Uber Driver Tax Treatment

Posted by Lee Reams Sr. on

This analysis does not address the potential employee/independent contractor issue related to Uber divers; it only deals with the tax treatment of drivers who are independent contractors.

How Uber Works – Each fare (customer) establishes an account with Uber using a credit card, Paypal, or other method. The fare uses the Uber app to request a ride, and an Uber driver picks that person up and takes him or her to the destination. Generally, no money changes hands, as Uber charges the fare’s credit card (CC), deducts both its fee and the credit card processing fee and deposits the net amount into the driver’s bank account.

Uber Reporting – Uber issues each driver a Form 1099-K reflecting the total amount charged for the driver’s fares. Because the IRS will treat the 1099-K as gross business income, it must be included on line 1 (gross income) of the driver’s Schedule C before adjusting for the CC and Uber fees. The net amount that Uber deposits into the driver’s bank account reflects the fares minus the CC charges and the Uber fee. Thus, the sum of the year’s deposits from Uber can be subtracted from the 1099-K amount, and the difference can be taken as an expense or as a cost of goods sold. Currently, a third party operates the billing, coordinates the drivers’ fares and issues the drivers’ 1099-Ks.

Uber also provides an online statement to its drivers detailing the miles driven with fares, and the dollar amount for both the fares and the bank deposits.

Automobile Deductions – Although the Uber statement mentioned above includes the miles driven for each fare, this figure only represents the miles between a fare’s pickup point and delivery point. It does not reflect the additional miles driven between fares. Drivers should maintain a mileage log to track their total miles and substantiate their business mileage. 

Luxury Auto RulesRegulation 1.280F-6(c)(3)(ii) exempts from the luxury auto rules any vehicle used by a taxpayer directly in the trade or business of transporting persons or property for compensation or hire.

Tips – Although tips are supposedly included in the fare charged by Uber, and additional tips can be added, it is not uncommon for a driver to receive additional cash tips. These should be included in Schedule C gross income.

Business Use of the HomeWhen deciding whether an Uber or Lyft driver qualifies for a home office deduction, remember the home office must be used exclusively in a taxpayer’s trade or business on a regular, continuing basis.  A taxpayer must be able to provide sufficient evidence to show the use is regular.  Exclusive use means there can be no personal use (other than de minimis) at any time during the tax year.  Use of only a portion of a room is acceptable as long as the taxpayer shows that section is totally for business. The office must also be the driver’s principal place of business.

Both Uber and Lyft provide their drivers with detailed accounting information (see Uber reporting above).  The only additional record keeping required is the miles traveled between fares and that is accomplished while in the vehicle. So justifying a home office is problematic. Without a qualified home office, the distance to pick up the first fare and the distance to return home at the end of the shift would be considered nondeductible commuting.

Some would contend that a portion of the garage where the vehicle is parked could be used toward a business use of the home deduction. Remember, the use must be exclusive, which means the vehicle must be used 100% for business.  Since the distance between home and the first and last fares is commuting, it is not realistic to believe that the vehicle is never used for personal purposes and justifying business use of the home for garage parking is also challenging.

Neither the courts nor the IRS have provided any specific guidance on this subject related to Uber drivers, so it is up to the tax practitioner to make the determination on a case-by-case basis.     

Deductions Other Than the Vehicle – Possible other deductions might include:

  • Prorated cell phone service if the phone isn’t used 100% for Uber activity
  • Liability insurance
  • Water for the fares

Lyft is a competitor to Uber and operates in a manner similar to Uber.