A recent report from the Pew Research Center found that more Americans are using ridesharing apps than ever before. In 2018, 36% of adults said that they used some sort of ride-hailing service, up from 15% in 2015. Of course, a rise in demand has also created an increase in supply, with more rideshare drivers on the road than ever before.
Two of the most popular rideshare companies in the United States are Uber and Lyft. While working as a ridesharing driver is an excellent opportunity for you to earn extra income with a flexible schedule, many people don’t recognize the tax implications that come with it.
Today, we’re here to provide you with a complete guide to Lyft taxes. We’ll cover why taxes for Lyft drivers are so tricky and what you can do to help simplify the process. Lastly, we’ll touch on what you should do if Lyft doesn’t send you a Form 1099.
Are Lyft drivers employees or independent contractors?
When working a paying job, you are classified as either an employee or an independent contractor. If you’re an employee, your employer is responsible for paying a portion of your taxes on your behalf. The employer pays 6.2% in Social Security taxes and 1.45% in Medicare taxes.
Employees are then responsible for matching these amounts. Typically, employers will withhold Social Security and Medicare taxes from an employee’s taxable income.
Independent contractors, on the other hand, don’t have an employer who pays these taxes on their behalf. Thus, independent contractors are responsible for paying the entirety of the tax burden in what’s known as a self-employment tax. Because you are paying your own taxes, as a contractor, you must pay 15.3% of your gross earnings to the IRS. 12.4% of this goes to Social Security taxes while the other 2.9% goes to Medicare.
This often comes as a shock to those earning self-employment income for the first time. Typically, you don’t realize this until you go to file your tax return. Upon filing, you discover that your tax bill is double what you had anticipated. You may not have funds set aside to pay this business tax.
This brings us to our first lesson regarding Lyft taxes. Lyft drivers are not employees of the company. Instead, you operate as an independent contractor. Operating as an independent contractor impacts the way you file your taxes.
Filing taxes as a Lyft driver
At the end of the year, Lyft drivers are responsible for paying the entirety of taxes on their business income. Independent contractors report this income on their IRS Schedule C. Not only will you report your income on this form, you’ll also report your expenses.
As a Lyft driver, your expenses are likely higher than you realize. Consider some of these tax-deductible expenses that you could write off next tax season:
- Vehicle expenses, like new tires and oil changes
- Mileage deductions
- Lease payments
- Parking fees
- The smartphone you use to navigate and pick up customers
- Car washes
The IRS says that “business expenses are the cost of carrying on a trade or business.” They also say the expenses need to be both “ordinary and necessary” to qualify as a tax deduction. Ordinary expenses are those that are “common and accepted in your trade or business.” Necessary expenses are those that “are helpful and appropriate for your trade or business.”
Where the line often tends to blur for Lyft drivers is personal vs. business expenses. Many Lyft drivers use their personal cars for business purposes. For instance, you may drop your kids off at school and then activate the Lyft app and pick up riders for a couple of hours. How can you deduct expenses then?
In this case, you’ll need to utilize the standard mileage deduction. The standard mileage deduction is a per-mile rate set by the IRS. The IRS aims to set this rate high enough to account for things like oil changes and car maintenance. The 2019 standard mileage deduction is 58 cents per mile.
If you take the standard mileage deduction, you can’t then deduct things like gas, oil changes, car maintenance, and other related expenses. There’s no way of knowing whether these are for personal or business use. So you’ll need to track your business miles to determine your year-end deduction.
If you bought or rented a car explicitly to work as a Lyft driver and you use that car exclusively for business purposes, you can deduct every expense associated with the vehicle. However, in this scenario, you can’t also take the standard mileage deduction. You must choose one or the other when paying federal tax. By keeping track of expenses, you can determine which option most benefits your tax situation.
There’s nothing worse than going through the tax preparation process and trying to figure out how much you spent on your ridesharing business over the last year. One of the biggest tax tips we can offer is to stay on top of business expenses throughout the year. Keeping track relevant tax information all year will make it easier to file come April.
How do you know how much income you earn?
Self-employed professionals typically receive 1099s that summarize their gross income throughout the year. This is a pre-tax number that indicates the amount on which you owe income tax. This number does not account for any expenses, as you are responsible for tracking and reporting those on your tax documents. Many Lyft drivers receive two versions of IRS Form 1099: the 1099-MISC and the 1099-K.
IRS Form 1099-K summarizes the income you earned through payment card and third-party transactions. Customers must use a card to pay on each ride that you provide. If you made more than $599 through those payments, Lyft should send you a Form 1009-K that summarizes those earnings.
Form 1099-MISC summarizes your non-driver compensation. While a 1099-K summarizes earnings made through rides, the 1099-MISC summarizes earnings made through other Lyft services, such as driver referrals or bonuses you earn through Express Drive, the service that allows you to rent your car out to others.
Lyft will also provide you with a daily mileage log showing how much you drove for the company throughout the year. It may not hurt to also keep a log for your personal records and make sure these two figures match at the end of the year. Doing so will ensure that you’re reporting the proper mileage on your Schedule C and receiving accurate deductions.
What happens if you don’t receive a 1099?
Lyft will only send a 1099 if you complete 200 rides during the course of a year or earn more than $20,000. What should you do if you don’t meet these thresholds and don’t receive a Lyft 1099 as a result? Even if you don’t receive a Form 1099, you are still required to self-report your income. You must pay taxes on any self-employment income you earned over the past tax year.
You can view your tax documents in your Lyft Yearly Stats dashboard. When you log in to your driver dashboard, you should see a section titled, “Tax Information.” Here, you can find relevant information such as your yearly gross ride receipts, ride earnings, and miles traveled. You can quickly switch between years dating back to 2014. Lyft says is not able to provide tax information from 2013 or earlier.
According to the IRS, anyone whose net earnings are greater than $400 needs to pay self-employment tax. As a Lyft driver, you should go through the year assuming that you’re going to have to pay self-employment tax next season.
The IRS can audit you for up to three years (or six years if you have understated your income by 25% or more), regardless of the dollar value. So you must report all of your income, even if you don’t have a 1099.
Estimated quarterly taxes
One last wrinkle in the tax-filing process is estimated quarterly taxes. The United States has a “pay as you go” tax system. This means that you’re responsible for paying taxes on income as it’s earned, instead of at the end of the year.
For example, let’s say you owe $4,000 in self-employment tax at the end of the year. The IRS expects you to have paid $1,000 each quarter so that your tax burden is practically squared away by the time you file forms in April. At the very least, you should pay at least 90% of your taxes through these payments. If you do not do so, the IRS can subject you to penalties and fees.
As you can imagine, numerous criteria go into determining how much you make each quarter. You can use our Self Employment Tax Calculator to determine how much you owe in taxes each quarter.
Make tax-filing a breeze
If you’re an independent contractor, you’re going to need to pay careful attention when it comes time to file your taxes. Taxes for Lyft drivers, Uber drivers, and other self-employed individuals can be tricky, but being organized and prepared for tax time can make the process a bit less complicated. Using tax software like QuickBooks Self-Employed can help get your books in order throughout the year.
Quickbooks can help you separate personal and business expenses, automate your deductions, calculate estimated taxes, and more. Then, when April comes around, you’ll be completely prepared to file your year-end taxes and avoid any IRS penalties or audits. For more tax advice, be sure to check out our complete guide to taxes for the self-employed.