by Tom Yamachika, President Tax Foundation, Hawaii

By now, pretty much everyone has heard about "ridesharing." Big names in the market are Uber, Lyft, and Sidecar. This industry presents itself as an alternative to taxis. If you are at Point A and need transportation to Point B, you pick up your smartphone, fire up an app that matches you with a driver, and the driver comes to give you a ride. At the end of the ride, the rider’s credit card is charged, the driver and the service that provides the app both get paid, and everyone is happy. At least in theory.

At this point, there are fierce debates going on all across the country about whether these ridesharing companies are running a taxi business without a license. We’re not going to touch that issue. Instead, we will take a look at tax-related issues that arise.

Generally, for tax purposes we only care about whether you are doing business at all. The Hawaii General Excise Tax (GET) applies whether or not your business is legal. And there is not much you have to do to be "in business." You need to receive income, and that’s about the only requirement. You don’t have to do anything to be in business. In fact, if you are paid specifically not to engage in business (for example, if I ran a business and sold it to my competitor, my competitor might not want me in the marketplace for a while and would pay me for this), that’s still business for purposes of the GET, and the GET applies to those payments. So if you are a driver, you pick up someone, drop the person off, and some money magically appears in your bank account, guess what: that’s business under the GET law, and you have taxable income. It’s probably also taxable under the income tax laws, state and federal, which also have a very broad view of what constitutes taxable business.

If you are in business, you need a GET license. Some folks don’t get them, hoping to fly under the radar, but that invites massive problems down the road. The license, furthermore, is public. There is a website that anyone can check to see if you have one. So if you are a driver, you have no license, and you have a competitor, that competitor may be motivated to look up your name on the website and rat you out for having no license. The Department of Taxation gets lots of tips like these.

Next, you need to keep track of what you make and pay the appropriate taxes yourself. One very big difference from working as an employee is that there is no employer to do all of this for you. An employer withholds taxes and Social Security from your paycheck, for example. The taxes still have to be paid, on time, or there are penalties and interest that rack up and there is no one else to blame for not making them. And, when you are calculating the estimated tax payments that you need to make four times a year, you have to consider that if you are an employee your employer generally will pay half of your Social Security taxes and deduct your half from your paycheck; but if you are self-employed you are stuck with paying both halves. Both halves total more than 15% of your income, and that’s on top of your other taxes, so you don’t get to keep all of what shows up in your bank account.

Finally, you, as a business owner, are allowed deductible expenses. You can write off related expenses. However, in my business I have seen lots of people write off expenses while having, shall we say an expansive view of what can be legitimately written off. At least in the beginning, it might be worth spending a few bucks to get competent tax advice (which is definitely a deductible expense).

So, if you are a rideshare driver or are considering being one, please go into it with your eyes open. It’s better than having nasty surprises later.

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