Can I Pay My Truck Drivers by 1099 or Do I Have to Pay by W-2?

It’s the age-old question, isn’t it? W-2 or 1099?

In a business like trucking, the legality of independent contractors can be difficult to decipher. Hiring an independent contractor could save you as a business owner money on taxes, but it is often not legal or practical for you to do so.

As a business owner, you must determine whether the people working for you are employees or independent contractors.

In this article, we will discuss questions like:

When should workers be considered employees?
How much will filing W2s cost your business?
What is the cost if you don’t file a W2 when you should?

Disclaimer: This article is meant to be a general overview of the difference between W-2 and 1099. More specifically, what trucking companies can do. Consult your attorney or tax professional before you make any decisions to ensure that you are following local laws.

W-2 or 1099?

There are two types of tests to determine whether or not a worker is an employee or could be classified as an independent contractor: the Common Test and the ABC Test.

The Common Test

The Common Test looks at three aspects to determine how the worker should be classified:

Behavioral: Does the company control how the worker does the job? Example: Say you hire a painter to paint your office, you wouldn’t tell them how to do the job.
Financial: Is your company in control of all the finances that a worker would need to complete a job? For a trucking company that owns the truck and pays for the maintenance and fuel it would be a deciding factor. If it’s you then the driver would be a W-2 employee.
Relationship: If the worker does a key aspect of the business for an undetermined amount of time then they are more likely to be employees. Going back to the painter’s example. The painter would be an independent contractor because they are doing one job for an incidental part of your business.

Drivers are not automatically W-2 employees under common law, even though truck driving is the key aspect of the company.

IRS 20 factor test

The IRS Test is a form of the Common Test. You can read a version of the whole test here and another below.

For trucking companies with owner-operators, the following parts of the test would be the most significant.

14: Furnishing Tools and Equipment: Who owns the truck and pays to maintain it.
15: Significant Investment: Also refers to who owns the truck.
16: Realize Profits and Loss: An independent contractor could maximize their own profits by the way they drive.

ABC Test

The ABC Test is generally stricter than the Common Law Test, especially for trucking companies with owner-operators.

This test, as you may have guessed, is three parts:

Absence of Control: Do you tell the worker how to do their job? This part is similar to the behavioral question for common law.
Business of The Worker: Does your worker perform the main business of the company? In most ABC states, trucking companies will not be able to function with owner-operators. This is because truck driving is the business of trucking companies.
Customarily Engaged: What does the industry typically do?

What test will I have to follow?

States are mixed about half-and-half common law and ABC tests. If you are in an ABC state that stricter test will supersede the IRS common test. Some states just follow the A and C of the ABC law making it more possible for you to hire owner-operators. The chart below has the breakdown for each state, but consult an attorney to be sure how your state operates.

What State Does My State Use?

Click here to see the full list

Costs of Paying Truck Drivers as a W-2

If you have a W-2 employee then you will have to pay payroll taxes:

FICA (7.65% of the first $147,000 in wage per year for 2022)
FUTA (0.6% of the first $7,000 in wage per year if you pay your SUTA on time)
SUTA (varies by state)

You can read more about payroll taxes in our article here.

Having a W-2 employee could also mean that you will have to provide benefits. Benefits such as health insurance, retirement, and vacation pay.

As an owner of a trucking company, taking advantage of per diem pay could reduce federal income and unemployment tax by almost 35%! 

Costs of not paying your truck driver W-2 when you should have paid them that way.

If you have a W-2 employee that you are paying as an independent contractor the legal penalties from the IRS can easily cost more than the worker’s salary. It could bankrupt your business.

  • Tax Penalties:

    There are many IRS Penalties, even criminal ones for mislabeling a W-2 employee. We listed some of the civil penalties below.

  • Workers Compensation Insurance Cost or Penalties:

    If a worker that should be a W2 employee gets injured at work you would still have to pay the hospital bills. The penalties for not having Workers Compensation can be very high too. As an example, in Michigan, the penalty for not paying Workers Compensation when you should have been is $1,000 per employee, per day.

  • Penalties for Labor Law Violations Due to Increased Employee Count:

    You could cross an employee threshold that would make you responsible for benefits. Such as having 50 or more W2 employees means you have to provide health insurance. Legal Fees: Lawyers are not cheap and they would have to do a lot of work for you.

Final thoughts on paying a truck driver as a 1099

If a worker meets the requirements to be an employee, they cannot opt-out of it. Even if they ask to opt-out. It’s a huge red flag if a worker does insist on filing a 1099, because this means that they would be paying more in taxes with a 1099, and may be trying to hide something illegal.

Workers can easily change their minds about being an independent contractor and file a W2 come tax time, which would cause a lot of headaches for you as an employer.  We have seen this happen to trucking companies that are trying to “help out” a driver.

Be careful how you refer to independent contractors. If you call them employees in a verifiable way, like a company handbook, a contractor could legally claim to be an employee.

Written by Mike Ritzema

With over 20 years of experience in entrepreneurship, management, business planning, financial analysis, software engineering, operations, and decision analysis, Mike has the breadth of knowledge and depth of experience needed to quickly understand entrepreneurs’ businesses and craft the most suitable solutions.

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