If you drive for Uber and Lyft, you’re a small business owner. You don’t work directly for the rideshare company, so the IRS views you as an independent contractor. Since you’re not an employee, the platform doesn’t withhold any taxes from your earnings. However, that doesn’t mean you’re off the hook. You still have to pay taxes on the money you earn from driving, but unlike W2 employees, you have to report and pay taxes on your own. In most cases, you will also have to pay estimated taxes every quarter. Learn more about rideshare taxes here
Do I Owe Estimated Taxes?
The IRS wants anyone who will owe more than $1,000 in taxes to make payments every quarter. If you drive regularly, you probably fall into that category. If you meet the criteria, you have to send the IRS a payment every few months. The amount you have to pay is based on the amount of money you earn during the quarter.
The quarterly tax process sounds complicated, but it’s easier than it seems. We’ve boiled the entire process down to three easy steps so you can do it in no time. These steps are specifically tuned to rideshare drivers, but you can check out our main post on estimated taxes for independent contractors if you’re looking for more general information.
Step 1: Organize Your Tax Info
To start off, open your dashboard and export your earnings info into a spreadsheet. Your dashboard has all the information you need for taxes, so its good to have it organized for easy reference. The data should include dates, times, number of trips, duration, miles drive, and earnings. Export this information to a CSV file and save it offline for easy access. You will need this info to properly calculate your quarterly tax obligations.
Step 2: Calculate Income and Expenses
The spreadsheet information tells you your total gross earnings, but you also need to deduct your business expenses. Deducting business expenses lowers your taxable earnings and reduces your tax bill. You should keep a record of every dollar you spend for business purposes so you can deduct it on your taxes. This includes any costs associated with your rideshare business, including car washes, snacks for passengers, and more. Keep receipts for every expense you plan on deducting so you can easily verify them if the IRS challenges you.
You should also track the number of miles you drive for business. You can claim a standard deduction for every mile drive, so it’s important to keep track of your business mileage.
Now that you have all of your expenses for the quarter, it’s time to calculate your net income. First, take the gross earnings listed on your dashboard spreadsheet and then deduct your expense. Whatever is leftover is your net income for the quarter. This is the number you should use to calculate your quarterly tax payment.
Step 3: Do the Math
Now you need to figure out how much money you owe the IRS for the quarter. Take your total net income and multiply it by your tax rate. Since you’re self-employed, you have to pay both the employer and employee portions of payroll taxes. Your total self-employment taxes includes 12.4% for social security and 2.9% for Medicaid. All in all, it adds up to 15.3% of your quarterly earnings. You also have to include federal income tax, so you should check your current federal income tax bracket.
Take your net income total and multiply it by 0.153. The resulting total is the amount you owe for self-employment taxes for the quarter. Then, do the same with your federal income tax rate. Add those two numbers together and you have your total tax liability for the quarter. Now, it’s time to send Uncle Sam his cut.
Step 4: Pay Up
You know how much you owe, but you still have to send in the payment. There are several ways you can send the IRS its money but you need to make your payments on time. Payments for the first quarter are due on April 15. After that, the following payments are due on June 15, September 15, and January 15. If you don’t pay on time, you could face significant fines and penalties.
If you want to pay your taxes through the mail, you can use a check or money order. Make sure you write your social security number and “1040-ES” in the memo section. Include Form 1040-ES with your payment to ensure it goes to the right place. Check out this page to see where you should send your payment. For added convenience, you can also submit quarterly payments online. Read our complete post on paying taxes online for more information.
Need More Tax Help?
If you’re still uncertain about the quarterly tax process, we’re here to help. Shared Economy Tax specializes in independent contractor taxes, so we can walk you through the entire process and show you how to save. Get started today with a one-on-one strategy session with a certified tax pro today. You can also sign up for our Tax Tips newsletter using the form below.