Do you know what Uber is? Uber is the advanced version of taxi service and is available almost worldwide. It has multiple options from which users can choose. I.t is a cheap and convenient taxi service and is used by everyone. However, these taxi services also have to pay taxes according to the tax laws of the United States.
Does uber pays taxes for drivers, or do drivers pay it themselves?
It has been and long-debated issue amongst a specific group of people. These people are the ones who are suffering from financial issues and want to work part-time with uber. Such people are confused about taxes that apply to uber drivers. Some say that the taxes are played by the company whereas some say that the Uber drivers have to pay taxes out of their earnings. Let’s clears this once and for all.
Uber drivers are the ones who have to pay taxes to the government, and uber does not have to pay taxes of the drivers. The internal company taxes are played by the company. The current tax rate for a company in the USA is 30 percent.
Drivers are responsible for paying their taxes, and the company is responsible for paying their taxes.
Uber does not bring new drivers into their company on a contract basis. Uber drivers are self-employed, and it would be wrong to say that drivers work for uber companies. The company works for the drivers, and for that work, the drivers provide it with the commission. This company has the authority to alter this commission in any way possible.
Most of the time, the uber drivers do not furnish a 1099-MISC uber.
It happens when the commission due to Uber Company is above 600 dollars. Commissions over 600 dollars that are due to any corporation or organization are not reported traditionally. As a result, uber does not report any statement that it is paying any compensation to the driver. So you must be wondering about what uber reports. Well, after good research, we found out that uber only reports the gross amount collected by each driver connected with uber. Moreover, they also calculate the total amount paid to the driver. The formula for the amount paid to the Uber driver is the gross amount- commissions due to the company. The remaining money is taken by the driver. Due to these reasons, payment is reported on a 1099k and not 1099M
1099K: this is an IRS information return that helps in enhancing voluntary tax compliance by reporting certain transactions. 1099K is applied when some conditions arise, such as payment due to credit cards or debit cards or when gross earnings exceed 20 thousand dollars, or when the number of transactions excess 200. It allows for the approval of money due to credit cards or debit cards by identifying the account number and approving the payment. If the total amount exceeds 20 thousand, third-party networks are given access to handle the transactions. The same is the case when the number of transactions exceeds 200.
1099M: This is used to report the tax returns of non-employees. It is mainly for self-employed personnel such as independent contractors or freelancers. It is used to check the overall earning of individuals such as freelancers and private contractors. They also report non-employee compensations such as prizes, prize bonds, awards, or healthcare payments. Customers receive 1099M when they receive a payment of more than 600 dollars in one month.
Therefore, uber drivers are given a form 1099K when their total earnings for one year exceed 20 thousand dollars. Provision of form 1099K is also compulsory if they carry out more than 200 transactions in one year. Some experts say that uber sometimes tend to report such forms even when the limit for forms is not reached by the drivers. They carry this out for the easiness of the drivers, but there is no such proof that they practice this. It might be unlawful, as some legal experts say.
Receiving a 1099M or 1099MISC is also very common. Uber is a side job for most people, so when they find a better alternative or don’t have enough time to uber, they earn less than 600 dollars a year. It happens when they uber for some time and then quit it in the middle. However, keep in mind that 1099MISC has nothing to do with the fares that drivers earn while being active on uber. Payment in 1099MISC is different. It includes the payments done to the Uber driver. The condition is that those payments should be 600 dollars or should exceed 200 dollars.
The company has not clearly stated what is included in those payments as there are multiple sources of payments in uber. Uber also provides extra payments to the drivers. They do this to keep them motivated or to reward them for their excellent performance as compared to others. These payments are in the form of bonuses and gift cards. Such incentives come under 1099MISC as nonemployee compensation.
There are certain conditions for providing the drivers with bonuses. A certain number of rides are set for a day. If a driver exceeds those numbers of rides, he will be given a bonus in the form of cash. It should also be kept in mind that these expenses are paid by the driver and not the uber company. These charges take out most of the pay that uber drivers receive. These extra charges include gas, insurance, maintenance, or any car loan payments if you have bought your car on loan. These loan charges depend on the type of car you have.
Usually, uber collect around 20 to 30 percent of the total money earned in one fare. The extra charges take up to 25 to 50 percent of the earning made in one trip. As a result, the driver receives only 20 percent of the total earnings for one trip. From that one fare, the driver has to pay UBER, the owner of the car, and Obama care. Most people prefer Obama care as the deduction amount is not fixed and depends on the income a driver earns from a fare. It also depends on the laws and the local income tax of the state where the car is used for uber. Let’s look into some calculations:
Let us suppose that an uber driver in Los Angeles drives on the UberX package. The drivers receive 0.90 dollars per mile and 0.15 dollars per minute. Most of the rides that people take are from 3 to 5 miles and take up to 4 or 5 minutes.
Suppose it take 5 minutes to cover 3 miles so the total income earns is:
5 x 0.15 = 0.75
4 x 0.90 = 2.70
Total income earned for one fare of 3 miles and 5 minutes is: 2.70 + 0.75 = 4.55 dollars.
