Can You Legally Pay a Truck Driver as a 1099 Contractor? – Season 2, Episode 3

Can you legally pay a truck driver as a 1099 contractor? Yes. Absolutely. But here’s the problem.

You don’t get to decide that somebody is a contractor just because you want to pay them as a 1099. The driver doesn’t get to decide it either. You can sign a contract, you can call them an independent contractor, you can even have an LLC for the driver. And they can even demand, I want to be a 1099 or I won’t work here.

None of those things by themselves make them an independent contractor. You don’t choose 1099 status. The working relationship that you have chooses it for you. 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 great drivers, all without losing control. I’m Mike Ritzema, your host and Owner of Superior Trucking Payroll Service, where our mission is simple to help trucking families. This podcast is one of the ways that we fulfill that mission. Today, I want to answer a question I hear from trucking companies all the time.

Can I legally pay my drivers as 1099 contractors? The answer is yes. But we’re going to spend the rest of the period talking about the next word, which is but.

So yes, but. Let’s start here because I don’t want to turn this into 1099 bad. W-2 good. It’s not what I’m saying. There are legitimate independent contractors all over the trucking industry. There are people that are truly operating their own businesses. They make business decisions, they take financial risks, they have an opportunity to make more money by running their business better. They have independence from the company they’re contracting with. That’s a real business relationship. And there’s nothing inherently wrong with it.

The problem is when we take somebody who’s functioning like an employee and say, we’re going to call you a contractor now. That doesn’t change what they are. A 1099 is a tax form, it’s not a business model. Seen all the time, you’ll see somebody who leases their truck to another to a motor carrier. And you might even see on the side of the door these two ABC trucking or something like that.

Those are great. The driver owns the truck or they’re financially responsible for the truck. No problem. Those should absolutely be legal. I do know that there are situations in certain states where that’s a little bit more murky, even in that situation. California, especially, but we’re not going to worry about them right now. But legitimate owner-operator relationships exist.

And they should exist and they need to exist. But there’s a difference between somebody who’s actually owns a business, like the guy who owns the truck and is responsible for maintenance and all the fuel and all that. And someone who’s getting 55 cents a mile but getting paid 1099.

They don’t actually own the business. And I’m not arguing that every driver must be automatically W-2. No. Every driver that is supposed to be W-2 should be W-2. The drivers that are supposed to be 1099 should be 1099. They should be vendors. They’re not employees. They are contractors. They bring their own tools and all the other qualifications. So they should be paid via 1099, but the other people should be paid via W-2.

It’s going to sound like I’ve got an axe to grind with the 1099s. I really don’t. So let’s talk about the first myth that I hear all the time.

But Mike, the driver asked us to pay him 1099, or even the driver demanded that we pay 1099, or he wouldn’t work here, or she wouldn’t work here. Well, okay. But that doesn’t answer the question about the working relationship.

The Department of Labor specifically says that a worker cannot waive employee status and choose to be an independent contractor. This is not a fork in the road where you get to decide which way you’re going to go. The IRS isn’t asking what do the driver wants ever. They’re looking at the actual working relationship and think about why the driver might want it. Maybe they think they’ll take home a little more money because there’s no tax coming out, so they will. Maybe they like getting a check without taxes withheld. Maybe somebody told them you can write everything off.

You can write off yeah, everything you’d ever own in your whole life. You can write off your pickup truck completely. You can write off this, you can write off that, you can do all these things, and you’ll never ever pay tax. Those are out there. Please don’t search for them. Maybe that’s how their last company paid them. But none of that matters when the government determines classification.

A driver can agree to be misclassified, but that doesn’t make the misclassification legal. I’ve heard it from companies all the time. I hear about they’ll call me and they’ll say, hey, I’ve got this new driver, and he really wants to be 1099. And I’ll ask, why does he want to be 1099?

Oh, because of this whatever story. Usually the story involves the driver feeling like they were aggrieved at some point and had some loss that now someone is trying to collect on, whether it’s child support, whether it’s an old credit card debt, whether it’s back taxes or something. Or they just heard it was better from somebody at the truck stop. Any of these things. The driver may think that they understand the tax consequences, but they may not. There’s a lot of tax consequences. There’s a whole, we can do a whole episode on tax consequences for this driver.

Not the least of which, by the way, quick spoiler. If you never pay tax, if you’re in 1099 and you work it out so your company never shows profit and the IRS never audits you, you’re never going to have any Social Security. So just plan on that.

You’re not going to collect anything when you run or retire. There’ll be nothing there for you. There’s a lot more, but that’s just one quick spoiler. And both sides agreeing to it doesn’t settle anything with the government.

The government was not party to your solution. As such, they’re the ones who really get to decide anyway. So just keep that all in mind.

The next thing I hear is we’re okay. Our attorney wrote up an independent contractor agreement. And it says right in there that the person signing it as the worker is absolutely to be paid as an independent contractor and have no employee rights.

