Tax season is here. If you are a part of the gig economy, you probably realize that filing has certain challenges not faced by W-2 workers. Here's what you need to know about taxes if you drive for a rideshare company, like Uber or Lyft. While it is no substitute for professional tax advice, this post should give you a better idea of how to prepare your documents and plan a future tax strategy.
Understanding Independent Contractor Status
Working for a rideshare company typically means that you are an independent contractor, not an employee.
What's the difference? As an independent contractor, you enter an agreement with a company to provide a service or services. They have no responsibility to you other than providing access to jobs through their platform.
Some states, notably California, have tried to challenge the status of gig workers, but thus far, even providing resources for worker's compensation has resulted in court challenges brought on by big companies like Uber.
As an independent contractor, you must:
Find your own health insurance if you want coverage.
Invest in your own retirement account, like a SEP plan.
Pay 100% of the payroll taxes you owe.
Submit Misc-1099 forms to document your income.
File a Schedule C form as part of your tax return along with Form 1040 so that you can deduct expenses and potentially lower your tax burden.
Combining W-2 Earnings with Income from a Rideshare Gig
One of the biggest challenges of earning your money as a gig worker is estimating the amount of tax you owe in any given year — in advance. If you don't pay enough tax during the year, you could incur a penalty when you go to file.
One way to mitigate that headache is to have some form of W-2 income in the mix. When you are a W-2 employee, you can opt to change the amount of money your employer withholds from your check by changing the number of dependents on your W-4 form.
If the company withholds more than you owe, normally you would get a tax refund. But this "extra" money can also go toward paying your independent contractor tax.
Tax Strategies for Rideshare Drivers
Here are a few extra tips to help you cope with tax season:
File quarterly taxes so that you can properly estimate what you owe. Filing quarterly taxes significantly reduces the chance that you will face an IRS penalty for underpaying your taxes.
Take full advantage of business deductions. You are entitled to claim either the expenses associated with driving your vehicle for work or the standard IRS mileage deduction, currently $.56 a mile.
Make contributions to your IRA and Health Savings Account (HSA). Both of these contributions reduce your tax burden as they are tax-deferred.
Keep careful track of earnings. Employers are required by law to send a 1099 statement showing what you earned from them. But you'll also pay taxes on tips as a rideshare driver, so you also need to keep your own records.
Lower Your Auto Insurance with a Defensive Driving Course
When you're an independent contractor, you should take advantage of every chance to save money. A court-approved online defensive driving course from Aceable is not only a great way to get a ticket expunged from your record; it can also potentially lower your auto insurance payment. Plus, you can use your improved driving skills to impress the customers you're ferrying around town. It's a win-win situation.