How Uber and Lyft Drivers Can Best Save Their Earnings
When a bulk of your income comes from driving for a rideshare company, the topic of saving gets a little murkier.
It’s still entirely possible to develop a strong saving and investing habit, but it takes a little more legwork.
It also takes a smart approach to some of the unique challenges presented by variable income.
If you work for Uber or Lyft, you might be struggling to save. Here’s what you can do to get your finances back on track.
How Do Rideshare Companies Pay Their Drivers?
When you work a traditional job, saving can be relatively easy.
Because your income is so stable, setting aside a certain amount from your paycheck every month is easily factored into a budget.
You also have employer-sponsored investment options, so saving for retirement is a breeze.
The fact is:
A driver for a rideshare company is a contractor, not an employee.
A contractor is paid on a variable basis, while an employee receives a stable salary. A contractor doesn’t have the same rights and benefits that are afforded to employees, such as health insurance, paid time off or 401k contributions.
Uber and Lyft pay their drivers based on the length of the ride, both in terms of miles driven and the length of time.
The algorithm varies depending on the city and type of ride, including any surcharges. Some companies will also offer special promotions if drivers complete a certain amount of rides at one time.
Drivers get paid once a week through Uber, but can opt for daily payments with Lyft.
After the end of the year, drivers will get a 1099 form from the company that shows their annual earnings. Drivers will have to report that figure on their taxes.
The best thing any person can do for their future is to establish a robust saving habit - and this includes Uber and Lyft drivers.
Social security benefits don’t pay out enough to cover all of a senior’s expenses during retirement, and many elderly individuals find themselves living paycheck-to-paycheck even in their golden years.
There are several ways an Uber or Lyft driver can save for retirement:
A traditional Individual Retirement Account (IRA) is a retirement account that anyone with earned income can open.
The maximum annual contribution is $6,000 for 2020 and 2021, which means drivers can stash up to $500 a month before hitting the limit.
Traditional IRA contributions are tax-deductible, which means you can decrease your taxable income by saving money in a traditional IRA. When you withdraw those contributions in retirement, you’ll have to pay taxes.
A Roth IRA has the same annual contribution max as a traditional IRA, but its tax benefits work differently.
When you contribute money to a Roth IRA, you can’t deduct the contributions on your taxes. However, you’ll be able to take out those contributions tax-free.
You can start a traditional or Roth IRA at an investment firm or with a robo advisor.
Uber even offers drivers in select cities the opportunity to start an IRA with robo advisor Betterment for free for one year.
Lyft has a similar program with Honest Dollar, a robo advisor powered by Goldman Sachs. Log onto your account to see if you’re eligible for any of these options.
A self-employed IRA (SEP IRA) is designed for a full-time freelancer or self-employed individual, like an Uber or Lyft driver.
The main benefit of a SEP IRA over a traditional or Roth IRA is the increased contribution limit of from $57,000 in 2020 to $58,000 for 2021.
A Solo 401k is a retirement account that sole business owners with no employees can open.
The 2020 contribution limit is $57,000 ($58,00 for 2021) and drivers 50 or older can add an extra $6,500 a year as a catch-up provision.
Quarterly Tax Payments
If you have a traditional job, you’re probably used to taxes being taken out of your paycheck.
There’s a difference between your stated salary and your take-home pay, which depends on how much you earn and how much is withdrawn from your pay stub.
When you’re an Uber or Lyft driver, taxes aren’t deducted from your paycheck. Uber and Lyft will deduct their fees, but they don’t take anything for social security, Medicare or FICA.
It’s up to the individual driver to pay taxes on their rideshare earnings at the end of the year.
How to pay your taxes every quarter
Drivers who make Uber or Lyft their full-time job should report their income on a quarterly basis and pay quarterly taxes to the IRS.
These payments are due:
- April 15
- June 15
- September 15
- January 15
If you don’t make quarterly payments and your rideshare earnings comprise the majority of your income, you could face a huge tax bill at the end of the year.
