We’ve been getting a lot of questions on our Facebook page and via email about the latest tax bill, the Tax Cuts and Jobs Act, and how it will affect rideshare drivers. As rideshare drivers are independent contractors, taxes can be slightly more complicated than an average salary worker (you can learn more about taxes for rideshare drivers here!) Today, senior RSG contributor Christian Perea breaks down how the new tax plan could impact drivers and what you need to know about it.
The ink is still drying on the final Republican tax bill known as the Tax Cuts & Jobs Act and we’ve been getting ALL KINDS of questions on how the new tax bill will affect us as Uber and Lyft drivers.
Disclaimer: I’m not a tax professional and you shouldn’t take this article as tax advice.
Broadly, the bill should benefit rideshare drivers, since it strongly favors small businesses and as you already know, we are all small businesses. That being said, this bill is still brand new and very complex. It’s likely to take several months before the experts hash out the best tax strategies.
First things first, let me start this article by dispelling a HUGE myth that has been making the rounds in driver forums and on the internet:
Business Deductions ARE NOT Disappearing!
There is a rumor going around that business deductions like the standard mileage rate are disappearing but this is fake news. False. Started by a Facebook account called Jim Anthony who posted the following:
Getting rid of business deductions would be a monumental shake-up of the tax code and maybe kill a majority of the businesses in the United States. Businesses (in theory) pay taxes on the money they generate as profit (that means after expenses). Having to pay taxes on gross income wouldn’t work.
Uber Driver Taxes: Before & After The Tax Plan
Let’s compare an Uber and Lyft driver named Brady who made $40,000 in fares, drove 50,000 miles, lives in California, and doesn’t own a home during the 2017 and 2018 tax years.
Income Tax Brackets Are Lower For Everybody
Beginning in 2018, income tax brackets will change and under the new brackets almost everybody will end up paying less in taxes. This is true for those like our fictional driver Brady, who participates in the gig-economy as a rideshare driver.
I didn’t include the tax brackets for earners above $200,000 because very few (if any) whom participate in the gig economy are earning above six figures. Most full-time drivers make between $10,000 and $30,000 after taking their deductions.
Someone with a Modified Adjusted Gross Income (MAGI) of $40,000 under the new plan would end up paying $4,739.50 in Federal Income Tax with the new bracket regime in 2018 as compared to $5,653.75 in 2017. That’s a total savings of $914.25.
Most drivers will end up having a Modified Adjusted Gross Income (MAGI) of MUCH less than $40,000. A full-time rideshare driver can easily rack up 50,000 business miles a year while taking in about $40,000 in fares. Each business mile is good for a $0.535 cent deduction and that translates into a $26,759 deduction for business miles at the end of the year.
That’s a massive $26,759 deduction against the $40,000 in fares for a Modified Adjusted Gross Income of $13,241.That’s without any other deduction!
Remember: You can use an app like QuickBooks Self-Employed to automatically track your mileage, sort through your business expenses, record receipts, and send invoices.
$12,000 Standard Deduction
Previously, the Standard Deduction was $6,500 for individual/single people. Now it will be $12,000 – and that’s kind of a big deal since you get to deduct that from your net income on your business ($13,241).
Using the example above for Brady, that translates to $40,000 Gross Income – $26.759 Standard Mileage Deduction – $12,000 Standard Deduction = $1,241.
You’ll still have to pay self-employment taxes (15.3%) on the $13,241 of business income but only $124.10 in Federal Income Tax (10% x $1,241) on what was $40,000 in fares for Brady.
20% Deduction For Small Business Pass-Through Income
Corporations pay a special corporate tax rate (that was lowered as part of this tax plan) but for everyone else who’s a sole proprietor, partnership, LLC or S-Corporation, the money that your ‘business’ generates passes through to your personal taxes and in the past, you would pay ordinary income tax on that money.
The biggest change for Uber and Lyft drivers with this plan is that they WILL now be able to deduct 20% of their pass-through income.
There are some exclusions that apply to ‘service professionals’ but as long as you make less than $157,500 a year (individual)/$315,000 a year (married) you are allowed to take this deduction.
