How to manage your Rideshare income

How to manage your Rideshare income

Uber and Lyft income Management Financial Plan

How to manage your Rideshare finances

It's very important to have the financial side of your Rideshare business in order. Remember, as an Uber or Lyft driver you are a business owner. 

For this reason, I recommend that you manage your income in a way that will make it easier for you to manage your finances and to be a successful Rideshare Driver. 

It's very tragic that many independent contractors (not just Rideshare drivers) find themselves owing money to the IRS because they failed to properly manage their finances. 

This is very serious and can even lead to legal fines by the IRS and or even imprisonment in extreme cases. Please don't take this lightly. 

For this reason I think the best strategy to avoid having your Rideshare business become a financial nightmare is to plan ahead and organize your finances.

I suggest that you manage your Uber or Lyft income in the following order:

How to Manage your Rideshare Income:

10% of your weekly earnings should be put aside for Taxes

10% of your weekly earnings should be put aside for an Emergency Car Fund

10% of your weekly earnings should be put aside for Operating Expenses

70% of your weekly earnings can be used for personal reasons or savings

Using this strategy, you will basically put away a third of your earned income (30%) and you can do whatever you want with the other 70% (pay rent, buy food, go to the movies, savings account, etc.)

Case Study: John Doe

For example, say John Doe started working for Uber in NYC on January 1, 2015 and every week he would gross roughly $1,000. John Doe lives in NYC and he has a 2013 Toyota Camry. 

As an Independent Contractor, John Doe is not employed by Uber. He is simply an Independent Contractor (1099). This means Uber will not deduct anything from his check. It's kind of like getting paid cash but you still have to report your income to the IRS.

For this reason, John Doe realizes that he must be smart in order to avoid any legal issues with the IRS come tax time. So John Doe organizes his finances in the same way I mentioned before. John Doe opens up 3 business (or checking) bank accounts and 1 personal savings account.

John Doe's Finances

Weekly income with Uber = $1,000

Business Account #1:

10% each week in his Car Emergency Fund = $100

Business Account #2:

10% each week in for Operating Expenses = $100

Business Account #3:

10% each week for taxes = $100

Personal Savings Account:

70% each week for personal reasons or savings = $700

Personal Savings Account

Using this strategy, each month John Doe grosses $4,000 however, he can only use $2,800 of this money and whatever he does not use goes to his personal savings account. This is his take home pay. 

He uses this money to pay his rent, buy food, go out with his girlfriend, take a vacation, etc. And whatever he doesn't spend stays in his personal savings account.

Now the other business accounts

From the $4,000 that John Doe grosses a month with Uber, $2,800 goes to his personal savings account. The other $1,200 goes to business accounts.

Business Account #1 Taxes

10% of John Doe’s monthly earnings (10% of $4,000 = $400) or $400 a month goes to an account for taxes. The tax business account is money that John Doe cannot touch. After 12 months of working for Uber, John Doe will have roughly $4,800 in this Business Account for taxes. This is a nice cushion to have for taxes. 

Business Account #2 Emergency Car Fund

Another 10% of his monthly earnings ($400) goes to an account for an emergency car fund. By the end of the year, John Doe will also have roughly $4,800 in his emergency car fund. This is a nice cushion to have for car repairs and or to purchase a newer car.

Business Account #3 Operating Expenses

And lastly, another 10% of his monthly income ($400) goes to an account set up primarily for operating expenses. This business account (operating expenses) is not for savings, but for weekly expenses related to operating his business. 

The purposes of the operating expenses account is not to save money, but to cover expenses related to operating his Rideshare business.

John Doe may earn $1,000 a week driving for Uber, but he is also putting a lot of miles on his car every month. He has to spend a decent amount of money on gas and oil changes (more frequently) since he puts on hundreds of miles every week. 

Car washes, tolls, business lunch expenses, tire rotations, cell phone bill, all of these expenses are not cheap and add up. But since John Doe is putting $100 a week out of his gross for operating expenses, he has roughly $400 a month to cover all his operating expenses.

$400 a month in money should cover most of John Doe’s operating expenses while working as a full time independent contractor with Uber. Remember, mechanical failure or damage to vehicle is covered by his emergency car fund. 

The purpose of the operating expense account is to cover all money needed to keep his business running. This account is important because it keeps John Doe from having to touch his savings, emergency car fund or tax account.

By the end of the year, most likely John Doe's operating expense account won't have a penny in it. But that's the purpose. The purpose is to use it to keep his business running. He even uses a debit card from his operating expense account to pay all gas, tolls, lunch, oil changes, etc. 

Organize your finances

It's important to keep all accounts separate because this way you will have more control over your finances and when you file your taxes it will be much easier.

When people are not organized, they can easily spend money that is needed for taxes on something that is not important and then find themselves in trouble with the IRS. By organizing your finances you can budget your expenses in a way that will make it easier to acquire financial stability in your Rideshare business.

The worse thing that can happen is come tax time you find yourself owing thousands of dollars to the IRS. This can happen if you don’t have you’re financial house in order. Take a look at Case Study 1 to see just why it’s very important to make sure you organize your finances:

Case Study 1: An example of poor financial management

If John Doe grosses $1,000 a week driving for Uber in 12 months he will have grossed roughly $48,000. Not bad right? It's not a bad yearly income, however, remember at the end of the year John Doe will receive a 1099 form from Uber. The 1099 form means that John Doe has to file income taxes with the IRS as an independent contractor. 

John Doe is responsible for paying taxes on the $48,000 he earned as an Uber driver. If John Doe wasn't smart, and he made a poor choice of not organizing his finances, he could find himself in big trouble come tax time.

