How do taxes work for Uber Eats independent contractors? What's different about them, and how are they similar to ordinary taxes?
Let's take a look at nine crucial concepts that will help you understand how Uber Eats taxes work. We'll examine how things are different as a self-employed independent contractor and point the way to additional resources that will help you get the additional details you need.
Taxes for Uber Eats and other gig work don't have to be a big mystery. They seem intimidating. However, if you avoid the topic, you could be stuck with a massive tax bill on tax day. That can lead to penalties and interest charges with the IRS. We'll walk through the things you need to know to avoid tax trouble.
Independent contractor taxes are essentially business taxes. My years of managing finances for small companies, non-profits, and my own businesses forced me to understand these concepts. I felt I could use that experience, along with my five years delivering for Uber Eats and other gig companies (much of that full-time) to help make sense of taxes for fellow delivery drivers.
The beauty of delivering for Uber Eats is it's a great way to make money. But whether we do this as a side hustle for some extra money or as full-time delivery drivers, we have to think about taxes at some point.
Unfortunately, too much information out there is either too complicated or too basic. That's why I created this series about Uber Eats taxes. This article covers the important concepts as an overview, and then we have several articles to provide more detail about different topics.
Nine Important Concepts to Help you Understand Uber Eats Taxes
If you understand these nine things, UberEats taxes start making a bit more sense.
You realize you don't have to be an expert, but you at least get the idea. That allows you to plan and prepare.
And once you understand a bit more, it's no longer as intimidating. You don't get blindsided on tax day. You can make decisions leading up to that day that help you keep your taxes down.
We'll talk about each of these essential concepts:
- We are taxed as small business owners
- Uber Eats Taxes are based on profits
- What Uber Eats paid you and what they say they paid you are two different numbers
- Your car expenses can reduce your taxable income by thousands
- There are several other business expenses you can write off.
- Schedule C is the most important tax form outside your 1040.
- We have to pay self-employment tax (our version of FICA)
- Profits added to other income determine your income for your tax form
- Income tax bill plus self-employment tax minus payments and credits equals what you pay in (or refund).
Finally, we'll discuss how to use this information to prepare yourself for tax season.
About this article:
First of all, this is not tax advice. My purpose here is to educate and inform. It's to help you understand how taxes work for Uber Eats drivers. You should seek out a tax professional to provide specific advice for your individual tax situation.
Second, this is about Uber Eats taxes in the United States. Every country has its own tax regulations. Many local and state taxes have their own way of doing things. Talk to your tax expert about how taxes work in your location.
We discuss taxes for Uber Eats delivery contractors. However, these concepts apply to gig economy workers across several food delivery services. We'll talk about some quirks with how Uber Eats does things, but this information should help you with whatever platform you contract with.
As I mentioned earlier, this is the first of a series of articles. We'll go into more detail about things like 1099's, tax write-offs, and filling out your tax forms. I'll point out articles along the way, and you can see a list of articles in the series at the end of this post.
1. We are taxed as small business owners
I'm sure you know this, but it's worth stating: You are not an employee of Uber Eats. As an Uber Eats driver, you agreed to the terms of service that you are an independent contractor and not an employee.
That means you are providing a service as a business, not as an employee.
And you're taxed as a business. Most independent contractors are known as sole proprietors. It's just like if you start any other kind of business without actually incorporating the company.
Sole proprietor business taxes are known as pass-through taxes. You operate a delivery business, but your business's profits are taxed on your personal income tax return.
What this means is you are on your own. No one is withholding your taxes for you.
Employees have money taken out of their paychecks for Social Security, Medicare, and Federal, state, and local income taxes. None of that happens with your pay from Uber Eats.
You are responsible for knowing what to save and putting it aside for taxes. Failure to do so could be an incredibly expensive mistake.
The good news is it's not all bad news. In fact, being taxed as a business gives you a considerable advantage, which we discuss in the next concept.
2. Uber Eats Taxes are based on profits
This is very different from being an employee.
Here's the thing: Your income and FICA taxes are based on your income. It's a percentage-based system. The more you make, the more you owe.
The vital difference here is that your income from your business is NOT the money you got from Uber Eats or any other gig apps. That's known as gross income. Your business income is your profit (or net profit). It's the amount of money that's left over after expenses.
To understand how your taxes work, you must first figure out your profit. Put simply that means first you must know what you made. Then you have to understand what your expenses were. Subtract expenses from your net income, and that's your profit.
This is excellent news. It means you can write off all your Uber Eats business expenses without going through the itemized deduction process. In other words, you can claim things like miles, phone expenses, and delivery bags even if you claim the standard deduction.
3. Uber Eats does some weird things with 1099's that could cause you to over-pay your taxes.
Uber Eats does some things very differently regarding reporting your income.
In fact, that's why the next article in this series discusses Uber Eats 1099 forms and tax documents. It's a bit much to try to explain in an overview like this. But here are some essential things to know about how Uber Eats reports your income.
Uber Eats claims to have paid you more than they actually did. What they say you earned in your 1099 forms is more than they deposited into your bank account. Uber Eats claims that they took fees and commissions out of your check. You may have received $10,000 for the year, but Uber may claim you made $13,000 and took out $3,000.
