This Tax Guide is written with very specific information for UBER drivers of all types. It can be used by LYFT and other casual taxi drivers, but may not have enough information for true professional non-web based taxi drivers.
Most clients I see trying these businesses out have not given a thought to taxes, but UBER does a fairly good job of helping out. The year end statement you receive has a wealth of useful information. That said, there are a lot of deductions that aren't included that are a slam dunk, as well as some others that might be more shaky. As with all new business models, a lot of how these things apply specifically to UBER have not been fought out with the IRS, so some things may evolve over time. I'm going to start with a general discussion of things that every UBER driver should understand about taxes, and then get into the specifics of your documentation, and then get really specific on deductions.
First, some things you should know and understand:
1. Your business model is a bit unique, and you're doing some things that are fairly common in the tax world, but on a much higher scale than normal. You're using your own car for business, but the business side may be a very small percentage (or very large) of the use of your car. Your car is now a business asset (in part) and thus there are potential implications when you buy, sell or trade it. Keep things simple by only using one vehicle at a time, and taking the standard mileage rate (discussed later).
2. You should be, at this point, a sole proprietor. This means that you own and run the business by yourself, with no employees. You will file the business taxes as a part of your personal taxes, usually on a Schedule C. I strongly encourage you not to have any partners, even your spouse. Your spouse can help, but should generally not be an employee, and not have any true decision making power, except the power that is normal in a healthy spousal relationship (advice and support, but no "official" role). The reasons for this are myriad, and anyone who's delved into a partnership can attest to the issues that arise. For now, just trust me. Later you may want to form a more complicated business entity, but that will require professional assistance and guidance. If your spouse or partner also drives for UBER, they will have a separate and independent business, with it's own schedule C, and, hopefully, their own car. Co-mingling cars at this point will greatly complicate your taxes and probably seriously confuse your, or your preparer's, tax software.
3. You are going to spend more time doing taxes, and it's going to cost more. Even if you use software (which I highly discourage if you are running a business) you will pay more for the programs. Based on the returns I've done so far, the more you drive, the more likely it is that you will also generate taxable income after expenses. This income will be taxed at a much higher rate. 15.3% minimum for self employment taxes (the self-employed person's Social Security and Medicare). The good news is, you only pay taxes on the profit. We'll talk more about budgeting for taxes later.
4. You might not actually be a business. There's some tension between Hobby and Business income. If you take losses year after year, the IRS may put the kabosh on taking a negative income from your business off of your regular taxable income. This is called Hobby Income. It means you do it more for fun than for profit. UBER recruiting has not helped with this, as they sell it more like a Hobby than a Business. As a Hobby, you still have to claim the income (on Line 21 - Other Income), but you deduct the losses on your Itemized Deductions (subject to 2% of income limit, maximum deductions equal to income and a bunch of other restrictions that ensure that you pay taxes on the income instead of getting write offs.) My advice is to go full bore, gung-ho towards making a profit for 3 years. File the Schedule C's and take the losses on your taxes (improving your refund). If, after three years, you haven't made a profit, and gross revenues aren't approaching 5 digits ($10,000), take real stock of where you're at. If revenues are growing and profitability seems close, keep things going. If revenues are flat, profits are a distant dream, and/or your enthusiasm is waning, bite the bullet and either shut the business down, or tone it back and start filing as a Hobby.
Moving along. Here's the advice you need to make things work...
Income: This is the easy part. UBER will issue you a 1099-K and (maybe) a 1099-MISC. The 1099-K reports the income from all the rides you gave and the 1099-MISC reports all other income. You just need the totals from these, though some software lets you enter the whole form and pulls the relevant data. Box 1a of the 1099-K and Box 7 of the 1099-MISC is your Gross Receipts for your Schedule C. I've seen UBER drivers that took tips, and others that did not. If you get tips, add them to these amounts. Any other income you make as a driver should also be added, but I think UBER frowns on this.
Record Keeping: This is usually the biggest deal for a small business, but for UBER it should be very simple. Keep a mileage log!!!!! We will discuss mileage below but, know this, the one piece of information from UBER you should ignore is the mileage number - this is where you will save the most in taxes. (Mile IQ is AWESOME for this)! Other than that, have a notebook and an envelope for receipts. When you make a purchase for the business, write down date, description and cost, if you get income not tracked by UBER, add it here as well. Throw the receipt in the envelope. You can add categories, but don't really need to, if you're unsure something's deductible, write it down and let your tax guy tell you if it's deductible. That's it. Really? No sorting, categorizing or organizing? No. Simply put, your odds of ever needing them for an audit are slim to none. Save the box, notebook, mileage log and tax returns for 7 years, and then throw it all away. If you ever get audited, there's plenty of time to sort through the box and organize it to match the notebooks - but why do it if it's not necessary. If I'm doing your taxes I'm going to use the notebooks, and remind you that you should have a receipt for everything. You don't have to prove things to me. It’s important to understand not to over think things. You get money, it’s entered as income, you pay money, it’s entered as a deduction.
