Whether you entered the ride-sharing business as a means to full time employment, part time cash, or something to do in your free time, one thing that all ride-share drivers have in common is that they signed contracts which designate them as self-employed independent contractors. While it's a mouthful, what it boils down to is that when it comes to taxation, you are the one responsible for your portion of self employment and medicare taxes, and that unless you are careful and diligent regarding your tax strategies, you could owe the IRS a bit more than usual.
Many Uber drivers, while looking for tax shelters, come across two pieces of advice. The first is to make sure they are documenting all their mileage, as Lyft and Uber only account for miles with a passenger in the car, and not mileage to the location. The other, which is far more nebulous, is to set up either an LLC or an S-corporation, for some tax savings. So which is better for the average driver?
Lets take a look.
Option 1: The LLC
A sole-member LLC is very much like any contract labor payment you might have received in the past. Basically, you work for someone, ie Uber, as an independent contractor. At the end of the year, they send you a Form 1099, made out to your social security number or business EIN, and it gets put on a schedule C on your personal return.
Using this model means that 100% of your net profit, or profit after all expenses are taken into account, are subject to a 15.3% self employment tax on top of your regular tax rate.
The biggest advantage of running a sole-member LLC is simplicity and lack of extra costs. There's no easier way to account for business income. It's all included in your personal return. And because it's all in your personal return, there's no need to file an expensive Corp or Partnership alongside it. Finally, like all LLC's, it protects you in the off-chance someone tries to name you as a defending party in a lawsuit.
Option 2: The S. corporation
An S. Corp is basically a way to remove your business from your personal return and file its taxes as its own entity. When the net profit or net loss is calculated after all factors are made, the loss or gain is carried to your personal return as income.
While its true that many businesses benefit from S-corporation status, there's a catch. First, they benefit because they are able to designate some of their income as salary and some of it as distributions from the company. Second, the business is profitable enough that it has enough of a tax burden that the extra administrative costs are worth it.
On average, filing as an S. corporation is going to cost you around $1,200 in administrative costs: About $250 for the return, and likely a little shy of $100 per month for payroll services.
So which is best for me?
On average, a driver for Uber or Lyft makes somewhere around $350 a month, before expenses. While some drivers who dedicate themselves full time to the rideshare business exist, those drivers are rare.
Therefore, the typical Uber or Lyft driver doesn't bring in enough money with the part-time gig to justify the costs of an S. Corp. While there are always exceptions, unless your business brought in $50,000 after expenses, it's usually not worth the additional expense.
If your business IS that successful, then perhaps an S.Corporation is right for you. For more personalized analysis, schedule a Consultation appointment with me. I am always happy to discuss and analyze the best tax position for you and your business.
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