Tax Preparation Tips for RideShare Service Drivers | ChooseWhat.com

Tax Preparation Tips for Rideshare Service Drivers

All too often, drivers for rideshare companies do not realize that, unless they expect to receive W-2 forms every year as full-time employees, they are actually independent contractors. In other words, they are business owners, with the associated income tax requirements.

I’m not a rideshare service driver, and I’m certainly not a tax expert. But, as an independent contractor, I can state that this is not as frightening as it sounds. As long as you know what paperwork to expect from the company — and how to keep proper records throughout the year — you will be in good shape to file taxes that pay what you owe without overpaying.

The Difference Between Employees and Independent Contractors

As a general rule, rideshare service drivers are considered to be independent contractors. The upsides of this designation are that they collect more money upfront since withholding doesn’t apply, and they get to write-off related expenses. In addition to not qualifying for employee benefits and other employee perks, however, the downsides include more complicated tax filings. It’s unlikely that filing the short-form 1040 form will be sufficient.

Still, the IRS applies strict rules when distinguishing between employees and independent contractors. Before assuming that you are not an employee of the company, carefully review the IRS Information that defines these designations, just to be sure.

Your Tax Requirements Will Definitely Change

If you have been an employee in the past, you may be accustomed to preparing relatively-simple tax returns. As an independent contractor, however, the rules change significantly. Some key points include the following:

  • Instead of receiving form W-2 from rideshare companies after year-end, those companies send form 1099 for drivers who earned $600 or more during the year.
  • The companies do not withhold any taxes from drivers’ pay during the year. In the short-term, this provides drivers with more money, but, to avoid potential penalties, they most likely are expected to pay those funds on a quarterly basis during the year using form 1040-ES. At the very least, the funds will be due at tax time.
  • The companies do not pay a portion of employment taxes (like Social Security and Medicare), meaning that the entire amount must be paid by the driver when filing taxes.
  • In addition to a long-form 1040 and quarterly estimated tax filings on form 1040-ES, a typical independent contractor’s tax return includes Schedule SE (for self-employment taxes) and Schedule C (to write off expenses related to operating their businesses).

The process definitely can be more cumbersome. But, if you are well-prepared before you start filing your taxes, it does not have to seem overwhelming.

Rideshare Services Typically Make Record-Keeping Easy

Since all driving activities are sent electronically to and from your smart phone, you can expect your company to maintain records of each ride, including what each passenger paid. This information is generally available to drivers by logging into their Dashboards on the company website. You will probably find copies of your 1099 there as well, once it is issued.

Keep in mind, however, that keeping your own records — even if they’re scribbled on a notepad while you’re in your car — can be valuable for comparison purposes. Electronic errors are rare, but they do happen.

If you ignore the rest of the website, however, you’re probably missing important information. Look for pages that explain tax issues, which are generally written clearly and succinctly so that they are easy to understand.

You Will Have Additional Expenses

So far, we’ve basically discussed your income, which is taxable. But, have you considered how much money you spend related to your occupation? Your expenditures probably represent write-offs, which can reduce the taxes that you pay. The following is a partial list of expenditures that you might be able to deduct from income in whole or in part:

  • The greater of mileage (beyond the miles recorded by your company), or actual expenses that can include the portion of gas, auto repairs, financing/lease costs, auto insurance, and other expenses that are related to your business. Note that choosing between mileage and actual expenses can get pretty complicated, so make sure that you get the best deal by understanding the details.
  • Parking fees, tolls, and even membership to a roadside assistance plan.
  • Your smart phone and plan.
  • In-car incidentals ranging from air fresheners to treats for your passengers

This list is far from all-inclusive, so think hard about the money that you spend for the services you provide. Then, do plenty of research to ensure that you do it right.

Keep Records on a Daily Basis

Even a pad and pen beside you while you drive will provide the opportunity to instantly track expenses when you incur them. The best way to keep the information organized and available for tax filing, however, is to purchase simple bookkeeping software, like QuickBooks and enter the information every day when you return from a driving tour. This not only ensures that no information gets lost, but it also keeps it organized in a manner that is appropriate for tax filings.

Tax Filing Does Not Have to Be a Do-It-Yourself Project

Once you have received all applicable 1099s and other forms required for your personal income taxes, tax preparation can begin. You can, of course, prepare the paper tax forms manually, or hire a tax accountant or service to create your return.

Another option falls right in the middle of these options: tax filing software. The reputable brands use a question-and-answer format to capture all of your information, place it on the correct forms, check for errors, and help ensure that you have met all filing requirements. They also help ensure that you have taken every deduction to help reduce your tax burden. They probably even offer free or low-cost online filing, and they typically include return preparation for one state, as well.

Before you try to prepare your tax return completely on your own, consider seeking some form of online or in-person professional help. Guess what? You can write off these expenses, too.