Keep in mind that UBER will report every penny you make, and then give you a report of deductions they took off. This is the easy part. For a lot of people, especially casual drivers, these will be all the deductions they have - except for the mileage log that you MUST have. You can use UBER's mileage, but you'll be leaving your best deduction on the table (or in the car!)
Expenses: You can deduct any ordinary and necessary expenses for your business. I generally describe the requirements like this: If it will make you more money, is required by someone in authority, or makes your business more efficient or your life as a business person easier, it's probably deductible. The list below is actually a fairly exhaustive list of normal business deductions, tailored to UBER. Some won't apply at all, but I'm leaving them there to stimulate your own thoughts.
First some things most UBER driver's could or should be deducting (details in the numbered lists): Mileage, any tolls, parking or access fees not included in the UBER statement, driving gloves, insurance riders, office supplies for the business, steering wheel covers, car equipment specifically for driving passengers that is not normal car equipment or maintenance, mileage tracking apps or equipment, business cards, commercial driver's license, car seat additions that help for long driving, and a percentage of cell phone bills if you use your cell phone for the UBER app. Also any safety clothing or equipment that would not be considered normal for a car that was not used for driving paying passengers. Examples might be first aid kit, flares, fire extinguisher, or a reflective vest. Some might argue that these are normal for a regular driver, but how many people do you know that have these in their car? I would deduct them.
Second, things you should not be deducting: Car maintenance including car washing, oil changes, gas, repairs or any other vehicle expenses unless they are specific alterations or additions to allow you to drive commercially (the mileage deduction covers all these things). Meals and entertainment would be unlikely. Uniforms or clothing would not be deductible, though possibly dry cleaning of a specific set of "driving clothes" - this would be shaky.
Here's the exhaustive list:
1. Pretty much anything the company charges you for. If they deduct it off your commission check, deduct it off your taxes (you report the gross commission, not the commission after deductions). These are all the deduction numbers listed on your annual UBER tax summary (except the income, of course). They generally fit into nice categories on your Schedule C, mostly as commissions.
2. Marketing Expenses: I'm thinking most of this will be handled by UBER, but if you spend money for business cards, signage, websites, etc, these will be deductible. I'm guessing you might have some for finding new drivers for UBER and getting the referral fee, though I'm not sure you should be recruiting your own competition.
3. Insurance: I'm not talking about homeowners insurance here. I'm talking about ‘oops I screwed up and someone is suing me insurance.’ There's a lot of argument right now as to whether your personal car insurance is good enough for the business, and I'll provide a link to an article on the subject below this comment. That said, if you have just regular, personal car insurance - no deduction. If you pay extra for commercial insurance, or a rider for commercial use, or a special 'UBER' rider that some companies are providing, that cost is deductible.
4. Entertainment and Meal Expenses: You really shouldn't have any of these. Your meals aren't deductible, even when waiting for a customer. I also can't really envision you taking someone to lunch. Since UBER provides the customers, this is a no-go. Some drivers have had mints or such in the car - I call those supplies (and they are deductible). I guess theoretically you might take a potential driver to lunch to talk to them about driving for UBER in hopes of getting the referral fee. In that case, save the receipt and write the persons name, and the topic of discussion on the receipt. That would be deductible entertainment expense - don't abuse this.
6. Cell phones, laptops and tablets: You can take a portion of the phone and data costs for the phone you use for UBER. Ratio based on time or data usage. Don't go crazy figuring the exact ratio. If you do a lot of driving, or it's your main source of income, you may want to get a business only phone, and/or laptop. You can take a portion of your personal stuff, but it might not be worth it unless the ratio is high. We'll talk about business use of home later. The purchase of laptops or phones that you use for business generally requires them to be depreciated (taking a portion every year for several years.) Your tax professional or software should handle this, but make sure you put the information in right.
7. Vehicle Expenses: Keep a mileage log. Let me say it again, unless you have a vehicle that is 100%, no s**t, total business and no personal use, keep a mileage log. Don't worry about gas, repairs, oil changes, insurance or any other car expenses (except as discussed above under insurance). There are other ways to track vehicle expenses, but mileage is the best. Do track annual car taxes and finance charges. The easiest mileage log is a notebook where you right the date, the trip purpose and the miles driven. You will also need to know the total miles the vehicle is driven for the year, so write the odometer reading down every January 1st! Mileage will be one of your biggest expenses, so keep track of it religiously! 10,000 miles of properly tracked vehicle mileage can result in $1500 of tax savings! UBER only tracks miles with passengers. If you're "on the clock" driving around waiting for a call, driving to or from a pickup, or driving to do other things to support your business - write it down! You pretty much get no other deductions for the vehicle, but the mileage deduction is very generous.
