Having the right type of car insurance is the first step in setting yourself up as a rideshare driver.
It is essential to keep good records. Taking advantage of tax deductions will help keep more of your income in your pocket.
Use some of this extra income to build a more secure future.
I'm thinking of supplementing my income by driving for a rideshare service. What's the smartest way to think about this income in terms of the bigger picture?
Rideshare services have certainly gotten a lot of attention, whether it's the increasingly competitive market, concern over employee status or lawsuits brought by taxi companies. But despite issues like these, if you listen to the ads, it sounds like driving for a rideshare company is a relatively easy way to earn a few extra bucks.
I say, "sounds like" because, as with any business venture, it's only "easy" if you do it the right way. And that means being aware not only of the regulations governing the business, but also of the potential tax issues. So it's good you're looking at the big picture before you get started.
I'm no expert on the ins and outs of rideshare companies, but I can point out some of the financial issues to be aware of to help keep as much of this extra money in your pocket as possible.
Carry the right insurance
Having adequate insurance is the first step in protecting yourself and your income. This can be a bit complicated in this relatively new area. Of course, you have to have personal automobile insurance, but that won't cover you for commercial purposes, and driving for a rideshare service is considered commercial use of your vehicle.
Rideshare companies generally have insurance to cover drivers while they're carrying passengers, but there are gray areas in which you may not be fully covered. To make certain you're not uninsured or underinsured in certain situations, it's important to research your options.
First, notify your current insurance carrier that you intend to drive for a rideshare service. If your company finds out after the fact, it could drop you. Next, purchase any necessary extra insurance to cover the commercial use of your car. Standard commercial insurance is expensive. Fortunately, many insurance companies seeing a new market for a new kind of insurance, now offer specific rideshare policies at a lower cost.
Also, some rideshare companies have partnered with insurance providers to expand affordable insurance options. Before you sign up for a service, be sure you fully understand the insurance they offer. But don't stop there. Make sure to also look into other types of rideshare insurance available in your area.
Make the most of tax deductions
Next, assuming you're considered an independent contractor as a rideshare driver, you'll want to take full advantage of allowable tax deductions. The obvious deduction is for car expenses—things like gas, repairs and depreciation, even lease payments, if you lease rather than own your vehicle.
There are two ways to do this:
- The standard mileage rate method. With this method, you deduct an amount set by the IRS per business mile. For 2016, it's 54 cents per mile.
- The actual expense method. With this method, you keep track of specific expenses, which can include licenses, registration, repairs, depreciation, gas, oil, tires, tolls, parking fees, etc. You then determine the percentage of business use of your vehicle, and deduct that percentage of your expenses.
There are also other costs that may not appear that obvious. These include things like business use of your cell phone, a percentage of car payments and insurance premiums, fees charged by the rideshare company, home office use, and even tax preparation fees. It all adds up!
Keep detailed records
As with anything dealing with taxes, you need to keep good records. Number one is a daily mileage log of business miles traveled, no matter which expense method you use. If you use the actual expense method, you'll also need to keep receipts and invoices, and have the original cost of the vehicle and service records available. IRS Publication 463 is a good resource for more information.
In general, keep receipts for everything. To make it easier come tax time, keep a running tally of expenses on an app or a spreadsheet, so you'll have totals handy when you need them.
Set aside a percentage for taxes—and for the future
As an independent contractor, Social Security and Medicare taxes aren't withheld, so you have to cover this yourself. If you drive a lot, you may have to make quarterly estimated income tax payments. It would be wise to save a certain amount for taxes so you're not caught short.
And while you're in the saving mode, think about what you want to do with this extra income. You'll have short-term goals of course—and hopefully one of them is to make sure you have an emergency fund—but don't forget about the future. Even if you have a 401(k) through your other job, consider opening an IRA and putting some of this money toward retirement. In 2016, you can contribute $5,500 annually to a traditional or Roth IRA with a $1,000 catch-up for those 50-plus.
Good luck with your new venture. Hopefully, it will be fun and interesting as well as economically rewarding.