As a tax professional, I’ve worked with many gig economy workers, including Uber and Lyft drivers. While driving for these platforms can be a flexible and lucrative way to earn income, it also comes with unique tax responsibilities that many new drivers aren’t prepared for. Unlike traditional employees, Uber and Lyft drivers are considered independent contractors, which means they’re responsible for managing their own taxes. If you’re thinking about becoming a rideshare driver or are already on the road, here’s what you need to know about taxes to avoid surprises and maximize your earnings.

1. You’re Self-Employed: Understand Your Tax Obligations

The first thing every Uber and Lyft driver should know is that you’re classified as an independent contractor, not an employee. This means the companies won’t withhold taxes from your earnings, and you’re responsible for paying your own taxes throughout the year.

Key Points:

• Self-Employment Tax: As a self-employed individual, you’re required to pay self-employment tax, which covers Social Security and Medicare. This tax is 15.3% of your net earnings (12.4% for Social Security and 2.9% for Medicare).
• Income Tax: You’ll also need to pay federal and state income taxes on your earnings.
• Quarterly Estimated Taxes: Since taxes aren’t withheld from your pay, you’ll need to make quarterly estimated tax payments to the IRS and your state (if applicable) to avoid penalties.

Example: Let’s say you earn 30,000 driving for Uber in a year. After Deducting 30,000 driving for Uber in a year. After deducting 10,000 in expenses, your net income is 20,000.You’ll owe 20,000.You’ll owe 3,060 in self-employment tax (15.3% of $20,000) plus federal and state income taxes.

2. Track Your Income and Expenses

One of the most important aspects of being a rideshare driver is keeping accurate records of your income and expenses. Uber and Lyft provide annual tax forms (Form 1099-NEC or 1099-K), but these forms may not include all the details you need to maximize your deductions.

What to Track:

• Income: Keep track of all payments received from Uber, Lyft, and any tips from passengers.
• Expenses: Document all business-related expenses, such as gas, car maintenance, insurance, phone bills, and cleaning supplies.
• Mileage: This is one of the biggest deductions for rideshare drivers. You can deduct either the actual expenses of operating your vehicle or use the standard mileage rate (65.5 cents per mile in 2023).

Example: If you drive 10,000 miles for Uber in a year, you can deduct 6,550 using the standard mileage rate(10,000 x 6,550 using the standard mileage rate(10,000 x 0.655). Alternatively, if your actual expenses (gas, repairs, etc.) total $5,000, you can choose to deduct that amount instead.

Common Mistakes:

• Not tracking mileage from the moment you start driving for the day until you stop.
• Forgetting to save receipts for expenses.
• Overlooking smaller deductions like tolls, parking fees, and car washes.

3. Maximize Your Deductions

As an independent contractor, you can deduct a wide range of business expenses to reduce your taxable income. Understanding what you can deduct is key to lowering your tax bill.

Top Deductions for Uber and Lyft Drivers:

• Mileage: The standard mileage rate is the easiest way to claim vehicle expenses, but you can also deduct actual expenses like gas, oil changes, and repairs if you choose that method.
• Phone and Data: If you use your phone for navigation, communication, or managing rides, you can deduct a portion of your phone bill.
• Rideshare Insurance: Specialized insurance for rideshare drivers is deductible.
• Car Cleaning and Maintenance: Expenses for keeping your car clean and well-maintained are deductible.
• Tolls and Parking Fees: Any fees incurred while driving for Uber or Lyft can be deducted.
• Snacks and Water for Passengers: If you provide amenities for riders, these costs are deductible.
• Home Office: If you use a dedicated space in your home for administrative tasks (e.g., tracking expenses or managing rides), you may qualify for a home office deduction.

Example: Suppose you spend 100 per month on gas, 100 per month on gas, 50 on car maintenance,  20 on tolls, and 20 on tolls, and 10 on snacks for passengers. Over a year, these expenses add up to $2,160, which you can deduct from your taxable income.

4. Understand Your Tax Forms

Uber and Lyft will send you tax forms at the end of the year, but it’s important to understand what these forms mean and how to use them.

Key Forms:

• Form 1099-NEC: This form reports your non-employee compensation (i.e., your earnings from driving).
• Form 1099-K: If you earned more than $20,000 or had 200+ transactions, you’ll receive this form, which reports your gross earnings.
• Schedule C: As a self-employed individual, you’ll use this form to report your income and expenses.
• Schedule SE: This form is used to calculate your self-employment tax.

Example: If Uber reports 25,000 on your 1099−NEC,but you only earned 25,000 on your1099−NEC,but  you only earned 20,000 after accounting for cancellations and fees, you’ll need to adjust your income on Schedule C to reflect the correct amount.

Common Mistakes:

• Assuming your 1099 forms include all the information you need for your tax return.
• Not reconciling your records with the amounts reported on your 1099 forms.
• Forgetting to include tips in your income.

5. Plan for Quarterly Estimated Taxes

Since taxes aren’t withheld from your earnings, you’ll need to make quarterly estimated tax payments to avoid penalties. These payments are due in April, June, September, and January of the following year.

How to Calculate Estimated Taxes:

1. Estimate your annual income and expenses.
2. Calculate your self-employment tax and income tax.
3. Divide the total by four to determine your quarterly payment.

Example: If you expect to owe 4,000 in taxes for the year, you’ll need to make four quarterly payments of 4,000 in taxes for the year, you’ll need to make four quarterly payments of 1,000 each.

Final Thoughts

Driving for Uber and Lyft can be a great way to earn extra income, but it’s important to understand the tax implications before you hit the road. By staying organized, tracking your income and expenses, and planning for taxes throughout the year, you can avoid surprises and keep more of your hard-earned money.

If you’re unsure about any aspect of your taxes, don’t hesitate to consult with a tax professional. With the right guidance, you can focus on what you do best—driving—while staying compliant with the IRS and maximizing your earnings