WASHINGTON — Be your own boss and leave the drudgery of the 9-to-5, Monday-through-Friday workweek behind.
Those are the dreams of many workers, especially those who have faced flat wages for years while paying more for essentials such as education, health care and housing.
Last May, Uber Technologies said on its blog that the median income for UberX drivers was more than $74,000 a year in San Francisco. That figure attracted a lot of attention, though it turned out to be unsustainable.
Uber’s no longer making those lofty claims — a more recent study it commissioned reported that the typical Uber X and Uber Black drivers make about $19 an hour after paying Uber’s 20 percent commission (you would have to work about 80 hours a week to make $74,000 at that rate) — yet that hasn’t diminished the appeal of driving for Uber. The company said that, as of December, it had more than 160,000 drivers in the United States who drive at least four times a month.
So why not you, too?
To get started, you’ll need a fairly new car, a driver’s license and clean driving record and an iPhone to access Uber’s app that connects you with riders (if you don’t have an iPhone, you can pay Uber $10 a week to rent one).
You’ll also need insurance. Check with your insurance company to make sure your policy covers you when you’re using your car for commercial purposes rather than just for personal use, because it probably doesn’t. If your provider does offer a hybrid personal/commercial coverage, your premium for personal coverage will likely go up when you tell your agent you’re driving for Uber.
Taxes are another thing to pay attention to. A lot of attention.
Remember, you don’t work for Uber. You’re a self-employed independent contractor.
Assume that you made $62,500 in fares and, after paying Uber its $12,500 commission, you’re left with $50,000.
When you’re self-employed, and if you owe at least $1,000 in taxes, you’re supposed to pay estimated taxes to the IRS each quarter and not wait until you file an annual return.
Tax accounting
So, every three months, you estimate your taxes due. First step: Estimate your income.
You figure out your net business income by subtracting your business expenses from your business income. As an independent contractor, you have vehicle expenses including gas, insurance, fees, repairs, depreciation, etc.
You can either document your actual expenses or take the standard mileage rate, which is 56 cents for each business mile driven. If you do this, you can also deduct your parking fees and tolls. If you use actual expenses, then you calculate the business share of your vehicle use. Both of these amounts go on Schedule C, which is where you calculate net profit from your business.
As an independent contractor, you’re also responsible for paying taxes that an employer would otherwise pay for you, namely Social Security and Medicare taxes that you owe under the Self-Employment Contributions Act, or SECA. Because you’re self-employed, you’ll be able to deduct half of the Social Security and Medicare tax.
Now, assuming you earn all your income from Uber and you’re single with no kids, let’s figure out what your tax burden might be.
Suppose you net $50,000 in fares after paying Uber’s commission and that the wear and tear on your car and other expenses give you a $10,000 deduction, giving you $40,000 in net self-employment income. (Calculations from here on out are as if you receive no tips. You are required to report them, however, and they’ll increase both your income and your taxes due.)
You’ll pay 15.3 percent SECA tax on 92.35 percent of that $40,000, or about $5,652. This amount goes on your federal 1040 income tax return. You deduct what is essentially the employer half of the payroll taxes. After that, and taking the standard deduction and exemption, your taxable income is about $27,000, in the 15 percent marginal tax bracket. The tax tables show you’ll owe about $3,600 in federal income tax, or about 13 percent of your income.
That’s not all. There’s one other potential “tax” that’s new for tax year 2014: a fee for health insurance. If you don’t have the minimal essential coverage, as required under the Affordable Care Act, then you have to pay the greater of $95 or 1 percent of your income. For you, that’s about $300.
Add the federal income, SECA taxes and ACA fee together, and you’ll owe about $9,500 in taxes, or 25 percent of your net earnings. Every three months, you’ll send in about a quarter of that.
By now, you’ve probably realized that there can be a big difference between the fares from driving for Uber — say $62,000 — and what’s left after paying Uber’s commission, your gas, car maintenance, health and car insurance expenses, and your federal income and self-employment taxes — about $27,600. And you may still have to pay state and local income taxes, another thousand dollars or so.
Keep in mind that you don’t get fringe benefits as an independent contractor. No paid sick leave, holidays or vacation, no subsidized health insurance or free coffee or snacks in the company cafeteria. No employer matching contributions to your 401(k) savings. No educational assistance, group term life insurance, health savings accounts and so forth.
Things would be different if you worked for Uber Technologies. You would receive a 401(k) plan, gym reimbursement, nine paid company holidays, full medical/dental/vision package and an unlimited vacation policy. You might even get snacks in Uber’s lunchroom.
Because the value of most of these fringe benefits isn’t included in your taxable income, you don’t pay taxes on them.
Despite all of this, you may still decide that you would like to be your own boss and make extra cash in your spare time (According to Uber, more than half of its drivers work less than 16 hours a week).
But keep in mind that the “independent contractor” business model has a few baseline costs.
