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Rideshare Driver? Cover Your Assets with an LLC

Rideshare Driver Cover Your Assets

If you’re driving for Uber or Lyft, this might be the first time you’ve taken on the responsibilities of self-employment, including reporting business earnings on your income tax return. Ridesharing is a bit different than other businesses, and you have a few options for how you report that income—you can use a Schedule C, or start your own business entity as a Limited Liability Company (LLC) or an S-Corporation.

Schedule C – Sole Proprietorship

Rideshare drivers start out as sole proprietorships because they’re easy and inexpensive to set up. With a sole proprietorship, your income and losses will be taxed on your personal tax return but you will also have to file a Schedule C & SE in addition to your 1040.

The biggest disadvantage of a sole proprietorship is the fact that the owner can be held personally liable for all of the business’ bad debts and judgements from lawsuits. If you do have personal assets that need protecting, you may want to consider an LLC.

Limited Liability Company

For rideshare drivers, LLCs will give you more liability protection than a sole proprietorship.

LLC owners will still report income and losses on their personal income tax return but an LLC effectively separates your personal assets from your business’ assets. The downside of an LLC is the cost associated with starting one. The price is pretty reasonable in most states but in NY you have to pay extra for Publication (close to $1000 in some counties).

If someone sues you during the course of your business activities, your LLCs assets would be held liable but your personal assets would not. LLCs can protect drivers from potential liability claims.

A lot of business owners are under the impression that they cannot be sued if they form an LLC. But forming an LLC will not protect you against personal liability for your own negligence, malpractice, or other type of personal wrongdoing in relation to your business.

If both you and your LLC are found liable in a judgement of this nature, your LLC and your personal assets could still be at risk.

Examples of wrongdoing/negligence could be:

  • Driving your passengers around while drunk,
  • Knowing about a broken seat belt, failing to fix it and then getting into an accident where someone is injured because of the seatbelt,
  • Any other type of wrongdoing where you knowingly failed to act to repair the situation/problem.

S-Corporation – Tax Benefits

For most rideshare drivers, sole proprietorships or LLCs will probably be the best option but there are certain instances where an S-Corp could make sense. Both LLCs and S-Corps actually have a lot in common:

  • Pass-through taxation
  • Limited Liability of a corporation

But the main reason why you’ll hear people opting for S corporations, is because the owner can be treated as an employee and paid a reasonable salary. FICA taxes (social security and medicare totaling 15.3%) would only need to be paid on the salary and the rest of the profits would be treated as unearned income.

S-Corp Tax Example

Let’s say you make $75,000 a year driving for Uber. If you pay yourself a reasonable salary of $50k and leave $25k as business profit, you would pay FICA taxes on the $50k but since the $25k is unearned income, you would only owe state and federal taxes. That would save you about $4,000 in FICA taxes ($25,000 x 15.3%).

If you’re an occasional driver or you don’t have many assets to risk, a sole proprietorship might work for your rideshare business. But if you’re worried about the liability issues and/or want to give yourself that extra layer of protection, an LLC is probably the better option. And of course if your rideshare driving is starting to bring in significant income, it may be time about forming an S-Corporation.

Are you a rideshare driver or thinking about setting up your own business? Do you have other questions about bookkeeping or taxes? Connect with the experts at 1-800accountant for your personalized business needs consultation.

Published: September 9, 2019

Source: 1800 Accountant

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