Updated for tax year 2023.
The business of sharing your car with a total stranger or using it to run various errands is now a multi-billion-dollar marketplace, and many people are taking advantage of this easy way to earn a buck. In fact, while the value of the sharing economy was an impressive $150 billion in 2023, Statista forecasted this number to jump to $794 billion by 2031.
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, and that can mean different tax implications than you’re used to.
Working as an independent contractor
More than likely, if you’re driving for Uber® or Lyft® or petsitting through Rover®, you’re considered an independent contractor, which means a whole different world when it comes to taxes.
As an independent contractor, you don’t have an employer to withhold taxes from your paychecks for you. 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’ll tell you all about how to stay in Uncle Sam’s good graces.
Filing taxes when you’re self-employed
First things first. Whether Uber is your full-time gig or you just shuttle folks around occasionally, you have to pay attention to how much income you’re earning.
If you make money as a rideshare driver, errand-runner, or grocery-getter, you’ll need to report your earnings on Schedule C, Profit or Loss from Business.
For many taxpayers who do not keep their books, Schedule C is the best way to actually determine if they have $400 or less of net income. However, 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® Self-Employed makes it easy to complete both forms. Once you enter your information for Schedule C, our tax prep software determines if Schedule SE is needed and, if so, automatically completes it for you.
Paying estimated taxes
After you determine your net income, you may need to start paying quarterly estimated taxes to avoid a large tax bill and penalties when it comes time to file your income tax 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Since taxes aren’t being automatically withdrawn from your earnings, you’ll have to account for them separately.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 for estimated tax payments is to have a portion of your monthly income automatically transferred to a separate account so you aren’t tempted to spend it.
Offset taxes with tax 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.
There are several apps that can help you track how much you drive for work. Keeping mileage records will also give you a backup if the IRS ever asks for documentation to support the mileage deduction you want to claim.
As a driver, you can also deduct other car-related expenses as long as those costs relate to your business. This includes basic service, repairs, car payments, lease fees, registration, insurance, tolls, and even passenger amenities like snacks or extra phone chargers. For a closer look at what rideshare drivers can deduct on their taxes, check out this article.
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 our tax 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 or Postmates. Mileage, along with many of the same operating expenses, can be deducted from your tax return, too.
Pay attention to your 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.
For example, Form 1099-K, Payment and Third Party Network Transactions, reports the total of your customers’ processed payments. Keep in mind this amount will likely be higher than the dollar amount you saw hit your bank account as it includes the rideshare company’s commissions and other services fees.
There is a 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. However, even if you don’t get a 1099-K, you’ll still need to report any earned income on Schedule C and pay taxes on the income you earned.
Depending on the payer, you may also receive Form 1099-NEC, Nonemployee Compensation. In certain instances, you may have duplicate payments show up on both Form 1099-K and Form 1099-NEC, so it’s important to check these forms against your own records to ensure you report your income correctly. Income documented on these forms needs to be reported on Schedule C when you complete your tax return.