The dangers of not organizing your finances

Let's say that John failed to organize his finances. Instead of saving a third of his income for emergency savings, taxes and operating expenses, John spent nearly all of his $48,000 yearly income on fancy vacations, groceries and eating at fine restaurants and paying rent in an expensive luxurious apartment. 

Now come tax time, after deducting 54 cents per mile (mileage deduction) of his $48,000 2015 gross earnings, John Doe's taxable income stands at around $24,000 (rounding off). 

This means John Doe is responsible for paying Social Security taxes and other taxes on $24,000. As a W2 employee, your employer pays half the Social Security Taxes and you (the employee) pays the other half which is deducted from your paycheck. This means you don’t have to pay any social security taxes during tax time as a W-2 Employee since the employer and the employee pay for it during the year.

But as a 1099 independent contractor you have to pay all the Social Security taxes yourself. So John Doe is shocked to see that he owes $3,000 to the IRS. And the worst part is he doesn’t have any money since he never organized his finances. John Doe is in a hole and is in danger of getting fined by the IRS.

And worse, if he never pays the money the IRS can garnish his bank account and or wages, etc.  This is why financial planning is essential to have financial success not only with Uber or Lyft but with any self-employed business. Now take a look at case study 2:

Case Study 2: An example of good financial management

Now going back to my example, let's say that John Doe did follow the financial plan I explained earlier. Let’s say that he did put away a third of all his earnings into 3 different accounts for taxes, an emergency car fund and operating expenses, and put away any unused money into his personal savings account.

By the end of the year, he owes $3,000 in taxes to the IRS. However, remember, he has $4,800 in his tax account, so he has more than enough money to cover the taxes and has $1,800 to spare. John Doe, being wise, leaves the extra $1,800 in his tax account for next year (since he will continue driving for Uber). This is smart since he will already have a nice cushion to build on for his 2017 tax return. 

He also put $4,800 in his emergency car fund during 2015. Let's say John Doe had to use $2,300 of his emergency car fund during 2015 for some emergency car repairs to his 2013 Toyota Camry. This means he has $2,000 left over in his emergency car fund. So what will he do with the extra $2,000?

Well, John Doe, being a smart guy, decides to leave the $2,000 in his emergency car fund and he will continue to grow this fund in 2016. John Doe understands that as his car continues to accumulate high mileage and gets older, the car’s value will continue to depreciate. His car will also get worn out fast if he continues to put on thirty to forty thousand miles per year.

It’s easy to put on 40,000 miles a year if you’re working full time for Uber or any other Rideshare job. John Doe is thinking down the road and also understands that Uber's yearly new car minimum will continue increasing. 

In a few years his 2013 Toyota Camry may be too old for Uber. He also realizes that most passengers prefer to be driven in a late model car. Having a newer car means getting more passenger requests and making more money. So what does John Doe do? He keeps adding to his emergency car fund every year. If his car needs repairs, he digs into the fund and uses the money to fix his 2013 Toyota Camry.

However, any money that is left over, John Doe will use this money as a down payment in the future to buy a new car. John plans on purchasing a new late model car in 2017. He is thinking about using any money he has in his emergency car fund as a down payment for a 2016 Toyota Camry.

John also understands that the more money he puts down on a late model car, the lower the interest rate and the more favorable the loan (if he decides to get a car loan). As John's emergency car fund grows, not only is this important for mechanical repairs (and or body damage to his vehicle from an accident), he can also use this money to buy a new car in the future.

The more money John has in his emergency car fund, the more options he will have for buying a new car and of course the security of being able to fix his car in any emergency. Remember, Uber and Lyft will not provide you with a car when you decide to work for them.

Your car is the instrument you need to continue to make money as a Rideshare driver. If your car breaks down or gets totaled in an accident you will need to be able to fix your car or get a new car if you still want to work for Uber, Lyft or any other Rideshare company.

This is the reality of working as an independent contractor driver, you usually take all the risk and if your car suddenly doesn’t work, you’re out of a job. This is why it’s very important to prepare for any emergency and have an emergency car fund.  

Since John had an operating expense account, he didn't have to spend any of his $2,800 monthly earnings to run his business. At the end of the year, this summarizes John Doe's financial plan:

John Doe's yearly financial plan

John Doe earned $48,000 in 2015

John used $2,800 a month or $33,600 for the year for personal use. This is money for personal savings, rent, food, vacation, entertainment, etc.

John saved $400 a month or $4,800 for the year for taxes.

John saved $400 a month or $4,800 for the year for Emergency Car Fund

John saved $400 a month or $4,800 a year for operating expenses

Summary

At the end of the year, John Doe earned roughly $48,000 a year and was able to pay his taxes, repair his car and operate his business and still have $33,600 left over for himself.

Now of course this is just an example. If you make more than $1,000 a week, your tax liabilities and operating expenses will most likely be greater.

If you make less than $1,000 a week, your tax liabilities and operating expenses will most likely be lower. For example, say you gross $500 a week with Uber or Lyft.

Your tax liability and operating expenses will most likely be lower than John Doe's. But you should still follow a financial plan.

If you earn $500 a week driving for Uber, you should still try to put 30% aside every week or month to help manage your business so when tax time comes around you won't have any unpleasant surprises.

If 30% seems too much for you, then at least try to do 20%. Even 10% is better than nothing. The point is to try to force yourself to save some money for a rainy day. 

And remember, as an Independent Contractor, you are liable for social security and other taxes. Taxes are something you should take seriously.

I hope this article helped, and wish you luck in your Rideshare business.

Disclaimer: I am not an accountant. Please consult with a competent Tax Professional regarding your tax obligations if you do decide to work for Uber and Lyft as a Rideshare driver. I am not responsible if you experience negative consequences for following the advice on this website. Please exercise caution and make sure to comply with tax laws.