Ridesharing services such as Uber and Lyft have become increasingly popular both as a means for transportation and as a way to earn extra money. In June Garrett Camp, co-founder of Uber, estimated that there were 2 million Uber drivers providing rides to 65 million riders across the globe. The United States is one of the biggest markets for ridesharing, gaining a foothold several years ago in larger cities and eventually finding its way to small-medium metropolitan areas. In San Francisco alone there are 45,000 registered Uber and Lyft drivers, 12-percent of whom are active on a regular basis. These drivers account for 20-percent of the city’s traffic (about 570,000 average miles driven per day), leaving the area’s 1,800 licensed taxi drivers in the dust.
Becoming a ridesharing driver is easy, and thousands in the United States view it as a viable fulltime job and as a way to earn extra money. Regardless of how many fares are collected, it is important that ridesharing drivers understand how they are taxed on their earnings and the tax deductions that are available to them.
How is the Income Taxed?
Ridesharing drivers are self-employed for tax purposes and are treated the same as individuals that own their own business or perform contract work. They will need to prepare Schedule C, Profit or Loss from Business, when they file their individual tax return. This form will summarize the income that was received and the expenses that were paid during the tax year.
Income is reported on Form 1099-K (Payment Card and Third Party Network Transactions) and Form 1099-MISC (Miscellaneous Income). Uber and Lyft provide these forms to drivers who earn more than $600 in fares during the tax year. Uber also provides tax summaries to its drivers which show total fares, other income earned (ex. referrals, bonuses), fare miles driven, and expenses paid back to the company.
The net earnings from ride sharing activities are subject to taxation at the taxpayer’s marginal tax rate. The net earnings are also subject to self-employment taxes, or the employer and employee FICA and Medicare liabilities. There is no withholding on ridesharing earnings, taxpayers are responsible for paying any additional tax on their own.
What Tax Deductions are Available?
Vehicle expenses are reported on Schedule C, line 9. There are two methods in calculating the deduction: the standard mileage rate method and the actual costs method. Owning or leasing a vehicle can dictate which method is allowable.
|Vehicle is Owned||Vehicle is Leased|
|If a taxpayer wants to use standard mileage, they must do so in the first year the car is available to use for business||If a taxpayer wants to use standard mileage, they must do so for the entire lease period|
|Going forward a taxpayer can choose on an annual basis whether to use standard mileage or actual cost|
Standard Mileage Rate
If choosing the standard mileage method, miles driven for business purposes are logged and multiplied by a rate set by the IRS. The current rate is 53.5 cents per mile. The deduction is equal to business miles driven multiplied by the IRS rate. If choosing this option, deductions for vehicle related expenses (outlined below) are forfeited with the exception of parking fees, tolls, and interest expense for vehicle loans.
Uber and Lyft will log fare miles, or miles driven when there is a customer in the vehicle. It is important that drivers also track the miles driven to pick up customers, as these can be included in calculating the deduction as well.
Jeff Gordon is a rideshare driver. He drives a total of 16,000 miles during 2017, 12,000 of which pertain to rideshare fares. He spends $500 on parking/tolls during the course of driving customers. He also spends $2,000 on vehicle loan interest. His tax deduction using the standard mileage rate is $8,420.
|Parking / Tolls||500|
The actual costs method summarizes vehicle-related expenses paid by the taxpayer and adjusts for business use of the vehicle. Vehicle-related costs can include:
- Registration, licensing
- Oil changes
- Repairs or maintenance
- Vehicle depreciation
- Parking and tolls
- Interest on vehicle loan
Most vehicles used for ridesharing will be considered listed property, which means that the deduction for depreciation expense will be limited.
After summarizing vehicle-related expenses, the business-use percentage is applied in determining the allowable tax deduction.
Jeff Gordon is a rideshare driver. He drives a total of 16,000 miles during 2017, 12,000 of which pertain to rideshare fares. He spends $3,000 on fuel, $1,500 on insurance, and $5,000 on maintenance during 2017. Annual depreciation for his vehicle is $3,000. His tax deduction using the actual costs method is $9,375.
Rideshare drivers can also deduct expenses such as allocable cellphone and navigation service fees, fees paid to either Uber or Lyft, and amenities provided to customers. These items are not subject to a business use allocation, assuming that they were paid in connection with providing ridesharing services.
While Uber and Lyft will provide rideshare drivers with basic fare information, it is the responsibility of the taxpayer to keep their own records to substantiate expenses that are deducted. Taxpayers should keep their own record of miles driven and keep receipts for vehicle-related expenses.
To learn more about deductible vehicle expenses, see IRS Publication 463 or contact a member of DKB’s tax team today.