The 2018 Tax Cuts and Jobs Act created a lot of work for tax auditors and tax consultants alike. One of the most affected areas of these tax changes are the independent contractors, which is where rideshare drivers are classified.
So, we decided to review the changes and focus on those specific items that affect Uber and Lyft drivers.
20% Pass-Through Deduction
This is the big game changer for independent contractors; it basically affects anyone that gets 1099. This change means that if your individual annual income is $157,500, or as a married couple filing together ($315,000, you get a 20% deduction on your total profit.
Here is an example of this deduction:
If you earn $50,000 in 2018, and your expenses were $35,000, then your profit is $15,000, which is taxable. Now, take off a further 20% from your profit, which is $3,000 and your taxable income is only $12,000.
This will only affect your income tax, not your self-employment tax which is still 15.2%.
If this is not your only income source, then all income sources within the 1099 format will have this tax deduction. If you are employed, and this is a part-time job, your wages will not be affected by this, only applies to your rideshare income.
Standard Mileage Deduction rises to $0.545/mile
All rideshare drivers have an option, to deduct their expenses by manual calculation, or to take the IRS SMD, which is reset every year. This year it’s $0.545 per mile, and while this might not sound so much, it’s quite a lot. One cent per mile when driving 50,000 miles adds up to $500.
Just remember, that the most important expense to track is your rideshare miles, from the moment you turn on the app till the moment you turn it off. The miles are all-inclusive.
Luxury Vehicles Depreciation
Uber and Lyft provide luxury vehicles for higher paid rides. These vehicles obviously cost more to by and run, that is why the new law provides a bonus deduction on depreciation. Any luxury vehicle owned or leased by you will receive an extra $10,000 deduction the vehicles the first year of use, and a further $16,000 in the second year.
Take heed; this deduction only applies when you decide to take the manual expense route. It does not apply when using the SMD.
If you are an Uber Black or Lyft equivalent and higher, then you should take the manual expenses route, especially if you work full time for either or both companies. The expenses generated by more expensive cars will push your manual calculations over the SMD.
SMD or Manual?
Most rideshare drivers do not generate enough income to appreciate the difference in manual deductions truly. This means that the best route is to take the SMD. Unless you are a fleet owner, and your income bracket grows significantly.
But since a majority of rideshare work is reported on 1099 whether you drive for Uber, Lyft, or other rideshare companies where you aren’t their employee, your business deductions won’t change for the most part.
Do not expect much help from Uber or Lyft, as their customer service for drivers is skimpy when it comes to dealing with taxes.
Tax Deductible Expenses
The choice between the SMD and manually deducting expenses is a personal choice based on optimizing your income. This means that you should perform an exploratory exercise in your expenses, list everyone in the last three months, and calculate the difference between the manually estimated expenses and the accumulated mileage expenses of the SMD.
These are the basic expenses you need to include in your estimation:
- Car purchase payments
- Depreciation: don’t forget the new bonus.
- Gas: calculate every mile you drove from the moment you started the app till you closed it.
- Insurance: ridesharing and other vehicle-related
- Maintenance: all maintenance costs and overheads.
- Parking and Toll Fees: all parking fees related to the job, or if you pay to park since your home doesn’t have free parking.
- Cell/Smart Phone: you bought it, you use it for work, it’s
- Apps: just like a smartphone.
- Gadgets: phew, a long list starting from a smartphone holder to a smartphone cable to a child seat, and vomit bags.
- Food and Drink for passengers
- Health and Medical Insurance so long as your business is profitable.
- A percentage of your home infrastructure costs, since as an individual contractor your home is your office too.
Its quite a list and you might think that it will save you more than the SMD, but experience has shown that it will only be useful to manually record expenses when driving full time, especially with a more expensive vehicle.
The big picture is a decrease in taxes for all rideshare drivers no matter their income from ridesharing work. The big difference in the tax change is the 20% pass through, other then that, there is no real change that will affect you.
Now, no matter what your decision, you should always record your expenses, and there are several tools for this. The best one on the market is QuickBooks. This app comes with a mile counter and a full array of accountancy modules that enable you to categorize expenses, track expenses and even perform an estimated tax return based on your data.
Finally, if you manage a few gigs and not only ridesharing, or if you drive for more than one company, you must be able to segregate the expenses per company. This is important for you, and will also stop you from making a double expense error, where you claim the same expense for two different clients, which is a big no-no.
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Written by: Aman Bhangoo is the co-founder of Uber Driver Forum who helps rideshare drivers and riders to find answers to their most pressing questions. With over 3.5 years of experience, Aman brings a vast amount of knowledge, style, and skills to help fellow drivers. He has given over 18,000 rides with Uber and more than 6,800 rides with Lyft.