Don't worry about this. You can write off the “service fees” as a business expense.
Uber Eats uses two different 1099 forms. Form 1099-K reports delivery fees and customer tips. Incentives, promotions, and referral fees show up on form 1099-NEC. Both are legitimate forms, reporting different types of income.
Because of how Uber Eats has done things, many drivers have reported too much self-employment income because they didn't write off their service fees. When you understand how this works, you can avoid that mistake. Fortunately, drivers can also use the Uber tax summary found in the Tax Information portion of the Uber Eats driver portal.
Many veteran drivers will be in for a rude awakening this year. In previous tax years, Uber Eats only had to send a 1099-K form when your fares and tips totaled over $20,000. The reporting threshold has dropped to $600 starting with the 2022 tax year.
4. Your car expenses can reduce your taxable income by thousands
Remember two things we discussed earlier:
- Your taxes are based on what's left over after expenses
- You can write off expenses regardless of whether you itemize or claim the standard tax deduction.
Using your car creates a significant expense for you. You can reduce your taxable income by quite a bit because of that.
If you earned a dollar for every mile you drove, your write-off for your car can reduce taxable income by nearly two-thirds.
The IRS lets you choose how to calculate the cost of driving. You can either:
- The actual expenses method calculates the actual cost of using your car and writes off the business portion of those costs.
- Use the standard mileage allowance to write off a flat rate per business mile.
In 2022, the standard mileage rate is 58.5 cents per mile for the first six months and 62.5 for the second half.
We go into much more detail here about how to write off car expenses for Uber Eats deliveries. There we talk a lot more about how the actual expense method works and how to determine which is better.
5. There are several other business expenses you can write off.
Your car-related expenses are just part of what you can write off.
Many self-employed individuals make the mistake of thinking that if they claim the standard mileage deduction, they can't claim any other expenses. Understand that the distinction here is between the standard mileage rate and actual VEHICLE expenses. Non vehicle expenses can still be deducted either way.
Here's what the IRS says about if an expense is a legitimate business expense:
To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.IRS publication 535 – Business Expenses: What can I deduct?
If you buy delivery bags for your business, that's a legitimate business expense. A paid subscription for apps like Hurdlr that track your business expenses is a normal part of running your business.
Some items have mixed purposes, which you use for business and personal reasons. Your smartphone is necessary because the Uber driver app drives almost everything you do. However, you use it personally as well. You would estimate the percentage of the use for business and then claim that percentage of the plan and phone costs as a business expense.
Remember the phantom extra pay that Uber Eats reports, as mentioned in concept #3? Uber claims that's a charge they deducted from your earnings for service fees and commissions. That's a deductible expense. Claiming that is how you make up for the extra they claim to have paid that you never received.
We won't discuss every possible write-off or deduction here. For more information, please view the part of our series that discusses business deductions for Uber Eats drivers.
6. Schedule C is the most important tax form outside your 1040.
So far, we've discussed what makes up your taxable income. We started with annual earnings and then talked about the expenses you can write off.
Now we get into what to do with all that. At tax time, the place you put it all down is a form called Schedule C: Profit and Loss from Business.
This is where most everything happens for your business taxes.
Schedule C is the closest thing a self-employed person has to a W-2. It's more so than a 1099 form. Your Schedule C, NOT your 1099, is the form that determines the income you move over to your 1040 tax return.
Here's another way to put it: A 1099 form reports your BUSINESS's revenue. Schedule C determines what part of that is taxable income.
There are two primary sections on Schedule C. The first is where you list the money you received for your deliveries. The second part lists your expenses. Subtract expense from income to determine profit. Profit is added to your personal tax return as income, much like wages from a W2 form are.
There are twenty different expense categories on Schedule C. You add up the total amount spent for each relevant category. For example, your mileage deduction goes on line 9 for Car and Truck Expenses. If an expense doesn't fit one of those categories, there's a section for “Other expenses.”
The business expenses part of our Uber Eats tax series discusses some of the expenses and expense categories, while another article goes in-depth on how to fill out Schedule C as an Uber Eats delivery driver.
7. We have to pay self-employment taxes (our version of FICA)
Self-Employment tax for Uber Eats drivers is not an extra tax for the self-employed. It's just our version of employment taxes (Social Security and Medicare, or FICA taxes).
Schedule C profits are moved to form Schedule SE, where self-employment taxes are calculated at 15.3%.
We don't often think about FICA taxes because we never have to file anything for them as employees. Money's just taken from our paychecks and sent in.
However, being on our own for our taxes, we must take care of our own Medicare and Social Security taxes.
FICA taxes are charged on every dollar of income. They're not reduced by filing status or tax deductions. In the same way, self-employment tax is assessed on every dollar of profit.
Here's where independent contractor taxes feel at a disadvantage: Employees only get 7.65% taken out of their checks. How is this fair?
Uncle Sam doesn't get more money. The difference is that employers pay half of the payroll taxes. When we're self-employed, we're responsible for both the employer AND the employee portion of these taxes.
