Ride-sharing service drivers are generally considered independent contractors rather than employees. This means there are more tax requirements, but it can also lead to more tax benefits. Drivers must pay self-employment tax if they are independent contractors: full Social Security and Medicare taxes that they will share with other employers. Ride-sharing service drivers must submit estimated quarterly tax payments throughout the year because no employer is withholding taxes and sending them from their earnings. Drivers can claim tax deductions for work-related mileage and other business expenses they incur.
Independent Contractor or Employee?
Your employment status affects how your taxes are calculated and paid, so the Internal Revenue Service (IRS) wants to know whether you are an independent contractor or an employee. Typically, you are an independent contractor when you work for a ride-sharing company.
Who Controls Your Work?
You are likely an employee if the company controls what you do, how you do it, and when you work. You are likely an employee if the company tells you exactly when to drive, where to drive, and whom to pick up.
Who Owns Your Car?
Employers control the business aspects of the job on behalf of their employees. You are likely an employee if the company provides you with equipment such as a company car to drive.
Do You Receive Benefits?
You are likely an employee if you enter into a written contract or receive employee benefits, such as a retirement plan, insurance, or paid time off.
Tax Implications
You will pay FICA taxes at a rate of 15.3% on your net earnings if you are an independent contractor: 12.4% for Social Security and 2.9% for Medicare. This is referred to as self-employment tax, in addition to income tax. You will only pay half of these Social Security and Medicare taxes if you are an employee. The employer will pay the other half.
Specific Tax Tips
You are eligible for certain expense deductions related to your ride-sharing work if you are an independent contractor. Keep detailed records and documentation, including a mileage log to calculate the percentage of miles driven for business purposes. You can download a mobile app to track your mileage. You should also keep records of work-related expenses, including vehicle repairs, fuel, maps, and supplies.
Forms 1099-NEC and 1099-K
Ride-sharing services like Uber and Lyft will send you Form 1099-NEC and/or Form 1099-K after the end of the year. These are effectively equivalent to W-2 forms for employees, although they will not show any withholdings. Taxes are not withheld from independent contractor income. You should receive these forms by the end of January so that you can report your earnings for the year on your tax return. Use them to complete Schedule C “Profit or Loss from Business.” All your income and deductible expenses should be reported on this form, and then the resultant taxable income is transferred to your tax return.
Paying Estimated Taxes
You must pay taxes directly to the IRS as an independent contractor because you do not have an employer withholding taxes on this income on your behalf. The IRS requires individuals (including partners, sole proprietors, and shareholders of LLCs) to make estimated quarterly tax payments if they expect to owe at least $1,000 in taxes for the tax year. Calculate your earnings for that quarterly time period.
Frequently Asked Questions (FAQs)
How much should ride-sharing service drivers set aside for taxes? The exact amount of taxes you will owe depends on many factors, including your tax bracket, other income sources you may have, and any available tax credits and deductions you can claim. However, most experts recommend that independent ride-sharing service drivers set aside 25% to 30% of their earnings to cover taxes.
Do
Can I deduct my car payment as a business expense? You can write off any expenses you incur for business purposes pertaining to rideshare services. This may include car payments, insurance, and vehicle registration fees. However, you should only consider the percentage used for business purposes if you also use your vehicle for personal driving. Claim this portion of your total car expenses related to work as a deduction on Schedule C.
Should I keep fuel receipts to claim them as business expenses? Receipts can be a helpful way to prove the amount you’ve spent on fuel while driving for rideshare services. However, you can also use other metrics such as mileage. The IRS will require a verified statement to attest to accurate reporting.
Source: https://www.thebalancemoney.com/tax-tips-for-ridesharing-drivers-3192955
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