The business of sharing your car with a total stranger or using it to run various errands is becoming a multi-billion dollar marketplace and many people are taking advantage of this new-age way to earn a buck. In fact, between 2012 and 2015, 10.3 million people made money through platforms such as Uber, Lyft, and TaskRabbit. That’s more people than the population of New York City!
While the Sharing Economy provides new career opportunities and can help us expand our pocketbooks, it’s important for those participating to remember one thing: you’re probably not an employee.
More than likely, if you’re behind the wheel for Uber or delivering goods through TaskRabbit, you’re considered an independent contractor.
And, that’s a whole different world when it comes to taxes because it’s likely your paychecks don’t have any taxes taken out.
But you still have to pay federal and state income taxes as well as self-employment tax (which consists of Social Security and Medicare taxes for those working for themselves).
If this sounds confusing, don’t worry. We’ve got the low-down so you know how to stay in Uncle Sam’s good graces.
To the IRS, You’re a Business Owner
First things first. Whether Uber is your full-time gig or you just shuttle folks around every once in a while, you have to pay attention to how much income you’re earning.
If you make money as a ride-share driver, errand-runner, or grocery-getter, you’ll need to report your earnings on Schedule C, Profit or Loss from Business.
For many taxpayers that do not keep their books, Schedule C is the best way to actually determine if they have $400 or less of net income.
However, there is one other caveat. If you make more than $400 in self-employment income throughout the year, you’ll also need to complete Schedule SE, Self-Employment Tax.
This form is used to calculate the self-employment tax due on your net earnings. Luckily, TaxAct makes it easy to complete both forms. Once you enter your information for Schedule C, the software determines if Schedule SE is needed and, if so, automatically completes it.
After your net income is determined, you may need to start paying quarterly estimated income taxes to avoid a large tax bill and penalties when it comes time to file your return.
Since taxes aren’t being automatically withdrawn from your earnings, you’ll have to account for them separately. To prepare for quarterly tax payments, make sure you set aside money throughout the year to cover those costs.
A simple way to save is to have a portion of your monthly income automatically transferred to a separate account.
Offset taxes with deductions
Driving for Lyft or Uber can be as easy as pushing a few buttons on your phone, but remembering to keep track of your expenses is a bit harder.
First, be sure to log your mileage while you’re on the clock! You’ll want to report those miles as a business expense on your tax return using Schedule C. Claiming them as expenses will help cut down your business income – meaning you’ll likely owe less tax.
Apps like MileIQ can help you track how much you drive for work. Plus, keeping records gives you back up if the IRS ever asks for support related to a deduction.
Drivers can also deduct other car-related expenses as long as those costs relate to their business. This includes basic service, repairs, car payments, lease fees, registration, insurance, tolls, and more.
Additionally, you can deduct the depreciation on the car, parking fees, drinks for the passengers and a portion of your cell phone bill.
Allocating business expenses against total expenses is another way TaxAct can help you.
For example, when it comes to the number of business miles driven versus personal miles, simply input your data and the software will quickly help you sort it out.
Even if you’re not earning cash as a driver for Uber or Lyft, you can still deduct vehicle-related expenses if you work for services such as Instacart and TaskRabbit. Mileage, along with many of the same operating expenses, can be deducted on your tax return too.
Pay attention to that 1099 form
As tax season approaches, you’ll likely receive a version of Form 1099 in the mail from the company through which you contract your business. The total of your customers’ processed payments are reported on Form 1099-K, Payment and Third Party Network Transactions.
Keep in mind this amount will likely be higher than the dollar amount you saw hit your bank account as it includes the ride-share company’s commissions and other services fees.
Any other payments you received, such as referrals or non-driving related bonuses, are reported on Form 1099-MISC. This form should arrive in your mailbox around the same time. All of the income documented on these forms needs to be reported on Schedule C when you complete your tax return.
There is a small chance you won’t receive a 1099-K if the company through which you provide services processed less than $20,000 in payments or fewer than 200 transactions under your name.
Even if you don’t get that form, you’ll still need to report any earned income on Schedule C and pay taxes on the income you earned.