Self-employment tax is often the biggest tax trap for gig workers for all the above reasons. They're often much more than our income tax liability, and we're often unprepared for them. When estimating taxes, a good rule of thumb is to start with the 15.3% self-employment tax and then determine if income tax will increase that total.
8. Profits added to other income determine total taxable income on your personal tax return
Again, I go back to the thing about your profits are your income.
Now that you've put subtracted expenses from income on Schedule C, the difference is your profit. That profit becomes your taxable income for income tax purposes.
You'll add your Schedule C profits to any other income, such as wages, investments, etc., to determine total personal income on your tax return.
From there, you subtract personal tax deductions and several other income adjustments. That's also where Uber Eats drivers can take some special tax deductions. Subtracting deductions and adjustments determine your taxable income.
Once you know your taxable income, you can calculate your income tax bill. The easiest way to do so is to look it up on the IRS tax tables. The income tax rate starts at 10% and increases with your total income. It's a progressive rate, meaning the first several dollars are taxed at 10%, the next several at 12%, and so on. The brackets vary by filing status.
We talk more about how to tell how much your Uber Eats income impacts your income taxes.
9. Income tax bill plus self-employment tax minus payments and credits equals what you pay in (or refund).
Here's where it gets tricky and a bit wild.
I see many people ask on social media, “How much will I owe if I make this much money?” There's no way to answer that because there are so many variables. Filing status, dependents, other income, and many other things can impact your income tax bill.
And then there's a wacky set of subtractions and additions to come up with whether you have to pay anything on April 15 or if you get a refund.
In a nutshell, here's how it goes:
- You start with your total income.
- Subtract allowances and tax deductions to get your taxable income
- Figure out your income tax based on taxable income, filing status, and tax bracket.
- Add your self-employment tax to your income tax for your total tax.
- Add up your tax credits, withholding, and estimated tax payments to determine the total payment. Compare that to your total tax.
- You get a refund if the total payment is more than the total tax. If not, you pay in.
These steps are somewhat oversimplified. There are some nuances. For example, some credits (non-refundable) may not lead to getting a refund. However, you get an idea of how it works to determine whether you get a refund.
How to use this information to prepare for tax season
The important thing is to be aware of how taxes work.
You understand now that you're on your own to save for your taxes.
You also know the good news: Because you're taxed like a business, and your PROFITS are your income, you can write off all your business expenses, whether you itemize deductions or not.
Taxes are complicated in some ways and very simple in others. Much of the tax complexity is from all the little details. There are many rules here and there because there are several different situations those rules must address.
With all that said, I suggest the following four action steps:
1. Focus on the the tax impact of your Uber Eats earnings.
Income tax is such a wildcard because of all the variables. For that reason, it makes more sense to focus on tax impact than on calculating your total tax bill.
Tax impact answers this question: How much more will you pay in taxes because of your Uber Eats income? Or, how much less will your refund be if you get one?
Another part of the series is our Uber Eats Tax Calculator. In that, we walk through calculating your tax impact.
Employees try to ensure their tax withholding is enough to cover their tax liability using withholding tables. An independent contractor's best way to have their tax bill covered is to calculate tax impact.
2. Track everything.
Remember that you can write off business expenses regardless of what type of personal tax deduction you claim. Also, remember that you're running a business.
One of the most important things a business can do is keep detailed records of its expenses and income.
My advice: Track everything. If you think something could be a legitimate business expense, keep track of it. You can always clarify with your tax pro when it's time to file your taxes.
The thing is, it's a lot worse to find out you could have claimed something, but you didn't have a record of it than to track it and find out later you can't claim it. Keep receipts, and at least figure out some basics of bookkeeping and expense tracking.
In my opinion, Hurdlr is probably THE best tool you can use. The free version has all you need (and I believe it is better than several paid programs). The subscription version has some extras, including automatic mileage tracking. I'm an affiliate, meaning I may receive a commission if you purchase a subscription. However, as I said, the free version is more than enough for many contractors.
3. Save for Taxes
Think about taxes you've filed in the past. What if no money had been withheld from your paychecks? Imagine how you'd have had to scramble to pay the tax bill.
That's precisely what happens when you're an independent contractor. Uber Eats is not withholding taxes for you.
Hurdlr has a good tax calculator function. Unlike many apps, it takes into account filing status and other forms of income. You can also read more about what to save for taxes as an Uber Eats independent contractor.
The best practice is to pull money out each week and set it aside in a savings account that is not attached to your day-to-day bank account. This helps reduce the temptation to spend it. Once a quarter, send that money to the IRS as an estimated tax payment. That way, by the end of the year, you've already paid your taxes.
4. Get a Tax Pro
While I believe that taxes are less mysterious than we make them out to be, there are still a lot of little details. If you're not totally sure how it all works, the best thing you can do is to get help with your taxes.
Even though I write a lot about taxes, I use a CPA. Having a fresh set of eyes is good to ensure I have caught everything.
I'm not here to give tax advice but to educate and help you understand how it all works. Tax professionals can help you with the specifics of your financial situation and often find savings that more than cover their fees.
The more you know, the easier you make things for your tax advisor. But even with all I can do to provide as much information as possible, the only piece of tax advice that I ever give out is to get a tax pro.