It includes all extra charges of the car as well as the charges which are due to uber. Let us cancel those charges now:
Uber fee = 25% of 4.55 = 1.37
Car charges = 1.62 dollars per fare
IRS tax deduction = 0.54 dollars
Income tax or federal tax of the state where the fare was calculated = 0.57
Total – all charges =
4.55 – 1.37 – 1.62 – 0.54 – 0.57 = 2.36 dollars
So from the above calculations, we can say that the driver receives approximately 2.36 dollars for one trip. These calculations may vary from time to time. On weekdays, people have to go to work so the driver can receive more riders, and hence he has to pay more tax per day.
Suppose on a busy day he receives 4 riders per hour, then 2.34 x 4 = 9.56 dollars per hour. Uber sometimes provides surges that can lead to better pay, but we should keep in mind that if we earn more, we will also have to pay more tax.
Consequences of not paying uber taxes:
Tax reforms are strict in our country, but have you ever wondered what will happen if you don’t pay such taxes? If we refer to US income tax, they might consider it tax evasion and can become very expensive for the common man due to high fines on nonpayment of taxes. Other than taxes, interest will also build up slowly and will lead to heavy payments at the end of the year.
Although the IRS has no evidence of the total income earned in the current year, so how do they calculate the penalties and interest then? They go for a rather constructive approach for calculating penalties and fines or will calculate those penalties and taxes by relating it with the proof they have about the income. While calculating, they do not exclude the earning that might have lead to a reduction in penalties and taxes. Therefore, it is best to provide the evidence every month to save yourself from extra charges that could be in thousands of dollars. By paying taxes on time, your income and associated tax will be drastically reduced.
Sometimes the IRS causes trouble for the people intentionally. They do this to instill fear amongst the residents so that they can pay their taxes on time. They will deliberately cause discomfort to a man who has paid his taxes and show to the public the consequences that they might face if they do not pay their taxes. Although this is not the right way to enforce the people, the IRS considers this the only way.
Such events have happened back in history. Sometimes they randomly select any person from an organization and check his or her tax reports. If they do find such problems in a tax return, both the person and the organization he or she is working for are in trouble. The IRS has not yet targeted cab driving companies such as Uber or Lyft, but they might and select a random person. Make sure that the person is not you, so clear all your due taxes as soon as possible.
For some reason, if you do not pay the taxes due to financial constraints, it is a better option to declare your income. Your image is improved in the eyes of the IRS, and you don’t need to pay as many penalties for late payment of taxes. The IRS will not cause trouble for you and will fully cooperate until and unless you are in constant contact with them. Some consider them very tough to deal with, but that is not the case. They are quite cooperative if the taxpayer is cooperative.
In some cases, when taxpayers cut communication and do not cooperate, they face a lot of trouble. The IRS has the authority to seize your assets and sell them to collect taxes, so you should cooperate with them to avoid any clashes with them. If your due tax payment is above 50 thousand dollars, they will seize your passport and keep you on the exit control list. These are measures taken by the IRS to make sure the taxpayer does not flee the country. If they still haven’t seized your passport and you have tax to pay, never try to leave the country as it will only make matters worse for you.
You don’t need to worry while handling taxes. In the first year of your driving career, hire a tax professional and reduce your tax to the minimum. Try learning the technique from him and then handle your taxes yourself from the other year. Turbo tax is ideal for dealing with tax-related issues with uber and Lyft drivers.
Tax reports given to IRS by Uber:
Most people are confused about paying and calculating taxes ourselves or does the cab organization provides a summary to the IRS of every individual driver. This summary might contain the total earning and the total tax on that income. Well, that is not entirely the case.
Uber does not pay your taxes. You have to pay them yourselves. While registering for uber, they require your TIN. If the TIN provided to uber is incorrect, it is reported to the IRS. The IRS does not care if the number was entered incorrectly intentionally, nor unintentionally. You will come under their radar, and they will call you to clear out your taxes.
The drivers are provided with two types of forms, and they are 1099MISC and 1099K. The provision of forms depends on how much the driver drives for the company. Both these forms are a copy of your original form with the IRS. If the data entered in these forms do not match your income tax numbers, the IRS will send you a match-up letter. You will have to manually relate your taxes with your income and prove to the IRS. The taxpayers may challenge the IRS judgment, but it will create more problems for you, and so you should keep your records clear in the first place.
All the above data and calculations, it is proved that Uber drivers have to pay their taxes, and the company does not do it for them. The uber company is responsible to only provide the IRS with the report of every individual. There are several accounting firms in almost every state of the United States that may help you out with calculating taxes. Some firms also take out ways to reduce your taxes and save you from paying any extra charges to the government. Moreover, multiple websites help drivers in calculating their taxes.
Turbotax is a great website especially initiated for uber drivers to help them in calculating taxes. They provide uber drivers with multiple services that include:
- Filing taxes yourself: the driver has to answer a series of questions, and according to those answers, TurboTax professionals will guide you through the whole tax calculating process.
- Experts: TurboTax also provides the service of live tax experts. Drivers can communicate with these experts online, and they will provide proper guidance and answers to your question. After you have calculated all your taxes, these experts will give a final review to those before you file them.
- They also provide a service that allows the experts to calculate all taxes for the drivers. He does it A to Z and also checks it multiple times to ensure it is correct.