How Trucking Companies Get Caught Misclassifying 1099 Drivers – Season 2, Episode 6

Most trucking companies that misclassify a driver don’t get caught because an IRS agent or the state randomly decides to investigate them. They get caught because something happens. A driver gets fired, a driver files for unemployment, there’s a workplace injury, which causes a work comp claim. A driver talks to an attorney, a driver files their tax return, and somebody gets mad and starts asking questions.

And suddenly a decision you made years ago about whether someone is a 1099 or a W-2 is sitting in front of somebody who doesn’t care how everyone else in trucking does it. You don’t usually get caught when things are going well. You get caught when the relationship goes bad.

Welcome to the Driven for Success podcast. This is the podcast for trucking company owners and executives who want to build a better business, make better decisions, and keep drivers without losing control. I’m Mike Ritzema, owner of Superior Trucking Payroll Service, and your host. As Superior Trucking Payroll Service, our mission is simple to help trucking families.

This podcast is one of the ways that we fulfill that mission.

We’ve been working through a series on 1099 versus W-2 for truck drivers. We’ve talked about the difference between them. We’ve talked about when you can legally pay a driver as a contractor. We’ve talked about some of the biggest misclassification mistakes.

And then the last episode, we talked about what misclassification can actually cost you.

Today, I want to answer the question that usually comes next. Well, how do trucking companies get caught? Well, it doesn’t usually start with an audit. And I think this is where trucking company owners sometimes underestimate their risk.

They think to themselves, what are the chances that the IRS comes and audits me? They’ve got all the other bigwigs to go audit. And that’s not even the right question. Because there are a lot of ways this issue can surface.

There’s federal agencies, there’s state agencies, both for income tax and unemployment, there’s workers’ comp insurance claims, there’s Department of Labor, there’s attorneys that get involved in these things. And much like the attorneys that want to sue the trucking companies, you see the billboards for big truck cases or big truck attorneys or whatever, labor is great for them too. So you got to watch out, right? Sometimes one issue leads to another.

The trucking company may have been paying someone the exact same way for three years, and nobody complained. Everybody was happy. And then something changes. The driver leaves, and now the driver wants to file for unemployment insurance.

Or the driver gets hurt, or the driver thinks that the company did them dirty for money. And then someone outside the company starts looking at the relationship. Then that’s when they aren’t necessarily going to care what you called the driver 1099 W-2. They’re going to care about the relationship and what it actually looked like.

A 1099 does not make someone a contractor, the relationship does. So though we’ve always done it this way, or my buddies do it this way, that’s not going to get you there. The driver demanded to be 1099, or they won’t work for me. Nope.

As an employer, you’re still going to get stuck on this. It seems incredibly wrong, and it is wrong, that the driver could demand a situation and you decide to allow it, and then they come back and bring action against you later. They can absolutely do this. An independent contractor agreement doesn’t automatically settle it.

If only it did, right? It’s really about the nature of the work and what happens in the day-to-day. We’ve talked about it in previous episodes. I encourage you to listen to those if you’ve got any questions about it.

But today is how you’re going to get caught.

One of the easy ways is there’s a few of them that go under this umbrella of terminated driver. So the driver files for unemployment. So you got a driver, you’ve been paying them 1099, they’re driving your truck, and eventually you just don’t have enough work for them, or you fire them in a way that they don’t agree with. Most people don’t.

That’s a whole HR topic for later. The person should always know they’re being fired in the meeting before the meeting even starts because you’ve warned them and things like that, but for another day. So you might even just be an innocent bystander in this. So they file for unemployment, and now you’ve got a problem because they go, I worked for ABC Trucking.

The state checks its records and goes, we don’t have any wages reported from ABC Trucking for this driver. Uh-oh, now there’s some questions from the state government. Was this person really an employee? That’s the first question they’re going to ask the employee who’s trying to collect unemployment to keep their bills at least a little bit in line, or at least get some money to keep food on the table.

They’re going to say, I was an employee. And so, and you’re then they’re going to ask you, and you’re going to say, Well, he was an independent contractor, she was an independent contractor. Then they’re going to get into, okay, we’ve got a dispute, and we’re going to get into settling it. Now the state’s in your business.

