What Taxes Do Rideshare Drivers Need to Pay

Making an extra income by driving your car can be a nice job. However, you need to consider tax issues if you’re working with Lyft, Uber, or any rideshare network. Ideally, Lyft and Uber drivers are not considered “employees” by the IRS. Rather, they’re classified as independent contractors. 

This means the rideshare services won’t withhold taxes from their payments. Whether you drive part-time or full-time, independent contractors are business owners in the eyes of the IRS. This means you’re required to pay taxes on your ridesharing income. This is why it’s vital to understand your tax implications. There are some key differences from the income tax filings you may have made in the past as a regular W-2 employee. This guide explains some tips to help you keep on top of your rideshare taxes for 2021 and beyond.

  1. Understand Your Tax Forms

If you’re a regular employee, you receive a W-2 form, and taxes are technically deducted when you get paid. As we mentioned above, rideshare drivers are classified as independent contractors. Like other independent contractors and freelance workers, you will receive 1099 for Lyft, Uber, or other rideshare apps. Technically, you can access the information you require on the Driver Dashboard inside your app. Additionally, you can also request the form from your rideshare company. Ideally, you will receive a Form 1099-K if you had more than 200 transactions or generated over $19,999 in customer payment for rides. Additionally, you will also receive the form even if you have fewer rides.

  1. Self-Employment Taxes

If your income grosses over $400 working as an independent contractor, you must pay the self-employment tax. This also includes all income you earned while self-employed. Ideally, this tax pays for Medicare and Social Security and is a flat rate of 15.3%. Your net self-employment earnings are only subject to self-employment tax only on the first 92.35%. This means you can deduct business expenses from your income and evaluate how much you owe. Something to note is that your self-employment tax is usually separate from your income tax. Income tax is only assessed at a proportion of your income instead of a flat rate. Additionally, you may be eligible for tax credits that reduce your overall income tax. However, these credits don’t apply to self-employment tax.

  1. Income Taxes

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Rideshare drivers should pay income tax like regular employees. You’ll also use the same Form 1040 to file your tax return and pay the same tax rate. This is primarily based on the marginal tax brackets created by the IRS. As we mentioned above, if you made over $400, you have to file taxes. However, you will only pay income tax on earnings that exceed the standard deduction. In 2020, this was $12,400 for single-filers and had shot up to $12,550 in 2021. Next, your taxable business income is subject to its deductions. Remember: you should indicate both profits and losses on your taxes. For instance, if you expect to owe maybe $1,000 in income taxes during a given quarter of the tax year, you should pay estimated taxes by the end of the specific quarter.

  1. Specific Tax Tips

If you fall under an independent contractor category, you’re eligible for certain deductions derived from your rideshare business. You should have in possession detailed records of a mileage log. This helps to evaluate the percentage of miles driven for work purposes. Next, you also need detailed descriptions of work-related expenses. This includes costs such as car repairs, maps, supplies, and gas. Ideally, you can deduct the standard mileage rate ($0.575/mile for the tax year 2020). You can also deduct a percentage of your actual expenses equal to the percentage of time you drive for income-earning expenses. You should note the IRS periodically changes the mileage rate. For instance, this rate has decreased to $0.56 in 2021. While you can deduct the standard mileage rate or actual expenses, you can’t do both.

  1. Estimated Taxes

If you’re self-employed, you don’t have to wait until April 15 to pay all the income and self-employment taxes you owe for the year before. Rather, you’re required to prepay your taxes by making estimated tax payments to the IRS. This should be done four times every year. You need to pay estimated taxes if you expect to owe at least $1000 in federal tax for the year from your rideshare business. However, you’ll need to earn $4,900-$5,900 from your business to owe this much tax. The IRS obtrudes moderate interest penalties if you fail to pay enough estimated tax. If you want to avoid penalties, you need to pay at least the smaller of 90% of your total tax due for the current year. You will also need to pay at least 100% of the tax you paid the previous year or 110% if you are a high-income taxpayer.

  1. Didn’t Receive 1099? What Next

Sometimes, you may not meet the income and transaction margins that call for the relevant tax forms. However, some rideshare companies provide an annual summary document that indicates a detailed analysis of your earnings. Also, you can find your yearly summary on the tax information page of your Driver Dashboard. The summary includes tolls, online trip mileage, third-party fee, gross earnings, service and platform fee, and your non-ride earnings. However, the summary may not include details such as the mileage of your first passenger. So, ensure you keep records of these distances separately.

  1. Standard Mileage Rate Deduction

This is an expense you can deduct per every mile you drive for business during the tax year. However, if you claim the standard mileage rate deduction, you cannot claim most actual car expenses. This is because it simplifies the complicated math that goes into assessing costs like repairs and depreciation.

There’s been a recent change in tax law thanks to low pay. As a rideshare driver, taxes will probably not be the worst of your problems this year. However, low pay might likely be the bigger problem. The big question you need to answer is whether you’re making anything after expenses. The tips above will help you assess which tax area you need to cover and why. Remember: information is power!

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