Tax season is right around the corner, and with that, you may be thinking about ways you can save on your taxes. As an Uber driver, you are generally considered a contract employee or self-employed. Though some states are trying to change that, Uber maintains its drivers are self-employed. As a self-employed taxpayer, you can claim tax deductions that can potentially lower your tax bill. These common Uber tax deductions can significantly lower your tax liability.
Best Uber Tax Deductions
Uber income is subject to taxes, including income tax. Even if you only drive Uber on the side, the income is still considered taxable. Everyone wants to hold on to more of their hard-earned money, so it’s best to minimize your tax bill. Uber drivers need to understand a few key things about taxes. First, rideshare income is taxable and needs to be reported. If you don’t receive a 1099-K, you still need to report your income. You may also be responsible for self-employed taxes. Newer Uber drivers could be in for a rude surprise if they do not properly prepare for taxes.
Lessening Your Tax Burden
You need to understand taxes to navigate them efficiently. For starters, figure out if you have to pay estimated taxes. If you expect to owe more than $1,000 in year-end taxes, you might have to make estimated tax payments. Paying estimated taxes helps you manage your tax bill, and it’s mandatory if you want to avoid unnecessary fees and interest payments. If you also earn W-2 wages, you can ask your employer to withhold more funds from your paycheck to cover the additional taxes.
Also, maximize your deductions to minimize your tax bill. All rideshare drivers incur certain ongoing costs. If these costs are related to your business, they may qualify as deductible expenses.
What Is An Uber Tax Deduction
A tax deduction is an expense that you can subtract from your gross income at tax time. Deductions help you compensate for business costs by reducing your taxable income. To qualify as a deductible cost, the expense needs to be considered ordinary and necessary to your business operations. For example, Uber drivers can claim the mileage deduction to compensate for the cost of wear and tear on their vehicles.
Taxpayers have two options. They can either take the standard deduction or itemize their expenses. In order to take advantage of tax deductions, you need to itemize. The decision to itemize or take the standard deduction will depend on how much your total deductions are. In order for it to make sense to itemize, your deductions need to be greater than the standard deduction which is $12,200 for single filers, $18,350 for the head of household, and $24,000 for joint filers. It is advisable to discuss what makes sense with your tax advisor.
Tax Credit vs. Tax Deduction
Deductions and credits are often misunderstood. While they are both similar in that they reduce the amount of tax you owe, the method in which they go about it differs. While tax deductions work to lower the income you are taxed on, tax credits work to lower the amount you are being taxes dollar for dollar. Some examples of tax credits include the savers credit and the child tax credit.
When it comes to tax credits there are refundable tax credits and non-refundable tax credits. A refundable tax credit, like the child tax credit, reduces the amount you owe, but can also result in a refund if the credit is greater than the amount you owe. Non-refundable tax credits only reduce the amount you owe, if the tax credit is greater than the amount you owe, you do not get a refund. The alternative motor vehicle tax credit is an example of a non-refundable tax credit.
Mileage Deduction
Uber drivers can take the mileage deduction to compensate for wear and tear on their vehicles. Drivers can also choose to deduct the costs directly associated with operating your vehicle. This includes things like gas, insurance, DMV fees, and other expenses. Alternatively, the standard mileage deduction offers a flat rate of compensations based on every mile traveled.
What is the Standard Mileage Rate?
The IRS takes into account the average costs of operating your vehicle as well as depreciation when arriving at the standard mileage rate. In 2019, the standard mileage rate increased to 58 cents per mile. If you take the standard mileage rate, you cannot deduct the actual expenses of operating your car. You can take one or the other, not both. In some instances, actual expenses may exceed the standard mileage deduction. It’s important to weigh your options before choosing.
Should I Track My Mileage?
Regardless, you should always track mileage. Uber and Lyft will only track your mileage when you have a passenger in the car, but you can start counting miles as soon as you leave your home. The mileage count continues running into you get home, so drivers should track their own mileage separately. Mileage apps can help drivers track and categorize miles driven. Options include apps like MileIQ, TripLog, and Stride. Most of these apps easily integrate with most accounting software.
Business Expenses
Uber drivers are entitled to deduct more than just their mileage on their taxes. As an Uber driver, you incur many expenses, and most of them are deductible. Some common expenses that qualify as Uber tax deductions include:
Business Related Insurance
If you purchase additional non-auto insurance for your business, this cost can be deductible.
Cell Phone Bill
A portion of your cell phone bill is tax-deductible as an Uber driver. Deduct a portion based on your usage of the phone. For example, you can deduct half your phone bill as a business expense if you split usage between business and personal.
Cell Phone and Cell Phone Mount
New phones and phone mounts are deductible business expenses.
Vehicle Floor Mats
Purchasing all-weather mats to protect your car’s interior is a deductible expense.
Inspection and Background Check
Uber requires its drivers to produce an approved vehicle inspection and background check. These costs are tax-deductible.
Roadside Assistance
Roadside assistance can be deductible if you’re driving for business.
Service Fees
Uber and Lyft fees are deductible.
Snacks
If you provide snacks or bottled water to your passengers, you can deduct these expenses.
Can Uber Drivers Deduct Meals?
Yes, so long as you eat them while traveling for work. A meal from the McDonald’s down the street from your home isn’t deductible. To deduct meal expenses, you have to eat while you’re working, so you can argue that the expenses are ordinary and necessary.
Above The Line Deductions
In addition to uber tax deductions, there are other write-offs that can drastically lower your tax bill. You can claim above-the-line deductions without itemizing. These deductions are subtracted from your gross income before your deductions to lower your AGI. Above the line deductions include:
IRA Contributions
Contributions you make to your IRA are considered above the line deductions. The IRS allows taxpayers to claim up to the maximum contribution limit of $6,000. However, as a self-employed individual, that amount can go up to $56,000 but some exceptions apply So saving for your future can also bring some tax relief.
Self Employed Taxes
Self-employed taxes also provide an above the line deduction. These make up your portion and the employer portion of social security and medicare taxes for a total of 15.3%. You are allowed to deduct the employer portion of 7.65% (half).
Student Loan Interest
Are you still paying student loans? You can deduct the interest.
How To Claim Tax Write Offs
Deductions are a legitimate means of lowering your tax bill. In order to claim business expenses as tax deductions, you must keep track of your expenses throughout the year. Staying organized is crucial to lowering your tax bill. Make sure you have an organized accounting process so you can accurately report your finances.
Help With Independent Contractor Taxes
Navigating your taxes can be complicated and confusing, especially if you have multiple streams of income. Uber drivers are considered independent contractors, which is like working freelance. This is similar to being self-employed, which creates its own tax scenario. For starters, income tax and state and local taxes are not automatically withheld. This does not negate the fact that they are still due.
As an independent contractor, you are responsible for paying these taxes. Failure to do so can be quite costly. This is why it is important to work with a 1099 tax advisor who specializes in the sharing economy.
The right tax advisor can help you come up with an all-inclusive tax strategy that will maximize your Uber tax deductions. Contact one of the tax experts at Shared Economy CPA to schedule a one-on-one help session today, and click here to subscribe to our free newsletter