And they’re going to ask, what did the driver do and who owned the truck and who controlled the work? How do they get paid? All those things. So the owner didn’t call the state and asked for the worker classification review.

The driver just wanted to collect unemployment. And this happens a lot. The driver doesn’t have to turn you in. Sometimes they just have to file for benefits.

And as you are aware, employees are get unemployment insurance. They can collect unemployment if they get laid off. A contractor does not. And so you get the right employee who wants to fight with you on this, and they’re going to make the state make a determination.

And now the state’s in your business. And that’s almost never good. So it’s really easy for an employee, even if they left you on good terms, but now you’re following up their unemployment claim. That’s going to be a problem because now they’re trying to keep food on the table for their kids or something, and they see it as you’re in the way, they’re probably going to go scorched earth on you.

And that’s going to be the theme that you’re going to hear today is that a disgruntled driver is really where it all starts. And even a disgruntled driver who left you on good terms but get disgets disgruntled later. Man, oh man, that can absolutely happen. We had this happen literally yesterday.

We had a client come in and say that they had let somebody go for bad behavior, and the person filed for unemployment and went the whole bit on it because they were mad because they were fired. Now, I wasn’t in the room to see if they deserved it or not, but I’m just going to assume they did. But they were unhappy, so they said, Well, I’ll show you. Can’t pay me 1099.

You got to pay me W-2. I’ve got employee rights. And so the state got into the business. The business replied to the questions that they were asked truthfully, and were told that the employee or the driver of the person, the worker, really doesn’t matter if they’re a driver or an office person or whatever.

The worker was determined to be an employee, and now the company has to file back taxes, and there’s going to be penalties. We’re going to talk about the cost of it in another episode, the actual dollars and cents cost of this. But they’re now this small company, five or six employees, five or six workers, if you want to say it that way, has a whole bunch of work to do. And now they’re going to pay a whole bunch of tax.

It’s not going to be a good day for them. All because an employee left under bad terms.

Here’s another trigger. Driver gets hurt. There’s an accident. Doesn’t even have to be your driver’s fault.

It could be a teenager who was texting while they’re driving and swerved into them. Doesn’t matter. Ambulance comes out, they bring your driver to the hospital. And the company believes the driver’s an independent contractor.

However, as soon as you get to the hospital, while they’re admitting you, they’ll ask you, was this a workplace accident? I just got a test for me medically. It wasn’t a big deal. It’s a breath test about my stomach.

It’s not anything important. But the point was they asked me if it was workplace related. Like somehow my stomach issue was a workplace issue, which I don’t even know how it would be. So I joke that I’m only I’m only half serious that when my wife and I had our two kids, that they asked when they admitted her if it was a workplace thing.

Because the hospitals get to bill more for workplace accidents because the health insurance companies negotiate a discount and the workers’ comp insurance does not. So they’re always going to ask if it was a workplace accident because they get to bill full rack rate for everything they do. So the driver’s getting hauled in from a truck that says ABC trucking on it on the side. The ambulance is going to tell them, hey, we pulled him off the interstate, was in an accident from ABC trucking, and it’s already, it’s already happening.

And so at that point, let’s assume the drug the injury wasn’t incredibly serious. A few months off or a broken arm or something, not anything life-threatening, hopefully. And the you said, no, that person’s a contractor. Well, then they’re going to get a bill for tens or hundreds of thousands of dollars.

And they don’t have that money laying around. So now we got to dig in. They’re going to fight. And they’re going to say, no, I should have been an employee.

I should have been covered by workers’ compensation insurance. So now, again, you’ve got the hospital all over you. And then you’ve got the in Michigan, for example, you have to have workers’ compensation insurance if you have three employees. So if you have three employees, the state can fine you $1,000 a day for failing to have coverage.

Again, that’s more into next time, but that’s just something to know right now. But the hospital’s not going to stop. They’re going to collect their money. You see all the people with medical debt, they’re coming for you.

So classification, classification gets a lot more important when someone has to write a check.

And that’s the thing, right? Like it didn’t matter until it did. And some of you will say, Well, I have occupational accident for my 1099 drivers. Quick first side note is who pays that for that insurance.

