Author Trudy Howard.
Did you know that even as an UBER driver or LYFT driver you can start a retirement plan? Yes it’s true! Self employed business owners can save for retirement with a 401(k) plan just like when they were employed. By setting up a one-participant 401(k) plan small business owners such as insurance agents, contractors, hair stylist, barbers, consultants, and UBER/LYFT drivers can also receive a tax credit of up to $500 while reducing their taxable income! Let’s look at an example of how setting up a solo 401(k) would benefit an UBER/LYFT driver.
Hot Rod Harry drives for UBER/LYFT on the weekends to supplement his income & finance his vacations. He typically earns about $500 a week working part time in the evenings and on weekends. At the end of the year Hot Rod Harry didn’t receive a 1099 from UBER, so he contacted his tax consultant to see if he needed to file taxes on the money that he earned. Per the tax consultant, although UBER typically doesn’t send out 1099’s for amounts under $20,000 and LYFT doesn’t send out 1099’s, Harry still needs to pay taxes on the self employment income that he earned. After hearing the tax liability news, Hot Rod Harry was glad that he’d listened to his tax consultant and setup a self employed solo 401(k) so that he could reduce his side gig income of $18,000.
To earn this $18,000 Harry drove 20,000 miles which was a tax deduction of $10,900; he had $3,000 in additional business expenses such as loan/bank fees, car washes, utilities, supplies, etc. During the year, Hot Rod Harry contributed $2,500 to his solo 401(k), and at tax time he received an additional $500 tax credit for setting up the solo 401(k). Also, because of the new 2018 TCJA laws, Harry was able to take the 20% QBI deduction which knocked off another $220 from his taxable income. In the end, Hot Rod Harry only had to pay self employment taxes on $880, which total $66. Because Harry had no other income he didn’t have to pay any income taxes on the $880.
As you can see, setting up a solo 401(k) can not only help you save for retirement, but it can really lower your tax liability. If you are an UBER/LYFT driver or a self employed person looking to setup a 401(k) for self employed people, or need help with your business taxes, please call our office at 855-743-5765.