Ed note: Whether you drive for Uber, Lyft or any other popular ride share or private car service, don’t underestimate how important this income is at tax time. We asked tax experts Mike Slack and Jennifer Villarino to provide these five essential facts, so you can avoid unwelcome surprises when you file that 2014 return.
Mobile ride-booking services operate in cities all over the world, connecting passengers with drivers of vehicles for hire through various smartphone applications.
It’s likely that many of these drivers moonlight with these companies to earn income in addition to what they earn with their main employer. But when it comes to income taxes, the difference between those two types of income is as big as the difference between hailing a cab in the rain and ordering a ride in a Town Car with the touch of a smartphone button. For drivers who have steered into the “sharing economy,” here are five essential facts to keep in mind as tax time approaches.
1. Congratulations, you’re a small business owner!
Along with the freedom to choose your own schedule, dictate your own hours and be your own boss, you’ll need to consider that the income you receive is self-employment income, and self-employment tax will be due (see #2). You’ll also need to think about things like commercial insurance to protect yourself and your property, as well as state and local rules and licensing requirements.
2. What you make is not what you earn.
Because you are self-employed now, your income is subject to a 15.3 percent self-employment tax. This tax covers your required contributions to Social Security and Medicare, and functions similar to FICA taxes that are withheld from your wages and paid by your employer if you are an employee, rather than self-employed. While it can be exciting to see the deposits in your bank account every week, keep in mind that you need to pay the taxes on this side income.
3. Record retention is your friend.
Welcome to the world of trade or business deductions. Since you probably spend a significant amount of money running your ride-sharing business (on things like gas, car washes, mints, and bottled water), you’ll want to claim those expenses as deductions on your tax return. It’s important to keep receipts for all of the items you purchase to run your business. And if you’d like to take the IRS’ standard mileage deduction to calculate your deductible vehicle expenses, it’s essential that you keep a log of miles that you traveled for business.
4. Your tax return is about to get a bit more complicated.
In January, you’ll receive a Form 1099 reflecting the income you earned working as an independent contractor driver for the ride-booking company. You’ll need to report all of this income on Schedule C of your federal income tax return. The IRS also receives a copy of any Forms 1099 you receive, and will match that information against your tax return to make sure all of the income is reported.
It’s a common misconception that if a taxpayer does not receive a Form 1099, or if the income from the side job is less than $600, that income isn’t taxable. This isn’t true. All income you earn through your business, as an independent contractor or from informal side jobs, is self-employment income, which is fully taxable and must be reported on Form 1040, Schedule C. If your net profit exceeds $400 for the year, you’ll also need to prepare Form 1040, Schedule SE, for self-employment taxes.
5. Account for your tax liability.
You may be surprised to learn that, unlike Form W-2 income received from your employer, no taxes are withheld from the income you receive from your ride-booking company. Federal taxes will be assessed on the income you earn. That means, depending on your tax situation, you’ll be taxed at a rate of 15 percent to 40 percent, or even more, of your gross profits. You can account for this amount by making estimated tax payments, or by adjusting your withholding with your main employer to cover the taxes you will owe from your side job.
The big thing to remember when it comes to taking on side jobs is that there’s added complexity to consider at tax time. But much of this is overcome with patience during the initial learning curve. Once you’ve complied with local business regulations and get in the habit of keeping records, anticipating your tax consequences, and accurately filing your tax return, that driving side job could be well worth the extra effort.
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