There’s a lot of confusion around who can and can’t get this, but Harry and I have carefully reviewed the legislation and Uber and Lyft drivers will most definitely qualify for this pass-through deduction. There is an exclusion for service based industries, but if you are under the taxable income limits, you get to take a 20% deduction on your qualified business income (QBI) no matter what type of industry you’re in.
Qualified Business Income (QBI) is the net profits of your business so whatever profit you’re left over with from your rideshare driving activities at the end of the year would allow you to take a further 20% deduction on the QBI.
Will I Have to Incorporate or Become an LLC to get the Pass-Through Deduction?
No. In order to take advantage of the 20% pass-through deduction, you won’t need to do a single thing. As a rideshare driver, you’re already a sole proprietor and that means you will be eligible for this deduction as long as your taxable income is less than $157,000 (single)/$315,000 (married) which most of you should be!
Itemized Deductions Suffer
The Republican tax plan reduces a lot of the biggest itemized deductions. Mortgage interest in the new plan can only be deducted on loans with a principle of up to $750,000. Most controversially, the deduction for State & Local Taxes has been capped at $10,000.
The $10,000 SALT Cap
SALT = State And Local Taxes Deduction
Previously, we have been able to deduct ALL state and local taxes from our federal tax returns. This includes things like sales tax, state income tax, and property taxes. This has been part of the tax code for more than 100 years.
There will now be a $10,000 cap on deductions for state and local taxes. This will hit homeowners in places like California and New York the hardest since property taxes are included in that $10,000 cap. Most average folks like myself will choose to take the new Standard Deduction instead since what I can itemize for SALT is far lower than $10,000.
If you don’t own a home or live in a state with lots of taxes, then this shouldn’t have a big negative effect since most of us will ultimately pay far less than $10,000 in state and local taxes.
Health Insurance Mandate: Gone in Tax Year 2019
You still have to have insurance for tax year 2017 and 2018 to avoid the Affordable Care Act tax penalty. Starting in tax year 2019, the penalty disappears. It’s predicted that this will cause premiums to go up for everyone else since “the healthy” will be able to skip getting insurance.
See below for when penalty applies:
According to the Congressional Budget Office, this will cause premiums to rise an additional 10% each year through 2027 and ultimately leave 13 million Americans uninsured.
Expiration Date: December 31, 2025
Most people will experience a tax break in the coming years. Drivers will likely end up paying very little (if any) federal income taxes due to a combination of the Standard Mileage Deduction, Standard Deduction, and the pass-through deduction.
But it looks like everything above expires on December 31, 2025. Everything except for the reduction in the corporate tax rate, which is being reduced from a maximum of 35% to 21%. So who knows, maybe we’ll all want to become corporations then!
Tax Bill FAQ
Are Business Deductions Disappearing?
Business deductions ARE NOT disappearing! There is a rumor going around that business deductions like the standard mileage rate are disappearing but this is fake news. False.
Can Rideshare Drivers Still Deduct Business Mileage and Other Expenses?
Yes, on top of the increased Standard Deduction.
Will Uber and Lyft Drivers Be Able to Deduct 20% of Their Pass-Through Income?
Will I Have to Incorporate or Become an LLC to get the Pass-Through Deduction?
No. In order to take advantage of the 20% pass-through deduction, you won’t need to do a single thing. As a rideshare driver, you’re already a sole proprietor and that means you will be eligible for this deduction as long as your taxable income is less than $157,000 (single)/$315,000 (married).
What About State and Local Taxes?
There will now be a $10,000 cap on deductions for state and local taxes. This will hit homeowners in places like California and New York the hardest, since they have higher property taxes in general.
In many cases, rideshare drivers will choose to take the standard deduction since what they can itemize for State and Local Taxes (SALT) is lower than $10,000. However, this may impact drivers in high property tax states.
Will This Last Forever?
No, many of these tax benefits/breaks or penalties, depending on your tax situation, will expire on December 31, 2025.
Readers, does this summary help you understand the newest tax plan?
-Christian @ RSG
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