If the company’s paying for it for the driver, it’s just another thing saying they’re an employee. If you’re making the driver pay for it, you may and you can get through the contractor thing, you may be okay. I’ll tell you that occupational accident has limits where workers’ compensation insurance generally does not. And the limit can be half a million or a million dollars.

If there’s a catastrophic accident, you’re going to blow through that and the hospital’s coming to you for the balance and the ambulance and all those guys. It’s rarely a paper cut with a driver. It’s rarely a twisted ankle. Sometimes is, thankfully, but usually it’s a claim from the truck driving, and those are usually significant.

So you’re going to see this theme about right who has to write the check and how classification is important. It’s unemployment, work comp, taxes, wages, all these things, right? When there’s money involved, that’s when we’re going to find out really how the driver was classified by the work that they did, because there’s going to be someone else with an interest in trying to reach every pocket they can get into. So you got to be really careful about that.

And there’s no, again, there’s no contract or agreement that saves you. Even if they say I waive any claim to a workers’ comp benefit or something like that. It doesn’t apply. And the hospital’s not part of that agreement.

I have had people. There are some, I’ve got some clients who emigrated from Europe, and I was talking to them about this, and they wanted to pay their driver 1099. And I said, based on how what you’re telling me, you really need to pay them W-2. And they go, We’re not going to do that.

Okay. Well, what happens if there’s an accident? What happens if something happens to the driver? They’re like, well, the community from their country would take care of them.

And I’m like, that is fantastic that your culture is such that the community would take care of that driver’s family in the event of something horrible happening. But the local hospital is not part of that community, and they’re going to come get you. And so they ended up not working with us, so I don’t know how it ended up. But you got to watch that stuff, man.

You got to be careful to properly define the relationship as the work is done and not how you want it to be. Because you get away with it for a long time, but when the hammer comes down, it comes down hard and it’s significant.

So here’s the next trigger that we have. The relationship goes bad. The driver gets fired for being a bad driver, right? Like I’m not saying you fired them just because you’re mean and arbitrary.

They had it coming. Their logs were bad. They were rude to a customer. They didn’t take care of the equipment.

The truck cab looked like a pig style even the pigs wouldn’t go in there, right? All those things, right? So you let the driver go. The driver’s angry.

There’s a disagreement over the last paycheck. They always feel scorned and sometimes deservedly, but sometimes not. There’s a dispute over a deduction. Maybe they abandon the truck somewhere.

Maybe there’s some other things going on or damage the truck, all these things. And the driver feels like their last check was not what it was supposed to be. So they start asking questions. Maybe they talk to an attorney because it is insane how smart drivers get once they feel they have been wronged and they leave your company.

The amount of knowledge they gain in that minute is unbelievable. The learning rate that they have, all of a sudden, they’re like, oh, I can now they want revenge. And so they’re like an attorney. They might contact the labor board of unemployment, they might contact the IRS.

They can do all these things and say, I wasn’t a 1099. And so, were they really an independent contractor? And now that answer really matters. Because sometimes I hear, well, all my drivers want to be 1099.

Well, okay, they want to be 1099 today while they’re happy. But what happens when the relationship ends? A person agreeing with you today will be challenging this arrangement when it doesn’t benefit them. Handshake is strongest on the day you make it.

The law matters every day, even after the relationship falls apart. You got to keep that in mind. I’m telling you, everything is great till it’s not. There’s going to be, it’s not going to be that you are necessarily evil, because I don’t think that’s the case for almost all of you.

It’s going to be that the driver felt slighted somehow. And that’s the theme to all these things, right? It’s if it’s not the hospital, it’s that the driver felt wrong and they want to pursue a remedy, and they know this is one way to do it. So when you’re paying in 1099, again, even if they beg for it, this is a bill that’s going to come due.

And when it comes due, it’s going to be a lot because it’s not just that driver you’re going to have to fix, you’re going to have to fix all of them, and that’s going to be a huge mess. I think that’s a future episode. So another way this happens is just pay disputes while the driver’s working for you. There’s all these different things that could happen, and a pay dispute becomes a classification dispute very quickly, especially when you can’t resolve it.