The best way to save for quarterly taxes:
Transfer a set amount every month to a separate account earmarked for taxes.
Estimate how much you’ll make from Uber and Lyft and then calculate 25-30% of that for your taxes. This will be a rough guess and should include state quarterly payments as well.
You can also make manual transfers based on how much you actually bring in every month, but that requires more time.
If you make it automatic, you’re more likely to be stress-free when your quarterly payments are due.
If you have a regular full-time job and drive for Uber or Lyft on the side, you can simply change the allowances on your W-4 to account for the side hustle income.
If you’re confused about how much to deduct, talk to an accountant or CPA who specializes in taxes. You can also call the IRS if you’re having trouble making quarterly payments.
Drivers should also try to minimize their tax payments by deducting any related expenses. Legitimate rideshare expenses include gas, car repairs, parking fees, and tolls.
Everyone, no matter their profession, needs an emergency fund.
An emergency fund is a pot of money dedicated for the life events no one can predict.
Most Americans barely have $400 set aside for a rainy day, an amount that probably wouldn’t cover a major car repair or serious medical procedure.
If your income is variable, like a rideshare driver, you need an emergency fund even more than most.
The failsafes and fallback options available to salaried employees don’t exist for a contractor, so a serious emergency has much more potential to set you back financially.
For example, what happens when you need new tires, brake pads or a new battery? What if your car gets stolen or you lose your license?
For starters, your emergency fund should have enough to cover most basic repairs and maintenance appointments you might need.
Keeping up with the maintenance schedule will save you money in the long run, so don’t try to skimp out here. Drivers with older or less reliable cars should have more saved up.
Accidents and insurance
Insurance is another factor to consider.
Even the most careful and diligent driver can face a car accident while driving for Uber or Lyft, and more than 30,000 people die in car accidents every year.
Rideshare drivers aren’t immune from that statistic.
Unfortunately, your personal car insurance usually doesn’t cover anything that happens if you drive for Uber or Lyft.
Rideshare companies provide their own business coverage to drivers, which comes with a $2,500 deductible for Lyft and $1,000 for Uber.
If the accident isn’t your fault, the other driver’s insurance may chip in to repair your car - assuming they’re willing to be honest and accept culpability.
If the other party’s insurance company doesn’t cover the damage, you’ll be on the hook for the amount up until the deductible.
Your emergency fund should at least include enough to pay for the deductible both on your commercial and personal car insurance, as well as enough to cover some basic car repairs.
Car repairs can also take time, sometimes several days.
That means you won’t be able to drive and earn money through Lyft or Uber until the car is fixed. The emergency fund should also account for any income lost until the vehicle is up and running.
The ideal size of an emergency fund
Once you have that amount established, you should work on saving three to six month’s worth of living expenses.
Add up how much you spend on the necessities every month, including rent/mortgage, gas, food, health insurance, car insurance, utilities, internet and any loan payments.
Multiply that number by three to get your basic emergency fund. People with children, mortgage payments or those who are self-employed should have closer to six months of expenses.
Ideal Size of an Emergency Fund
|To start...||Ideal goal...||Super safe...|
|$1,000||3-6 months of essential expenses||12 months of expenses|
Keep your emergency fund in a separate savings account so you’re not tempted to spend it on things you don’t need. It may be tempting to invest that money for a bigger return, but doing so could be disastrous in the event of a market downswing.
If you invest $5,000 and an emergency forces you to withdraw when it’s only worth $3,000, you’ve just thrown away a month’s worth of income.
Rideshare drivers actually have solid investment options available to them - if they’re willing to do a little legwork to get their account set up.
After that, it’s just about building a strong saving habit. The more you contribute to retirement as early as possible, the more compound interest will allow your funds to grow over time.
When it comes to an emergency fund, the amount you need is entirely personal. Still, it’s best to aim for three to six months of expenses, stored in a separate and easily-accessible savings account.