Taxes for the Gig Economy

How do I report my Uber and Lyft income?

Rideshare driving is so confusing. Most jobs are fairly simple: Here’s your form, plug in the numbers, taxes are done. Rideshare driving is different. You are self-employed. Why? Because they don’t tell you when to come to work or what to wear, you can pick what jobs you do and how far you go, and you maintain your own vehicle, insurance, and driver’s license. You are in control of your schedule and you own the tools to do the work. By all standards, you are self-employed. They aren’t your boss and you are not an employee.  So now what? How do you handle taxes for the gig economy?

Taxes for the Gig Economy

IRS law says that if you make over $400 from self-employment (yes, four hundred), you need to pay self-employment tax on it. What’s that?  That is your part of Social Security and Medicare on your earnings PLUS what would normally be your employer’s part, too. Since you are both the employer and the employee (self-employed) you get to pay both halves. That is 15% ON TOP of any income tax you might owe.

I have so many people doing gig jobs freak out when I tell them they owe. “I’m so broke! I only made $4000 all year and now you tell me I have to pay taxes?!?!” Sometimes, yeah. Income tax and self-employment tax are two separate issues.  Even if you owe zero income tax, you still pay into social security. When you have a job, you don’t feel that 7.5% of your check disappearing, and you don’t ever see the part your employer matches for you. But everyone notices it the first time they report self-employment.

Calculate your Profit

The good news is that you don’t pay taxes on everything you collected. You pay taxes on your PROFIT. Your profit is what is left after you deduct your business expenses. (You’re a business, now, remember?) So, let’s look at how to figure your profit.

First, you need to log in to your app(s) and print out your annual reports. They should show the income you received (including referrals and cleaning fees), the fees that the app charged, and your online or trip miles. Note that these have a disclaimer like, ‘This is not a tax document.’ Tax documents are sent to the IRS. Your reports are not. You, as a self-employed person, are responsible for keeping your own “books and records” for conducting your business. The rideshare apps use your services, but they are not your employer and not responsible for keeping your tax info. They just report to you what services you provided for them.

The 1099-K

You may or may not get a form 1099-K. That does not affect the fact that you need to report your income. A 1099-K was a form introduced in 2012 that reports to the IRS anyone having more than $20,000 in credit card sales or more than 200 credit card sale transactions. If you are receiving credit card payments through a 3^rd party processor, they report what they processed on your behalf.  That means if Uber or Lyft (or eBay or Amazon or etsy) processed credit card transactions and then sent you the money (after they took their commission), they report your part of the credit card transactions to the IRS.  What does this mean? Almost nothing. Getting a 1099-K doesn’t make you a business or show that you had any taxable income. You could be selling junk from your garage on eBay. It just alerts the IRS as to who is taking credit cards.

History note: The IRS came up with this form in 2008 to see who was taking credit card payments. Getting a merchant account was still a pain then and had lots of rules. If you were taking credit cards, you were a business. The form became mandatory in 2012. However, in between those times, smartphones were invented. Square came out and by 2012 almost anyone could get a merchant credit card account and take cards. So much for the IRS finding non-reporting businesses with this form. (Did you hear my eyes roll?)

Schedule C Step-by-Step

You report your income on Schedule C of Form 1040. Most online tax software stops being free at this point. There are a few smaller software providers that do not charge for schedule C. You might consider using a tax professional. Often, private tax preparers cost the same or just slightly more than the price of the software. The big-box tax stores often charge far more than what I would consider reasonable and few, if any, employees of large franchises have the freedom to offer business advice, bookkeeping help, recommend software, or devise tax strategies. Whether you do it yourself or get help. you still need to gather the same info. Once you have your reports, let’s calculate profit.

• Total your income. If you worked for more than one app, you need to add all the similar numbers together. Use the ‘Gross Earnings’ numbers and include all the income numbers. This goes on Line 1.
• Total all the fees that the apps charged you. This is under ‘Expenses’ or ‘Expenses, Fees and Taxes.’ This goes in Part II on line 10, Commissions and Fees.
• Think back through your year about any other expenses. Do you provide water bottles or snacks? Do you pay for a music subscription so your riders can pick what they want to hear? Did you pay to get the car washed or detailed? Go back through your bank statements and receipts to document when and how much these expenses were. Remember, if you get audited, you will need to provide these records, so save everything you use to calculate the totals. If you can’t find it all, remember to start now saving it all for next year! Your car washes / detailing goes on Line 21 under Repairs and your Supplies go on Line 22.
• Now it’s time for the vehicle expenses. The IRS gives you 2 choices. Actual Expenses or Mileage. You can calculate exactly how much it cost to use your car. Or, the IRS figures out the average total cost of operating a vehicle, and they let you deduct that much per mile. In 2019, it was 58¢. In 2020, it is 57.5¢. Often, mileage comes out better than the actual costs because it includes wear and tear on your vehicle (depreciation). Remember, if you are using mileage, it includes EVERYTHING. You can’t deduct car tags and taxes, tires, repairs, insurance, oil changes, or fuel. Everything is included in mileage except cleaning your vehicle between customers. Report information about your vehicle (including business miles and personal miles for the year) in Part IV on page 2. Multiply your business miles times the Mileage rate for the amount you can deduct. The total goes in Part II Line 9.

Calculating Mileage

So far so good, right? Except the reports are missing one important fact. They only report your online miles. What about driving out to the airport or stadium before you turn on the app? None of your non-trip miles are on the report. Can you deduct them, too? You bet! However, you can only deduct what you can document. If you didn’t keep track, start now. Search for mileage tracking apps and you can run them at the same time to track all your offline miles. We like the MileIQ App, but find one that works the best for you.

Another tip: Keep all your repair receipts. I know I just said that you can’t deduct them if you are using mileage. However, most repair receipts will document your odometer reading at the time of the repair. This proves the total number of miles your car traveled over the course of time. This is very valuable if you are ever audited. Save all repair receipts and be sure they note the odometer reading.

Tying it all Together

Once you total your fees, supplies, cleaning, and mileage on Line 28, subtract that from your income and that is your taxable profit. Remember, you will also need to report your taxable profit on Schedule SE to calculate the self-employment tax if you made over $400.

Your profit may be surprisingly less than you expected. That is good when paying taxes, but why isn’t there more profit? You know you made more than that. It’s because we are including the wear and tear on your vehicle. You are converting your car into cash flow. The apps do not pay significantly more than the average cost of operating a vehicle.  It seems like you are making more money because you generally only buy fuel. You don’t have to pay for tires daily. Some expenses you would have to pay whether you drove rideshare or not, like tags and insurance. Rideshare is a great way to make some fast cash and not pay a ton in taxes. Once you figure out the tax reporting, it’s a great side gig.

Check out the IRS Gig Economy Center for even more great info.

 

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