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Tax Strategies & Credits

Uber (and Lyft) Drivers' Tax Tips and Strategies

by
Gordon W. McNamee
on
9/30/2017
Uber (and Lyft) Drivers' Tax Tips and Strategies

Are you currently working for one of the increasingly popular ridesharing companies, or thinking about signing up as a driver? Working for either Uber or Lyft offers drivers a great many advantages, with the most notable of these being tremendous flexibility. Most of the time Uber and Lyft drivers are supplementing their primary income with the money they make on these jobs. If you’re considering adding part time hours by working for either of these services, it’s important that you have a thorough understanding of how you need to report your taxes, as well as some important issues that you could potentially face. 

 You Are Not an Employee … At Least Not for Now

As things stand now, drivers working for Lyft and Uber are considered independent contractors. This may change in the not-so-distant future, as there are dozens of lawsuits that have been filed by drivers asking to be viewed as employees on the federal and state court dockets. Since we don’t know how those cases will be decided, all of the information that we are presenting here will be relying on the status that is currently in place, viewing drivers as independent contractors.

Understanding the Payment Process

When you work for Uber, every time you get word that you can pick up a client you do so with the knowledge that they already have set up an account with the company. The payment of the fare has already been secured via a credit card or other confirmed payment method. All you need to do is check the Uber app on your smartphone and you will know where to pick the customer up and where they want to go. You don’t need to worry about collecting money as it will simply be charged via the previously documented payment method. As the driver, Uber will take care of depositing your portion of the fee into the bank account that you have already registered with the company.

Understanding How to Report Your Income

At the end of the tax year, the companies each generate a Form 1099-K. This is the form that companies use to document what they have paid to independent contractors. In the case of the ridesharing companies, the 1099-K will reflect all of the fares that you have driven during the tax year. This amount is treated as gross income by the Internal Revenue Service, and as such it is your responsibility to enter it onto Line 1 of your Schedule C. After that entry you will be able to deduct the various fees, including those for Uber and from the credit card companies. Your actual bank account deposits will already reflect these fees having been deducted. Those deductions that Uber has made through the third party service that handles their billing, the issuance of 1099-Ks and their payments to drivers will be listed on your taxes as either a cost of goods sold or an expense. 

Vehicle Expenses

Along with the 1099-K that Uber provides, the company also gives each driver access to a comprehensive online log of all of the miles driven and fares collected, as well as a record of each deposit that has been made into the driver’s bank account. The miles reflected on this log are only reflective of those that have carried passengers from their pick up point to their destination: they do not include miles traveled to pick up a fare, and therefore it is important for those who want to properly record their mileage to keep meticulous records of these miles in-between so that they can be deducted.

There are two different ways that a driver can record and report their miles for tax purposes. Both allow you to deduct expenses like tolls and airport fees. You can use the highly detailed actual expense method, which involves keeping track of total miles driven, separated by business and personal miles. This method also requires tracking fuel costs, repair costs, insurance costs and more. Most drivers prefer to use a method that uses the standard mileage rate, which requires far less documentation. All you need to track is how many business miles you’ve logged, what the purpose of each one was, and how many miles you drive during the course of the tax year in total. You can then calculate your business miles and multiply them by the 2017 mileage rate of 53.5 cents per mile.

It’s important to note that if you opt for the actual expense method during the first year that you are using your car for business purposes, you have to stick with that choice for as long as you use your vehicle for business – you can’t switch over to the standard mileage method in any subsequent year. This is not true if during your first year you choose to use the standard mileage rate method of reporting your expenses. If you select that method you are free to alternate each year, as you wish.

Can You Take the Home Office Deduction?

When deciding whether an Uber or Lyft driver qualifies for a home office deduction, remember the home office must be used exclusively in a taxpayer’s trade or business on a regular, continuing basis.  A taxpayer must be able to provide sufficient evidence to show the use is regular.  Exclusive use means there can be no personal use (other than de minimis) at any time during the tax year.  Use of only a portion of a room is acceptable as long as the taxpayer shows that section is totally for business. The office must also be the driver’s principal place of business.

Both Uber and Lyft provide their drivers with detailed accounting information (see Uber reporting above).  The only additional record keeping required is the miles traveled between fares and that is accomplished while in the vehicle. So justifying a home office is problematic. Without a qualified home office, the distance to pick up the first fare and the distance to return home at the end of the shift would be considered nondeductible commuting.

Some would contend that a portion of the garage where the vehicle is parked could be used toward a business use of the home deduction. Remember, the use must be exclusive, which means the vehicle must be used 100% for business.  Since the distance between home and the first and last fares is commuting, it is not realistic to believe that the vehicle is never used for personal purposes and justifying business use of the home for garage parking is also challenging.

Neither the courts nor the IRS have provided any specific guidance on this subject related to Uber drivers, so it is up to the tax practitioner to make the determination on a case-by-case basis.     

Self-Employment Tax

As a driver for Lyft or Uber, you need to remember that you are not an employee but an independent contractor, and that means that you are considered self-employed and have to pay self-employment tax. Self-employment tax addresses the items that employers withhold from payroll for their employees, including Social Security and Medicare. Unfortunately, for self-employed individuals these add up quickly, as they have to pay both the amount that an employer would normally withhold for them, and the amount that the employer would have to contribute.

Writing off the Costs of Your Vehicle

There are limits to taxpayers’ abilities to write off the annual depreciation on their car, but the luxury auto roles that impose those limits also have exemptions, including for cars that are used for driving people or property for hire, as part of a person’s business or trade. In that case you are permitted to write off the costs of your vehicle in a number of different ways. You can use immediate expensing or normal depreciation, or you can write off half of the vehicle’s cost. You are also free to write off a mixture of all three. This flexibility means that you can find the method that works best for you and your personal situation. The only caveat is that in order to do so, you are required to use the actual expense method of tracking your costs rather than using the standard mileage rate method.

Keep in mind that if you are planning on depreciating half of the cost of the car or immediately expensing it, you are only able to do so in the year that you bought the car, and even then the option is only available if that is also the year that you started using the car for business purposes. A car that was purchased before you started driving for Uber can really only have its original cost or fair market value depreciated over a five-year period, and the choice of which to use is mandated to be whichever one is lower.

Handling Tips

Although tips are supposedly included in the fare charged by Uber, and additional tips can be added, it is not uncommon for a driver to receive additional cash tips. These should be included in Schedule C gross income.

Is There Anything Else You Can Write Off?

There are a few other expenses that a Lyft or Uber driver could conceivably deduct. These include liability insurance on your vehicle, the costs of your cell phone, and if you purchase water or snacks to provide to those who you are driving.

As you can see, there are a number of important considerations and complexities to driving for Uber or Lyft – it isn’t as easy as just getting behind the wheel of your car and making money. If you need advice on whether this is a good idea for you, or help with taxes, contact a professional today.

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Gordon W. McNamee

Gordon W. McNamee

Gordon W. McNamee is a Certified Public Accountant (CPA) based in Rancho Cucamonga, CA. Gordon W. McNamee can assist you with your tax return preparation, payroll, accounting and tax planning needs. <br /> <br /> 2021 is Gordon W. McNamee, CPAs 38th year in the profession. As as a former IRS agent (1984 through 1987), Gordon has been in public accounting since 1987. Gordon specializes in individual, corporate, HOA, trust, estate and payroll taxes. He also prepares financial statements and provides accounting & bookkeeping services. He enjoys making his clients feel at ease while providing a personalized professional service.

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