8. Home Office: If your business is getting big, set aside a space in your home that is 100% business use. Never used for anything else, and regularly used for business. This is where you keep your business records, your business computer or laptop, and do other business related things. The tax term is regular and exclusive business use. If you do this, you deduct a percentage of the household expenses - rent, interest, taxes, utilities, insurance, repairs, etc, based on the square footage of the office ratioed to the home square footage. Expenses directly related to the office, such as a dedicated phone line; do not have to be ratioed. You can also take a small depreciation deduction for the home losing value (let your tax guy handle this - it's a b**ch!) The IRS "simplified" this, allowing you to take $5 for every square foot of Home Office, up to $1500, but it's BS to call it simplifying, because any tax guy worth their salt is going to run the numbers both ways and take the number that makes the most sense.
9. Depreciation: Some items that you buy for your business, that have a useful life longer than a year will have to be depreciated over time rather than deducted all at once (examples include computers, digital cameras, machinery, big tools or office furniture). There are many options for deducting it up front, but be wary of this, there are tripwires that can cost you if you dispose of something before it has passed its useful life. Talk about these items with your tax advisor.
10. Licenses: If you get a commercial driver's license, that is deductible. If you have to pay for special licenses, tags, access fees or other things to let you pick up passengers in an area or work in an area, those are deductible. UBER pays some of these for you and accounts for them on your statement, so don't double deduct!
11. Taxes: Unlikely, but sales or other taxes may come into play in some super psycho jurisdictions. UBER should handle this, but don't assume they do. You also may need to pay business taxes and licensing fees to State/County/City. These are deductible, but you need to work these out on your own - this is an income tax guide, and these other taxes vary too much by locale to cover here. Again, don't screw these up. The local governments can be worse than the IRS if you mess up.
There's more that's deductible, but I think you get the idea.
Do I need a Separate Bank Account? This one might be a little controversial, but I believe it's the be all end all of successful businesses. Once your business really gets going, and is more than just a little side income, it's this, combined with record keeping discussions above, and budgeting discussions below, this will make everything easier. Open a separate bank account for your business. It doesn't have to be in a different name, just separate from your personal business. If you use credit, get a second credit card that is exclusively for business (again, it doesn't have to actually be a business credit card, just one that you use only for business). Put all business income in this account, and pay all business expenses out of it, or with the business credit card. Pay off the business credit card out of this account. The only expenses not paid out of the account are car expenses (especially gas) and home office expenses that will be divided based on square footage as discussed under home office above (utilities would not be paid out of the account, but office supplies and business only cell phone would). The beauty of this method is that it simplifies budgeting as we'll discuss below, and it allows reconciling of expenses to make sure your notebook covers everything. A good tax expert should be able to compare your account statements with your notebooks and know if you missed something (assuming you don't intermingle personal and business expenses).
How do I Budget if my Income goes up and down? Now that you have an account that is separate for business, you can start thinking about budgeting. Your income may fluctuate wildly, so you can use the business account to pay a "salary" to your personal account. I recommend letting some money build up in the business account until you have a feel for your income level. It will probably start small, but build up over time. Once you have a good feel, you can pay yourself this salary. The salary should be no more than 50% of your annual gross income or 60% of your net income (divide it by twelve obviously, to get the monthly amount). You need to play around with it. Start small and raise it if income exceeds expectations, but NEVER pay yourself more than 60% of net income. Having a salary allows you to budget like you had a normal job. Keeping a buffer amount in the account allows you to have a "salary" even during lean months. By paying yourself a salary and saving the rest, if you have a really big month, you end up saving more, which in turn allows you to have the money to pay the tax bill that the big month will generate. When you file your taxes, you should have plenty of money to pay the tax bill, and still have money left to maintain a buffer, and, if you're lucky, have the ability to pay yourself a bonus to your personal account for a big purchase or vacation!
Do I need to make Estimated Payments? My advice is that you should use the budgeting advice above to pay your taxes. You'll still need to make estimated tax payments if you're making good money, but you should pay the minimum required to avoid an underpayment penalty. Your tax advisor will calculate them for you, but to explain simply: you need to pay at least as much as your prior year's total tax liability in withholding or estimated taxes to avoid a penalty (oversimplified explanation, but really all you need to know). This is an easy calculation for your tax guy and he will set up quarterly payments and provide vouchers for paying them. (The timing is a little weird. You pay on 4/15, 6/15, 9/15 and 1/15.) You can also pay varying payments to try to avoid a tax bill, but it gets complicated, and the government won't pay you interest.
Keep the record keeping up to date. It's a nightmare to back fill. Work your ass off to generate business and make money. Research best practices and talk to the people making money doing this. The idea is to MAKE money, and then be pissed off that you are paying taxes on it. Getting a big tax deduction from your unprofitable business is only good at tax time. Paying taxes is a sign of success!