Working as a taxi driver is a growing field, according to the U.S. Department of Labor. If you choose to work independently, rather than as a company employee, claiming every tax deduction you can will be important if you want to keep your business in the black. Deductions not only save on income tax, but on the self-employment tax that independent contractors have to pay the IRS.
If you rent your cab from a taxi fleet, or use a dispatch service to find fares, you may wonder if that makes you an employee rather than an independent contractor. The IRS standard is that if someone else has the authority to set your schedule and tell you how to do your job, you're an employee; if you decide your own hours and do the job as you choose, you're self-employed. This remains true even if you only work part-time or have another day job as an employee.
If you make more than a few hundred dollars in profit, the IRS will require you to pay self-employment tax on your income. Self-employment tax--set at 15.3 per cent in 2010--is your contribution to Social Security and Medicaid; it's higher than the withholding taken out of an employee's paycheck because as an independent contractor, you have to pay the employer's share as well. You can deduct half your self-employment tax payment on your 1040.
Self-employed individuals will have extra forms to file with their 1040. You'll fill out your business profit or loss on Schedule C, and your self-employment tax on Schedule SE.
If you look at Schedule C, you'll see that you can deduct a wide variety of business expenses. Advertising, insurance, taxes, licenses and work-related vehicle expenses are all deductible; if you use a room in your house solely as an office, you can deduct a share of your housing costs too. If you're paying for your health insurance, a law passed in 2010 entitles you to deduct 100 per cent of your premiums.
If the IRS calls you in for an audit, you'll need to document every deduction you've claimed. If you've been reporting your income accurately, the IRS can only audit as far as three years back. If you're not filing your taxes or filing fraudulent forms, there's no limit on how far the IRS can go in those cases.
If, after all your deductions, you're going to owe more than £650 in self-employment tax and income tax combined, you'll need to pay estimated taxes. The IRS sets three dates during the current year--April 15, June 15, Sept. 15--for you to submit an estimated tax return if your income has crossed the threshold.
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