You might not feel like a business owner when you’re driving around passengers for Uber and Lyft, but in the eyes of the IRS you are operating as an independent contractor and a sole proprietor — A business owner! And as the new owner of non-W2 business income, your taxes have become a bit more complicated.
Your primary goals at tax time are to correctly report all of your income, and to maximize your deductions. But if you’ve never been an independent contractor or operated your business before, you’re probably not familiar with all of the steps involved in properly filing your taxes.
Many rideshare drivers make five tax mistakes that result in higher taxes and potential trouble with the IRS. These mistakes are easily avoidable, so take a look and make sure you’re avoiding these mistakes.
First: A few quick tax facts about rideshare drivers
- Uber and Lyft drivers are 1099 independent contractors
- No taxes are withheld from your earnings — It’s up to you to pay your taxes!
- You receive 1099 tax forms (1099-K and 1099-MISC) summarizing your income for the year
- You report rideshare income on the Schedule C tax form, and pay Self Employment taxes on Schedule SE
- If you decide to file your own taxes, software like TurboTax Self-Employed makes the process easier
Mistake: Taking the standard mileage deduction without calculating your actual vehicle expenses
The biggest deduction Uber and Lyft drivers typically take is for vehicle expenses. There are two ways to calculate & deduct your vehicle expenses. One option is to take the standard mileage deduction (53.5 cents per mile for 2017), which includes all vehicle-related expenses like fuel, maintenance and repairs.
The other option is to deduct your actual vehicle expenses. For most drivers, the standard mileage deduction is generally higher than your actual vehicle expenses, but it is possible that your actual vehicle expenses are greater than the standard mileage deduction.
It’s a mistake to take the standard mileage deduction without calculating your actual vehicle expenses!
Actual vehicle expenses may exceed the standard mileage deduction if:
- You had to pay for major vehicle repairs
- You drive a more expensive truck or van
If your vehicle expenses were very high this year, don’t automatically take the standard mileage deduction.
How to avoid this mistake: Carefully track all of your vehicle-related expenses and your business-related miles throughout the year. It’s easiest to use software like QuickBooks Self-Employed to easily categorize vehicle expenses. At tax time, compare the amount you’d get from the standard deduction to your actual vehicle expenses and take whichever deduction is greater.
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Mistake: Forgetting to track your mileage
The standard mileage deduction will likely be your biggest deduction as a driver, but if you simply report a mileage number without backing it up with any logs you could be in for a headache if you get audited by the IRS. You can’t rely on the mileage numbers reported by Uber & Lyft, because they don’t include all the miles that most CPAs agree are deductible. It’s safest and smartest to track your own miles.
How to avoid this mistake: Use apps like QuickBooks Self-Employed or Stride Tax to easily and automatically track & categorize your mileage. The old school way — a mileage logbook — works well too, but is more work.
Mistake: Not deducting enough miles, or deducting too many
It’s tempting to rely on Uber and Lyft to tell you how many miles you can deduct, but using the figures they provide is a mistake. Uber tells you the number of miles you drove while a passenger was in your car, and Lyft tells you the number of miles you drove while logged into Driver Mode. Both of those numbers are likely lower than your actual deductible miles.
Most CPAs and online tax resources agree that the miles you drive to your passengers, other miles you drive during your shift, and some commuting miles are deductible. If you don’t include those in the miles you deduct, you’re missing out on tax savings.
Another mistake is to deduct too many miles. It’s tempting beef up your mileage number to increase the amount you get from the standard mileage deduction, but it’s a dishonest practice that could come back to haunt you if you’re audited. It’s one thing to include some miles that you believe are deductible, such as certain commuting miles, but it’s another to simply pad the number with extra non-business miles.
How to avoid this mistake: Carefully log your miles using a tool like Stride Tax or QuickBooks Self-Employed to log and categorize mileage so you can correctly deduct business mileage. You want to strike the right balance between not enough (Uber and Lyft’s #’s), and too many.
Feeling stuck or lost on taxes? A good place to get help
If you’re feeling confused and overwhelmed about your taxes, TurboTax Self-Employed is the best tool to help you figure out your situation and file your return on time. It has special instructions for Uber & Lyft drivers, so you won’t need any special knowledge to get started.
Mistake: Incorrectly declaring your income
There are actually two incorrect ways that rideshare drivers commonly report their income on the Schedule C:
- Adding up all of your weekly payments and reporting that as your income
- Reporting the gross fares figure from your 1099s without deducting Uber and Lyft’s fees
You might think that all you need to do to calculate your taxable income from Uber and Lyft is to add up all of your weekly pay statements for the year and input that as your business income on your Schedule C tax form. That’s a mistake!
Both Uber and Lyft report your gross earnings to the IRS, meaning they report the amount you earned AND the fees they took. That means that if you only report your net earnings to the IRS, your number won’t match up with the number the IRS gets on your 1099 forms.
It’s also a mistake to report the gross earnings number from the Uber or Lyft 1099 without deducting Uber & Lyft’s fees. That will make your taxable income way higher than it actual is, meaning you’ll pay too much in taxes.
To avoid this mistake: When doing your business income calculation, enter your gross earnings (The number reported on your 1099s) as your business income, and enter Uber & Lyft’s fees on Line 10 (Commissions and Fees) of the Schedule C. That will result in the proper net earnings amount, and will make your return line up with the information Uber & Lyft sent to the IRS.
Mistake: Failing to file your taxes
This is an obvious one, but it’s something more common than you might think. Many people simply don’t file a tax return at all, or completely exclude income from Uber and Lyft from their taxes because it adds extra complications. It’s clearly a mistake, but it’s an understandable one. Taxes are stressful. You might not have enough money to cover your full tax bill, or you might be so overwhelmed by the process that you simply don’t do it, or put it off until another year.
Even though taxes are stressful and expensive, it’s always less stressful and less expensive to file your taxes and pay for them to the best of your ability. Filing several years worth of tax returns is far more stressful than doing it every year, and if you’re not able to pay for this year’s taxes, you can set up a payment plan with the IRS.
And if you’re delaying your taxes because you’re overwhelmed by the process, there is plenty of free and affordable software that walks you through the process step by step.
How to avoid this mistake: File your taxes! If you want to file them yourself, using tax prep software is a good option. If you’re feeling in over your head, local tax preparers can do the job too. Now that rideshare has been around for a few years, even low-cost tax preparers will know how to handle your situation.
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