Ridesharing has become a favorite way for people to supplement their income. Some drivers even work full time for their chosen rideshare company. Whether you’re driving part or full time, it is essential to understand how taxes work when you’re driving for a rideshare company. For many people that have taken up the wheel instead of the office desk, they may not be sure what sort of tax deductions and other incentives they can use when it comes to file their taxes. Free online tax calculators are great tools that can assist you with the options.
If you use a rideshare program like Lyft or Uber for some or all of your income, the following five tips will help you save when tax season comes around.
- Keep A Mileage Record
The most significant tax deduction you can make as a rideshare driver is based on your mileage. The IRS allows you to deduct an amount based on the number of miles you’ve driven for work. As a rideshare employee that is continuously driving, these small deductions per mile add up. The 2018 ‘optional standard mileage rate,’ set by the IRS, is 54.5 cents for every business mile driven. Even if you’re driving part-time for Uber, Lyft or another company, 54 cents per mile is going to amount to a decent deduction off your taxes.
To make the most out of this deduction, you want to keep an accurate and comprehensive record of your ridesharing mileage. Not only will this make it easier to determine your mileage-based deduction, but, should you ever get audited, you have detailed records to back up the amount you’ve come to.
It’s a good idea to use a third-party app to track and record your mileage. You may even want to do it by hand. Uber and other rideshare apps do have a way for drivers to track their miles, but this only includes miles traveled with a passenger. On your taxes, you can deduct those miles, but also the miles traveled in between picking up passengers.
- Deduct Other Items And Charges
Mileage is your most important deduction, but there are many other deductions you can make on your taxes as a rideshare driver. If you’re still paying off your vehicle, you can deduct a portion of your car payments from your taxes. You also need your car to be well maintained and looking great. After all, a picky passenger might rate you low if you show up with a dirty, mud-stained vehicle! Since you’re using your vehicle for work, it’s mainly a piece of business equipment. To keep your business operating, that equipment needs to be looking and running great. Thus, you can deduct trips to the garage and the car wash.
You can even deduct the cost of snacks or supplies that you provide for riders. Some rideshare employees will manage to deduct a portion of their cell phone bill too, as they are using their phone for primarily work purposes. It’s also important to keep track of any parking fees or tolls, as these can be claimed on your taxes as well.
- See If You Qualify For An Eco-Friendly Tax Credit
The federal government and many states provide tax credits for drivers that have taken a green initiative by choosing an eco-friendly vehicle, like a hybrid or electric car. These credits are designed to encourage other drivers to pick eco-friendly vehicles, as they produce fewer emissions and require less gas consumption to operate. These tax credits can equal up to $7,500 if your vehicle qualifies. Qualifying vehicles must be purchased in or after 2010 and be classified as an EV (electric vehicle) or PHEV (plug-in hybrid electric vehicle). The tax credit you receive will be based on your vehicle’s battery capacity.
The US Department of Energy has an exceptional resource for fuel economy information, which includes a complete list of the vehicles that qualify for an eco-friendly tax credit and exactly how much that credit is worth for each car.
- Estimate What You Expect To Pay On Taxes
Once you’ve calculated your income and compiled your list of deductions, you can begin to understand how much you’ll owe on your taxes. Rideshare drivers are considered self-employed, independent contractors, not employees. There are some unique tax considerations for independent contractors that you need to pay attention to. Thus, it’s good to get started on your taxes as early as possible, as you may owe a lot more than you expect. Since you aren’t a traditional employee, you don’t have any taxes withheld for Medicare or Social Security. When it comes time to file your taxes, you’ll have to pay these. There’s even an additional tax for being self-employed! Depending on how much you’ve earned (and how much you owe), you may have to make quarterly estimated tax payments to the IRS.
- Don’t Withhold Anything
It might be tempting to keep that $20 tip to yourself and not report it on your taxes, but you really should report everything that you are earning. This isn’t just a matter of doing the right thing, but because doing the wrong thing and not reporting it could create a lot more trouble than that $20 is worth. It’s best to keep a record of any cash tips you’ve received, so that you know to add it to your total income.
Hopefully, these five tax tips for rideshare drivers make your life a little easier during tax season. They might even save you some extra money by finding new deductions and tax credits you didn’t know existed!