Uber Taxes and Employment Taxes: How They Differ

How does Uber provide such a cost-competitive business model for giving people rides? Part of the reason is they have a clear tax advantage over taxis, shuttles, buses, and trains that employ drivers, engineers, and the like.

The picture for this post shows two tax forms that Uber issues drivers. A 1099-K shows payments related to driving people—fares, tolls, split fares, and safe ride fees, for example. Uber also pays referral fees. These are reported separately on a 1099 form.

Tips? Uber tells drivers not to accept first offers for tips, a curious policy that suggests that some tipping conversations go to a second stage and beyond. One survey finds that 10% of riders pay a cash tip to drivers in California. That money escapes taxation unless the driver reports it.

How does this arrangement differ from a bus, taxi or train operator/driver? 

That person is an employee. On the employer side, employers must deposit and report employment taxes. These include  Federal Income Tax (withheld from wages); Social Security and Medicare Taxes (also withheld from wages), an  Additional Medicare Tax (as of January 1, 2013, employers are responsible for withholding the 0.9% Additional Medicare Tax on an employee's wages and compensation that exceeds a threshold amount based on the employee’s filing status); and Federal Unemployment (FUTA) Tax. In many states, there is an additional state and locality tax on employment.

Uber drivers must pay self-employment taxes, which include income, Social Security and Medicare components—however, those amounts due are calculated after the driver subtracts his or her business expenses. This opens the door to the possibility of excessive deductions—a possibility that is foreclosed in the traditional employment relationship.

Is Uber a clever business, or a business that skirts taxes? Or both? 

My thought is that Uber enjoys a large degree of its competitiveness due to its ability to shift direct operating costs to ordinary people, as well as its ability to avoid taxes that taxis, bus and shuttle companies, and train systems cannot duck.

Why should you care? Because if you are an employer or an employee or both, you might be paying in the future to keep Uber and its copy-cats cost-competitive.