You have decided to take the plunge and become a driver for Uber, Lyft or some other rideshare program. Congratulations! You are now a small business owner and your tax return just got more complicated. The income you earn from Uber is taxable and must be reported on Schedule C of your 1040. However, you may deduct expenses incurred in earning this income.
In January, you should receive a Form 1099-MISC from Uber or whatever company you drive for. The amount should be reported on Schedule C as income. Tips received from customers not included on the 1099 should also be reported.
The most important thing to realize at this point is that you must keep good records of your mileage and expenses. As far as the IRS is concerned, if you don’t have a receipt or can’t prove it, it didn’t happen. In deducting vehicle costs, you have two choices – you may take the standard mileage rate or you may take actual expenses. For 2016, that rate is 56 cents per mile. This rate includes gas, maintenance, depreciation, and other costs of operating the vehicle. Alternatively, you may choose to deduct actual costs of operating the vehicle. This involves keeping track of all your vehicle expenses – gas, maintenance, depreciation and the like. You must also maintain a mileage log and can only deduct the percentage of costs that were related to the business. For example, if the costs of operating your vehicle was $10,000 and you drove it 15,000 miles during the year, but only 5,000 was for business, you may deduct one-third of the cost of operating the vehicle, or $3,333. Mileage to pick up the passenger and return home are deductible in addition to the miles incurred with a passenger in the vehicle.
Some vehicle costs may be deducted regardless of which method you utilize. A portion of the interest on the car loan, or a portion of the lease payment if it is a leased vehicle are deductible. Parking and toll fees incurred in the business may also be deducted. Since the vehicle must be clean for your passengers, you may also deduct the cost of car washes.
Other expenses that may be deducted include snacks or drinks provided to your passengers, extra insurance that you purchase on the vehicle, credit card transaction fees, and the portion of your cell phone bill that is utilized for business purposes. If you have a portion of your home that is used regularly and exclusively for a home office for the business, you may be able to take a home office deduction. This would be utilized for recordkeeping and other administrative tasks related to your business. The IRS has a simplified “safe-harbor” deduction of $5 per square foot (limited to 300 square feet) with no recordkeeping of expenses required. Any promotional expenses such as business cards may also be deducted. Office supplies used in the business may also serve as deductible items.
Once all the income and expenses are included on Schedule C, the bottom line is your taxable income. And this amount should be transferred to page one of your 1040. But you’re not finished yet. Since you are now considered self-employed, you must complete Schedule SE to pay self-employment (SE) tax of 15.3 percent. This is the equivalent of social security and Medicare taxes that are paid by and on behalf of an employee. Even though the stated rate is 15.3 percent, the effective rate is slightly less at 14.13 percent as you multiply the profit by .9235 before determining the tax. Additionally, one-half of the SE tax may be taken as a deduction to adjusted gross income on page one of the 1040.
Since there is no withholding from your income you may have to make estimated payments during the year. These are handled by sending a payment to the IRS on the 15th of April, June, September, and January along with a Form 1040-ES. Failure to do so may result in interest and penalties for underpayment of tax.
In summary, there are three important things to remember for tax purposes:
1.Report all your income.
2.Keep good records so you can deduct all your expenses.
3.File your taxes properly and on time.
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