Disclaimer: Gridwise is not a personal tax advisor. The information below is meant only for guidance purposes and not as professional, legal, or tax advice.
Smart rideshare drivers treat driving for Uber and Lyft like a business, because it is!
This means building a strategy and choosing the right business assets, as well as managing your own tax obligations.
Unlike salaried workers, taxes aren’t automatically deducted from the paychecks of those who are self-employed, including rideshare drivers. So, you’ll have to keep track of them yourself. Lucky for you, there are loads of tax benefits that you can enjoy as a driver… but only if you take advantage of them.
The Basics of Doing Taxes as an Uber or Lyft Driver
Before we dive into our rideshare driver tax deduction guide, let’s go over a few things that you should be doing throughout the year to make taxes a bit easier at tax time.
Keep a detailed mileage log
Tracking your mileage is crucial.
For the 2021 tax year, the IRS allows rideshare drivers to deduct 56 cents for each mile driven during a shift—but you have to track your miles or you can’t take advantage of the deduction.
And, just so you know, the mileage tracked by your driving apps don’t count all your mileage; they just cover your trips. What about the miles you log between trips? You need to track, and deduct them, too.
Fortunately, that’s something you can easily do, if you have an easy to use and accurate mileage tracker – like Gridwise!
Open your Gridwise app and you’ll see a button at the top of the screen that says “Go Online.” Pressing that button starts a driving session during which your miles will be tracked. Also, when you have Gridwise, each time you drive you’ll get a notification asking if you’re on a shift. If you say “yes,” you’ll get sent to the app’s screen to begin tracking.
In addition to mileage, Gridwise also helps you track your earnings and the expenses you incur outside of mileage. You can view daily, weekly, and yearly results, including your total earnings, and the total number of rides given. The results will be displayed on slick and informative graphs like these:
What’s more, Gridwise will record earnings from all the services you use… automatically! All you need to do is link your accounts to Gridwise, and start driving.
Gridwise will also help you keep accurate records of your expenses. You can create your categories and enter the expenses as they occur, eliminating the need to create spreadsheets or calculate long columns of number at the last minute, trying to get in under the wire for tax time.
We’ll give you some ideas for categories a little later on in this article, but before we get there, we want you to understand what’s so great about these Gridwise features:
You’ll be able to use all this information for your tax forms.
Make estimated payments
Yep.
Rideshare drivers (along with everyone else who’s self-employed) are required by the IRS to make quarterly tax payments if you expect to owe $1,000 or more.
These quarterly payments are intended to cover your Social Security and Medicare taxes and are submitted using IRS form 1040-ES. The forms and instructions can be found here.
Watch for 1099s from your driving platforms
By January 31 of each year, you should receive a 1099 form by email and/or U.S. Postal Service mail from your ridesharing company. A 1099 is a statement of your income for the previous year, and is furnished to you and to the IRS. Uber and Lyft also make the forms available in your driver dashboard on the website or app.
These forms could be called 1099-MISC or 1099-K, but for tax purposes, they are treated the same. If February 1st comes around and you still haven’t received a 1099, contact the company. You need the information on the form in order to file your taxes.
Take Deductions
There are two ways that drivers can take deductions: the standard method, and the actual costs method. Let’s look at the differences between them.
Standard Mileage Deduction
The easiest way to apply deductions as a rideshare driver is using the standard deduction method.
Using this method, you’ll track your business mileage and simply multiply the total number by the set tax rate for that tax year.
This standard rate includes:
- Gas
- Insurance
- Maintenance & Repairs
- Registration
- Depreciation
- Lease Payments
Many drivers assume that mileage is all they can write off on their taxes, but that’s a misconception—and one that can wind up costing you a lot of money! There are plenty of expenses you can deduct as a driver. Here are some examples…
Cell phone
Did you buy a second phone for your rideshare business? If so, you can deduct the cost of the phone according to how much you use it for your business.
For example, if you bought a new phone for your business, and use it exclusively for your business, it is 100 percent deductible. On the other hand, if you upgraded to the newest iPhone and you only use it for business 50 percent of the time, you can only deduct 50 percent of the cost.
Cell phone accessories
You can deduct phone accessories such chargers, phone holders, cases, dash mounts, and auxiliary cords that are deemed “ordinary and necessary” for your business.
Paid apps and services
Did you buy Spotify for your rideshare business? If so, expense it!
Drivers can deduct paid apps that they use for their business according to usage. So if you use Spotify, Apple Music, or Tidal 30 percent of the time for your rideshare business, then you can deduct 30 percent of the cost.
Dash cam
As a rideshare driver, you should absolutely have a dashcam. It will protect you from not only dishonest passengers, but also inappropriate or dangerous passengers.
