Tax Deductions for the Self Employed – The Uber Way
In today’s economy, many individuals are deciding to take more control of their work-lives and have become self-employed business owners and contractors. Visionary companies like Uber and Lyft have helped shift the paradigm away from regular wage-employee arrangements, in which you receive a W-2 tax statement, to contractor/consultant status with Form 1099 tax reporting. As a self-employed person, you are responsible for your estimated tax payments, but you benefit from a whole range of tax deductions not available to employees. These include:
- Meals on the job
- Home office expenses
- Health and long-term-care insurance premium deductions
- Transportation costs
- Equipment and supplies
- Professional/educational expenses and fees
- Access to a Solo 401K
Let’s review the requirements for qualifying as a self-employed person, and then explore in detail the first 3 deductions listed above.
The IRS defines self-employed individuals as owners of unincorporated businesses. Generally, you can claim to be self-employed or an independent contractor if you pass three categories of tests:
- You control when and where you work
- You determine how you are paid, and you are responsible for you expenses, tools, supplies, etc.
- Your work is governed by contracts or agreements, and you generally do not receive employee benefits from your clients.
These are often judgement calls with many shades of grey. For example, the IRS will want to know whether your relationship with a client is open-ended and whether the work you performed is a key aspect of the client’s business.
The waters are further muddied by lawsuits like the one in California in which Uber drivers are claiming to be employees rather than independent contractors, and therefore entitled to expense reimbursement for items like mileage and vehicle maintenance. This case is sure to have repercussions whichever way it is decided.
For the purposes of the current discussion, let’s assume that you are clearly a self-employed individual and are entitled to the tax deductions that this status provides.
When the time comes to file your tax return, don’t be shy about claiming all the benefits you deserve for being self-employed – they are tax breaks that you’ve earned.
You can deduct half of your meal costs when you eat on the job, such as when you are on a business trip or are entertaining a customer. If you are an Uber or Lyft driver, you’ll be especially interested in these two items:
- You can deduct meals if you traveled out-of-town to drop off a customer and came back on the next day. You can either deduct the higher of 100 percent of actual meal expenses or the U.S. General Services Administration (GSA) per diem rates.
- If you give snacks and/or drinks to customers, it may qualify as business gifts that receive a 100 percent deduction for up to $25 per customer
The IRS frowns on deductions for extravagant or lavish meals, so use common sense and file away your receipts/records where you can find them at tax-preparation time. The records should include the business purpose, time and place of the meal. The 50 percent limit also applies to tips, taxes, cover charges, rent paid for a room you use to host a dinner or cocktail party, and related parking expenses. You don’t need a receipt if you take 50 percent of the standard meal allowance, which starts at $46 a day but may be higher when eating in expensive cities and localities, or eating outside the continental U.S.
Home Office Expenses
Most self-employed taxpayers begin as businesses based in their homes. It is exceedingly important to maintain proper records of expenses stemming from a home office. To deduct home office expenses, you must fulfill two requirements:
- You regularly and exclusively use part of your home to conduct your business. This might take the form of an extra room or a portion of a room. The space is used only for your business, with the exceptions of parts of your home used to run a daycare facility or to store inventory.
- Your home office must be your principal business location. You can perform work out of the house but still receive the deduction if you meet the first requirement. For example, if you are a massage therapist, you may have a studio set up at home, but you also may make house calls.
Generally, your home office deductions are based on the percentage of the home, as measured in square feet, devoted to your business. This works also for free-standing structures on your property, such as a garage, barn or studio.
There are two principal methods for determining you home office expenses:
- Regular Method: A rather complex calculation that uses your actual home office expenses, such as a portion of mortgage expenses, property taxes, insurance, utilities, depreciation, repairs, etc., based upon the relative size of the office to the home.
- Simplified Method: Our IRS masters took heed of complaints about complexity and ordained an easier method in which you multiply the office’s allowable square footage by a prescribed rate of $5 per square foot. This method significantly reduces your bookkeeping burden, but is limited to 300 square feet, so that the maximum deduction is $1,500.
You may be aware that self-employed taxpayers can deduct the cost of the full cost of health insurance premiums, including policies covering dental care. But did you know that you can also deduct some of your premiums for a qualified long-term care policy? The amount of LTC premiums you can deduct are subject to certain age-related limits:
- Age 40 or younger–$370
- Age 41 to 50–$700
- Age 51 to 60–$1,400
- Age 61 to 70–$3,720
- Age 71 or older–$4,660
An LTC policy is qualified if it is guaranteed to be renewable, allows refunds to reduce premiums or increase future benefits, doesn’t provide a cash surrender value, and doesn’t reimburse Medicare-paid expenses. The policy must cover qualified long-term care services, which include those that are diagnostic, preventative, curative, palliative and more.
You can deduct health insurance premiums that pertain to your spouse and your dependents, and even to your children under age 27 who are not your dependents. This includes foster and adopted children, as well as stepchildren. You can also include voluntarily paid Medicare premiums.