We’re not even getting into California, has their own pay stub requirements and things like that, and they have AB5, which makes it much harder to 1099 somebody than it does in other states. I’m not even talking about California right now. California people, hi, how you doing? We’re looking at a at a series for you guys coming up soon.

But it can happen really easy, it’s just the driver feeling wronged. And then, oh my gosh, yep. You’ll they’re going to dig in deep on you because now they want their perceived justice. And again, maybe you wronged them, maybe you didn’t.

I wouldn’t know. I have no idea. I was not there. But if they feel wronged, they’re going to come after you.

And they’re going to actually have some power for a change, and you’re not going to like it.

Here’s the one that happens more often than people think it does. So you pay the dr you and the driver agree they should be 1099, even though maybe they shouldn’t. You issue the 1099 at the end of the year to the driver. The driver goes to do their taxes, and all of a sudden, you got a problem.

That driver owes thousands of dollars in Social Security and Medicare. That’s a bad day. If you 1099 the driver for, say, $75,000, I am pulling a number out of the air, but you pay your drivers well, and that driver works hard. $75,000, and they claim per diem for $20,000 of it. So you have $50,000 in taxable wage.

They really didn’t have other expenses because you covered everything. Well, they’re going to have self-employment tax of eight grand, which is Social Security and Medicare. They have to pay both sides. You were never withholding any.

So they didn’t do estimated payments on all that stuff, even though they should, but they don’t get advice or don’t follow the advice. And now they owe eight thousand dollars just in self-employment tax. We haven’t even gotten an income tax yet. Well, they don’t have eight thousand dollars around.

And either they don’t like it anymore because they didn’t know, or their spouse doesn’t like it. That was our spring break money. That was whatever, right? So now it’s not only the employee, it’s not only the driver’s problem, but it’s now their spouse’s problem, making it the driver’s problem who are going to make it your problem.

They’re going to come to you and say, look, you got to write me a check for eight grand to cover these taxes, or I got to go do what I got to do, which is extortion-y to me. But it happens. I’ve seen it happen, and you don’t want any part of that. So, and that’s not even the person who does their taxes saying, Hey, you really should be W-2 here or something like that.

And if you were W-2, your refund, you’d get $2,500 back, but because you are 1099, you owe $10,000. It’s a $12,000 swing. So then that becomes a problem. You want to write that check for $12,000 every year?

I don’t think you do. Just W-2 them, it’s easier. And again, I’m not even getting into the fact that you might have 10 drivers and five of them are W-2, and five are 1099, even though they all do the exact same spark and have the same relationship with you, which almost makes your deposition undefendable. You can’t say, well, we 1099 then because of this, other than because they asked for it, and the state or the IRS is just almost going to laugh at you.

That’s not a reason.

So I’m not even getting into the your return gets examined for some other reason or any of that stuff that actually is a government-initiated situation. And those all happen too, and we could spend more time on it, but I don’t want to go through every possible way this could happen to you. So there’s all these things, right, that could happen to make your company have to go through all this examination. And not only is it going to cost you the tax and the penalties and the interest that we’ll talk about later, you’ve also got the fees to prepare it.

It’s one thing, and I’m speaking for us, but it could be for anybody. It’s one thing to have to do payroll this week for this week. No problem, that’s what we do every week. But you’re saying, hey, we need to redo our 2023 payroll, which does happen.

I’m redoing a 2024 and 25 for the person I talked to yesterday. Right? That’s more expensive. It’s so out of process.

It’s going to cost a lot more money, not crazy money, but not nearly as much as the tanks and penalties they’re going to pay, even. But it’s still an additional expense at a time when you probably can least afford it.

So let’s bring this, let’s bring this home a little bit. Uh, this is the part I really want trucking company owners to get. The risk isn’t limited to the one driver that caused the problem. It’s all the drivers.

So when you look at the math, you have 10 drivers, it’s that times 10. Because you’re going to have to fix them all. Especially even if you didn’t, even if somehow you were so nuanced that you just fixed the one and the state bought it, the one’s going to tell the other ones. And so they’re all going to want the same thing.

Why is he getting extra money? Why am I not getting extra money? Right? So now you’ve got angry people, and that math is going to work against you and compound like you wouldn’t believe.

