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Should I Form an LLC or S-Corp to Drive for Uber?
If you are a rideshare driver with a company like Uber or Lyft, you are (by default) a self-employed, independent contractor. In fact, you are operating your own business as a sole proprietor. If your ridesharing gig is only a few hours a week for supplemental income, you probably need not think much more about it. Simply report your earnings on your individual tax returns.
But, if you are driving significant hours, want to make it your main or sole source of income, or want to make it one of many services you provide as part of a full-blown business enterprise, then you may want to consider formalizing your business by setting up an LLC or S-Corp to reduce personal and tax liabilities.
It’s always a good idea to seek advice from a lawyer or a certified accountant in deciding what type of company to set up. But we can, at least, get you started thinking about what might work best for you.
LLC versus S-Corp
Both an LLC and S-Corp provide benefits to rideshare-driving sole proprietors by protecting personal assets from business creditors. There can also be tax benefits to both, depending on the level of earnings. If you expect to pay at least $1000 in taxes, however, you will have to pay quarterly estimated taxes under both business types.
A Limited Liability Company (LLC) is a business entity that allows the same pass-through taxation as a sole proprietorship but with the liability protection of a corporation. Like the sole proprietor, LLC owners report profits and losses on their personal income tax returns. An LLC’s biggest benefit to rideshare drivers is the protection of personal assets from potential business liability claims if someone sues you during the course of your business activities. Note, however, like in any case, that personal liability protection does not extend to personal or negligent wrong-doing, like drunk-driving, for example.
The S corporation (S-Corp) is a special corporate designation that also enjoys pass-through taxation to avoid corporate income tax. It is a tax status rather than an actual business entity. The biggest advantage of the S-Corp to a rideshare driver is this tax status in cases where the driver is making significant earnings or if the owner is operating a fleet of cars and employs other drivers. Instead of having to pay Medicare and Social Security (or “self-employment”) taxes on the company’s entire profit, the S-Corp owner is paid a “reasonable” salary and can receive the additional profits as dividends. Thus, self-employment taxes are only paid on the salary and the dividends are taxed at a much lower rate.
Example: The Self-employment tax is 15.3% on income (of which half is normally shared by employers of wage earners) up to $132,900 (in 2019).
Say, this year, your company has a net income of $100,000. As an LLC, you would pay self-employment tax on the entire $100,000, with a tax liability of $15,300 ($100,000 x .153 = $15,300). But as an S-Corp, you could pay yourself a reasonable salary of $70,000, and take the remaining $30,000 as a dividend.
You would only pay self-employment tax on the $70,000, with a tax liability of $10,710 ($70,000 x .153 = $10,710). That is a tax savings of $4,590.
Note that the IRS is increasingly scrutinizing was salary is considered “reasonable” given the industry, so it is important not to underestimate your salary.
The biggest downside to the S-Corp is the somewhat cumbersome requirements of formation and maintenance — things like the adoption of by-laws, issuance of stock, election of officers and directors, regular meetings and corporate record-keeping. The S-Corp tax returns are also more complicated. These can be time-consuming and expensive and should be weighed against potential tax savings.
If you do create a business entity for your rideshare income, make sure you update your tax ID in the app to replace your social security number (SSN) with your Employer Identification Number (EIN). This will ensure that the earnings are recorded for your business instead of you personally.
So, which one to choose?
Most experts will tell you that the LLC is the preferred set-up for a full-time, self-employed rideshare driver because it is simple but has the added benefit of liability protection. In determining whether to choose the S-corp tax status, the question becomes whether potential tax savings is worth the trade-off of having to manage a more complicated business arrangement and complex tax returns. This may happen when income levels significantly surpass what a driver’s otherwise reasonable salary would be. If profits are significantly greater than your reasonable salary, the S-corp status may save you money. Either way, to get started on your formation, a service like Rocket Lawyer can help you through the process.
Claire Terrebonne is a licensed attorney in the State of Missouri with 11 years of experience. Her experience includes complex commercial and intellectual property litigation, small business development and dispute resolution, and child welfare law and policy.