employment tax.
How to file taxes?
Step 1: Calculate your income from ridesharing
The first thing you have to see is whether you are required to pay self-employment tax or not. This depends if your income is greater than $400 or not. According to your income, you will be receiving two forms; Form 1099-K and Form 1099-NEC. The latter is for those drivers who earn more than $600 as a non-driving income while Form 1099-K is for people who had taken off more than 200 rides and earned at least $20,000.
Note: These amounts may vary depending on the city you live.
Step 2: Calculate your expenses for this work
There are a couple of expenses that Uber/ Lyft drivers are supposed to write in the tax summary. These expenses mainly include parking fees, car wash, mobile data charges, third-party charges, taxes, etc. You will also be required to enter the mileage of your car during the period in the tax summary.
Step 3: Subtract your expenses from the income
Deduction of expenses from the income will provide you with the net profit or the loss you have incurred during the period.
Step 4: Add your self-employment and income tax
Once you get your self-employment tax, add it to the income tax and you will be able to know the total tax for the year.
A complicated tax structure has just been broken down into less complicated slices for you. Understanding these taxes is very easy if you get your grip on the categorization of ridesharing drivers by the IRS. Self-employment taxes are the only additional taxes that you will have to bear if you are associated with ridesharing work whereas, income tax, as mentioned above, will only focus on your income generated from other means.
Hope this article clears all your doubts about the topic!
Q. Is it necessary to separate your personal driving expenses from your work expenses?
A. Yes, the mileage rate will be applied only to the miles you drive for work. For example, if you drove 100,000 miles out of which 70,000 were driven for work, the mileage rate will be applied to 70,000 miles only.
Q. If I drive for Uber and Lyft both, do I still have to fill out the form twice?
A. No, if you work for more than one ridesharing organization, you will be asked to add your income generated from both the platforms as well as your expenses incurred, and later on, subtracting both the amounts will get you profit/ loss for the year.
Q. Is there any alternative for calculating my self-employment tax?
A. Yes, luckily, there is a couple of software that can let you know the amount you will have to pay in taxes. Furthermore, along with different software, you can also contact your lawyer to help you with taxes. For both ways, information related to expenses and income will have to be provided by you.
