Independent Contractor or Employee?
Your work status affects how you calculate and pay your taxes, so the Internal Revenue Service (IRS) wants to know whether you’re an independent contractor or an employee. You are most likely, but not always, an independent contractor when you work for a ridesharing company. The IRS looks at several factors when deciding on your work status. Three factors, in particular, can help you determine whether you’re an employee or an independent contractor.
Who Controls Your Work?
You’re probably an employee if the company controls or has the right to control what you do, how you do it, and when you work. You’re likely an employee if a company tells you exactly when to drive, where to drive, and whom to pick up.
Who Owns Your Car?
Employers control the business aspects of the job on behalf of their employees. You’re probably an employee if the company provides you with equipment, such as a company car to drive.
Do You Receive Benefits?
You’re most likely an employee if you’ve entered into a written contract or receive employee benefits, such as a pension plan, insurance, or vacation pay.
The Tax Impact
You’ll pay FICA taxes at the rate of 15.3% of your net earnings if you’re an independent contractor: 12.4% for Social Security and 2.9% for Medicare. This is referred to as the self-employment tax and it’s in addition to income tax. You would only pay half of these Social Security and Medicare taxes if you were an employee. Your employer would pay the other half. You’re also responsible for sending quarterly estimated taxes to the IRS if you make your living through independent contract work. Your employer would handle this if you were an employee, withholding taxes from each of your paychecks and submitting the money to the IRS on your behalf. Here’s a brief rundown of how self-employment income is taxed differently from regular wages: You can deduct the standard mileage rate, which is 58.5 cents per mile for the tax year 2022 (up from 56 cents per mile in 2021). Or you can deduct a percentage of your actual expenses equal to the percentage of time you drive for income-earning purposes. The IRS periodically changes the mileage rate to keep pace with inflation. You can use whichever method produces more savings for you. You can’t do both. Include miles you log when driving people around, plus other business-related driving. This might include a trip to the bank to make a business-related deposit or to a retail establishment to purchase supplies. The IRS can disallow the deduction if you don’t keep a mileage log. Other work-related expenses, such as drinks and snacks you buy for riders, are also deductible. A portion of your phone bill can be considered a business expense if your cellphone bill usage increases due to driving, or if you have to buy a higher-cost plan to accommodate the increased data usage.
Forms 1099-NEC and 1099-K
Uber, Lyft, and other ridesharing services will send you a Form 1099-NEC and/or a Form 1099-K after year’s end. These are effectively the equivalent of Form W-2 for employees, although they won’t show any withholdings. An independent contractor has no taxes withheld from their income. You should receive these forms by late January so you can report your earnings for the year on your tax return. Use them to complete Schedule C, “Profit or Loss From Business.” All your income and deductible expenses should be entered on this form, then your resulting taxable income is transferred to your Form 1040 tax return. You’ll only receive a Form 1099-NEC if you were paid more than $600 for the year. But the IRS still expects you to report the income on your tax return if you earn less. Form 1099-K reports any income you earn while driving when you have a paying passenger in the car. Form 1099-NEC covers other types of payments you may have received.
Paying Estimated Taxes
You must pay taxes directly to the IRS as an independent contractor because you don’t have an employer withholding income taxes from these earnings on your behalf. The IRS requires individuals (including partners, sole proprietors, and S corporation shareholders) to make quarterly estimated tax payments if they expect to owe at least $1,000 in taxes over the course of the tax year. Calculate the amount of each payment based on your earnings for that quarterly time period. You’ll have to pay estimated taxes on your driving income, even if you also hold down a separate, regular job with an employer that withholds taxes from your pay and issues you a Form W-2. But you would only pay estimated taxes on your independent contractor earnings. Another option is to increase your withholdings from your pay from your regular job to cover both your employment and independent contractor income. Check with a tax professional to find out whether this makes sense for you. This typically works best if you don’t earn a great deal as an independent contractor.