So, again, we’ll talk about it in the next episode about payroll taxes and penalties and interest. But I’m telling you, that’s it can be over years, and because you may not have filed a payroll tax return because you thought you didn’t have any employees, the audit window is still open on all that stuff. The IRS, like for example, for a 1040, your personal tax return, the IRS generally only goes back uh two years from when it was filed or three years from when it was due, whatever’s later. But if you never file, that clock never starts.

So you want to make sure those get filed. But because they were never filed, because you thought you didn’t need one, that’s going to be a problem. And even all this stuff for the unemployment would still be subject to fraud issues, and so they still go back at you anyway.

I want to cover one reason why this happens all the time, and I talked about it a little bit. It’s that the driver just demands to be 1099. That is just they will, I will not work for you unless you 1099 me. And you need a driver.

I understand you’ve got a customer who wants a load moved, so on and so on. Like I that’s real, and I would never want to discount that. But you can’t turn an employee into a contractor just by getting the employee to agree with it because you guys sign a form or you do whatever. What happens there is the driver gets all the reward of the possibility on the tax benefit, or if there is one, if they don’t file taxes, for example, they get all the reward, you get all the risk.

Every single time, there’s no risk for them, there’s only risk for you. They get all the reward. You get a very small reward of lack of payroll taxes. By the way, as an aside, for your driver file, you should have social security card and driver’s license anyway.

But if you don’t, if you’re not good at doing that, and there are people that can get those things that may not be citizens, is what some people will tell you. You’re not getting the I-9 if they’re if they’re a contractor. You’re only getting that for an employee. The I-9 demonstrates that they’re eligible to work in the United States.

You want to make sure you have that, but you only get it from employees.

So here’s the question I would ask if I was had 1099 drivers. Forget about the contract, forget what type of tax form you’re going to pay them. Forget what the driver asked for or even demanded. Just describe the relationship.

Whose truck is it? Who pays the expenses? How much independence does the driver really have? Are they operating their own business?

Can the driver make decisions that affect their own profit and loss? And then ask if someone who knew nothing about our company looked at this arrangement, would it obviously look like two independent businesses, or would it look like you hired a driver? Don’t ask what you call the driver. Ask what the relationship looks like to someone who doesn’t know you.

That’s the test I want you to think about. Not about you, not about the driver, just that examination, like a like a third-party examination before it ends up becoming the state.

So if you’re listening to this and thinking, oh boy, we’ve got drivers are paying 1099 right now, and I’m not sure we should be. Don’t make a crazy decision today. Don’t panic. Figure out what you’ve actually got.

Look at the relationship. And by the way, at truckingpayroll.com, we have trucking success tools. You can find it in the menu under resources. There’s one of them in there where you can check to see for free.

It’s about seven or eight questions, I think. And they’re easy questions and they’re in trucking language. Should I be paying my driver 1099 or W-2? You as soon as you finish it, you will get a score that indicates how close you are.

It’s automatically always one or the other. There is a little bit of gray area sometimes. Take that test. I’m not reporting it to the IRS.

I don’t, I don’t, I’m not required to do that, thankfully. So I don’t have to. And just find out for yourself. If you’re not sure, this might be a great way for you to feel better or more convicted to make a change.

So that brings me to if you’re going to make a change, when should you make the change? Do you change everybody January 1st? Do you do it tomorrow? What do you do with your to-date payroll?

How do you explain it to your drivers? How do you keep drivers from leaving when you’re telling them they’re going from 1099 to W-2? We’re going to get into that in a future episode.

The best time to fix a classification problem is before someone else finds it for you. I will tell you that right now.

The biggest takeaway from today is simple. Don’t judge your risk by whether you’ve gotten away with it so far. Company can operate for years without anyone questioning its 1099 drivers. That does not prove the drivers are properly classified.

It just means no one has caught you yet. A termination, an unemployment claim, an injury, a wage dispute, a tax issue, any one of these can change things for all of your people for all of the years. Misclassification can stay invisible for years. Then one driver makes it visible instantly.

If you’ve got 1099 drivers, don’t wait for that day to figure out if you have the relationship struggled structured correctly. No now.

That’s it for this week’s Driven for Success. We’ll see you next week.