And, with COVID-19 restrictions, the dash cam can provide evidence that you and/or your passengers are complying with masking and distance requirements.
If you’re using your dashcam for protecting yourself in your business, you can deduct the entire cost.
Passenger amenities
Are you bumping up your rating by enticing passengers with refreshments? The cost of bottled water, snacks, candy, soda, and other treats is deductible as long as you’re using them exclusively for your business.
Car loan interest
If you’re paying on a car loan, you can deduct a portion of the interest-based on how much is used for your business and how many miles are driven. Use Gridwise to keep track of your rideshare driving miles compared to your total miles driven in a year.
Once you know the percent of your total annual mileage that was spent on business-related driving, you multiply that by your interest paid for the year (available on your itemized bill). The resulting dollar amount is the interest that you can deduct on your taxes.
Parking and tolls
Sometimes when you’re on the job you need to pay for parking and tolls. Keep your receipts and records for these expenditures and expense them at the end of the year. This is especially important if you’re doing food delivery, and paying for parking when you have to payto park while you’re doing pickups and deliveries.
Car washes/Detailing
If you drive late nights, you’ve likely had a passenger or two who left their “lunch” in your car. If so, you can deduct that deep cleaning car wash or detailing session.
Normal car washes are covered under your standard mileage deduction.
Sanitizing
With COVID-19, the price for preparing your car to be safe for you and your passengers is something you’ll want to consider. Equipment, including any divider you might have installed, as well as the extra cleaning products you’ve had to buy, can be deducted for tax purposes.
Roadside assistance
AAA and other roadside assistance companies can get you out of sticky situations as a rideshare driver. You can deduct your monthly or yearly fees for this service based on what percent you use for business purposes.
Health insurance
As a business owner you will need to provide your own insurance. The cost is deductible as long as you are turning a profit and are not eligible to enroll in a spouse’s or family insurance plan.
Don’t get too carried away with deductions!
Take as many deductions as you can, but do it legally. You have to be careful because certain types of write-offs are monitored closely by the IRS. Claiming them will put you at risk of audit. Some examples include: clothing purchases, personal hygiene costs, and excessive restaurant expenses—actually, anything that’s excessive can attract unwelcome attention from the IRS. Tax filing software like Keeper Tax will automatically alert you if your tax return could be considered suspicious.
Deduction methods
There are two main methods of deducting. You and/or your tax professional will choose the one that puts you at the greatest advantage. So far, we’ve been working on the standard deduction method, where you use the standard mileage allowance. The actual cost method works differently, and has advantages and challenges.
The actual cost method isn’t quite as straightforward as the standard deduction method.
You’ll need to keep track of each and every cost you incur that is related to your business. So you’ll need to track:
- Gas
- Insurance costs
- Depreciation
- Lease payments
- Car repairs
- Car maintenance
This means keeping track of receipts for all these expenses along with calculating your own depreciation.
Depreciation is calculated based on the initial price of your car and the depreciation time frame. So if you buy a $20,000 car and you depreciate it over seven years, you’ll take a $2,856 tax deduction for depreciation each year.
If you use the actual costs depreciation method, you can still deduct the additional business expenses listed above.
But if you go with the actual costs method of depreciation, you can’t go back to the standard depreciation method on the same car the next year.
Which should I choose?
Most rideshare drivers would make their lives easier by choosing the standard mileage deduction, although there are exceptions.
For instance, if you lease your car, it may be advantageous for you to use the actual costs method. The same is true if you drive less than 20,000 miles per year for work. But often, the advantages of taking the standard deduction far outweigh the advantages of using the actual costs method.
Note: Don’t fall for the temptation of using the actual costs method because you’re facing some significant expenses like car repairs in the months ahead. Decisions about tax issues should be made based on big picture thinking.
Forgot to Keep Paper Receipts? No Problem.
It’s a common myth that paper receipts are required for taxes. Any digital record of a purchase made with a credit card, debit card, or bank account, constitutes a legitimate expense record for the IRS. The only exception is cash purchases over $75; you’ll need a receipt for those.
You can use software, like Keeper Tax, to automatically scan your cards and bank statements for these tax write-offs and save lots of time over sifting through your transactions manually. You can also take photos on your phone of your receipts and keep them in a file to use at tax time.
Remember… All of This Is Applicable Even if You Drive Part-Time
Another common misconception is that the standard deduction means part-time drivers don’t benefit from tax write-offs. Fortunately, that’s not the case. Every single dollar you claim in tax write-offs will save you money, up to the point where you might not owe any taxes on your driving income at all.
So – use Gridwise to track your mileage, your income, and your expenses, and make sure you’re getting all the tax deductions you truly deserve!
