In our first foray into self-employment, many of us experienced the sticker-shock of being on the hook not only for our “own” payroll taxes, but also for the portion formerly covered by our employers.
The shock is bigger for the uninitiated who don’t understand, or ignore, that no one else is automatically withholding taxes from their revenue. There’s also the frosting on the cake of quarterly payments that the IRS and state revenue departments require, but may escape the notice of newbie independent contractors.
And that’s where the Uber Tax Timebomb comes in.
In an unscientific sample of my own experience and opinion, a substantial percentage of first-year Uber drivers will get nailed at tax time. They will discover the wonderful world of payroll taxes, interest and penalties, and it will put many of them behind the tax-man’s 8 Ball.
To wit, Uber says in its Help section:
About partner taxes
All Uber partners are independent contractors, so we do not withhold any taxes and partners are entirely responsible for their own tax obligations.
You should seek the advice of a tax professional if you are unsure of how to report this income.
If you’re a partner based in the United States, you will receive a 1099-K and/or 1099-MISC form to report income you earned with Uber. You’ll receive one or both depending on the type of payment you earned in the calendar year.
The Uber blog claims that “For example, the potential income a driver on uberX can make in a year is more than $90,000 in New York and more than $74,000 in San Francisco.” A quick search shows that the reality appears to be different; e.g., this article from Business Insider.
But whatever the actual case, the tax challenge remains, regardless of a driver’s net income after Uber’s 20% take, fees, gas, car payments, etc. At $30,000 net, for example, the payroll tax alone is $4,900; 12.4% for Social Security and 2.9% for Medicare. (“Whaddya mean, I need to pay 12.4%??? I thought it was 6.2!!”)
It’s likely that few first-year drivers will have prepared for this, and also likely that it’ll take them time to recover while many of them pay off the tax debt with its accruing interest and penalties.
Welcome to the world of independence.