TaxAssurances Blog

Executive Summary

Car service drivers, including those who drive with Uber, Lyft, Doordash or working independently, must keep detailed records and accurately file taxes based on their annual income and expenses.

This case study offers insight on how I prepared a 2022 tax return for a car service driver client that I have. The information I’ve provided aims to assist other drivers in their own tax preparation process.

Background

• The car service driver is based in NYC, is married and made over $130k in total income in 2022
• For undisclosed reasons, the driver filed their tax returns separately from their spouse
• The driver focused on early morning driving, sometimes airport destined, business commuters with Uber
• The driver owns and uses their 2017 Lincoln Continental to run their car service business
• The driver paid for car related expenses with both cash and a bank debit card
• Total car related business expenses were over $108k for 2022
• The driver also received social security income. Only a small portion of it was taxable. The majority of it was tax free.
• The driver did not receive any unemployment or other sources of income during 2022
• The driver has a grown, non-dependent child
• The driver does not have a retirement account
• The driver does not have a savings account
• The driver did not have investment or crypto currency accounts
• The driver did not own their home
• The driver did not make charitable donations

Results

• The driver owed over $4k to the IRS and almost $1k to the state of NY in 2022. The bulk of the federal income tax obligation came as a result of incurring self-employment tax of over $3k.
• As a note, self-employment tax is the equivalent of the Medicare and social security tax that people pay when they have a “regular” job and receive a W2 at the end of the year. On the W2, box #4 and box #6 show how much tax was paid in Medicare and social security taxes by that employee during the year. Paying these taxes builds up credits so that taxpayers can receive social security and Medicare benefits in either their retirement years or if they become disabled before their retirement years.
• The driver was assessed a tax penalty for not paying estimated taxes during the year.
• The driver was also able to get a partial self-employment tax deduction that helped lower their total tax liability.
• The driver qualified for and received the Qualified Business Income Deduction and the amount was reflected on IRS form 8995.

Challenges & Solutions

The driver did not pay quarterly taxes during 2022 so at the end of the tax preparation process they owed a little over $4k to the IRS and almost $1k to NYS.

Solution #1

The driver needed to work out a payment plan with the IRS and NYS to pay the taxes that they owed for 2022.

Solution #2

The driver needs to use either a journal, file folder, spreadsheet or software like QuickBooks to keep a real time record of all revenue and expenses that they have related to the car service business for the year.

Solution #3

In future years, the driver needs to set money aside on a regular basis to pay quarterly taxes based on the income and expenses they have for the car service business.

Solution #4

In the future, after they set aside money for quarterly taxes they actually need to pay quarterly taxes in order to avoid a large end of the year tax bill.

Conclusion

Working as a car service driver can be a great way to make money to earn a living. The first and major challenge comes in making sure money is set aside to pay for the taxes incurred based on the income and expenses that are incurred. There is also the challenge of keeping good income and expense records. But if drivers can do both, it can help them efficiently manage their life and business financially.