Fantastic. You should have an independent contractor agreement. You don’t just Google it. It’s worth the money if you’re going to have independent contractors to retain an attorney for an hour or two that does trucking. We can make referrals if you need one. Have an independent contractor agreement. Absolutely, I support that. I think it’s a great idea. That doesn’t create classification, though. It doesn’t change the working relationship in any way. So the IRS specifically says a written contract describing somebody as an independent contractor is not sufficient to determine their status.

Well, why? Because otherwise everybody would do it. And every employer could just be in America, could just put an independent contractor on the top of a piece of paper and have the worker sign it and never have to pay payroll taxes ever again.

Well, while that sounds great for you, the government does need money to operate. And I’m not trying to get into a discussion of whether they spend that money well or all that stuff, or Republican, Democrat, none of that. That’s not here. There’s plenty of places on social media to be yelled at about that. My point is the government needs to collect that money and they’re going to collect it and they’re going to come get it. So you can’t just decide, well, me and the employee decided, me and the driver decided, me and the office person decided, they’re just going to be a contractor.

Doesn’t work that way. You can’t turn an employee into a contractor with a signature on a document. The contract documents the relationship that you guys have, and it might how you guys might perform. But again, the government didn’t sign off on that.

The IRS, the Department of Labor, the State Department of Labor, none of these guys signed off on your contract. And so their laws that they have still overrun anything that you’ll have in the contract. And what you do, how the working relationship again is, matters much more than what the document calls it.

So those just things to keep in mind. Because if only we could get out of it with a contract, we would. And I appreciate the creativity of the people that come to me with that, yet that they’re trying to save money because penny counts.

But this isn’t the way to do it, and it’s just not legal. So we get to the real question now. What actually determines whether this truck driver should be paid as a contractor? And if there was one magic answer, I would give it to you.

There is not. For federal employment tax purposes, the IRS looks at three broad categories: behavioral control, financial control, and the type of relationship between the parties. The Department of Labor uses a different analysis under federal wage and hour law. And that law changes under each administration.

So it goes back and forth. And so even if you think you’re okay now, if the Department of Labor is run by another party, you’re not. So if you set it up four years ago, you might be different today.

If you set it up eight years ago, it probably changed for four years and it might be close to the back to that, whichever way the political winds blow. But you still have the IRS and the state to deal with as well. The states have their own rules. And so you can still get hung up on it.

There isn’t one magic 1099 checklist that you can go through and say, okay, it’s like a quiz like they have in magazines about how good you are or whatever thing. And if you scored between this and that, we have those quizzes on our website, quite honestly. We have one. Should you pay 1099 or W-2? Go to truckingpayroll.com and go to Trucking Success Tools in the menu under the resources. You can take a test and we’re going to give you a point score. It’s not math, it’s our opinion of it. It’s not magical. I wish it was. But it really comes down to is the person really running an independent business or are they really working for your business?

Right? The question isn’t what you call the driver, the question is how the relationship actually works. The IRS has the 20-point test, is one that you might hear a lot. Some states have what’s called an ABC test that you can look at. California, again, there’s the strictest that I’ve seen, and there basically the rule is if you’re in the if the worker is doing the work of your company that your company does, then they’re going to be an employee, which actually gets rid of all the 1099s for truck drivers for trucking companies, which I think that’s a little too far.

That’s as much as I’m going to editorialize here. But this your state can be different. And the state where your driver lives can be different.

Like there’s all this goofy stuff. So you want to be mindful of all of those things when you’re considering how you’re going to pay your driver. Just the conflict between the different tests is enough to make you crazy. I’ll give you an example. On the IRS 20-point test, one of the things in it is can the driver, can the worker is what they’ll call it, it’s not driver, because that’d be a trucking one. Can the worker work for somebody else while they’re working for you? So can they take a job from you and then a job from another person and then a job from you?

Which, in a fast food restaurant term, they could work for McDonald’s in the morning and they could work for Burger King at night, and then the next day they could go work for McDonald’s again. And no problem. People can do that. But in trucking, you can’t do it.

The Department of Transportation specifically doesn’t allow that because you’d have to terminate with the first company, go hire on to the second company, do all of the renew hire paperwork, including the drug test and all that stuff. Account for your hours. Then you quit that one that night and go back to the first company, do all your new hire paperwork again. There’s no way. So that test doesn’t work for trucking.

That’s my point is that these tests aren’t written for trucking. And it’s something to keep in mind. So when you look at the 20-point test, that one will bum you out if you’re trying to pay 1099.

I wouldn’t let it bum you out. There’s three of them that really matter. And they talk about financial control and behavioral control and things like that.

But that’s again, you also get interpretation of these laws by whoever is trying to interpret them, which adds another layer of complication of a human trying to figure out how those particular laws apply to trucking. Good luck. So let’s forget about the legal terminology.

Let’s make this a trucking thing. Let’s say I own a trucking company. I bring in Joe. I provide Joe with a truck. I pay for the truck. And the insurance, I pay for the repairs.

I pay for the fuel. I tell Joe what loads he’s going to haul. I tell him when he’s supposed to pick him up. I tell him where he’s going. Joe’s been working for me continuously for three years. And if Joe wants to make more money, his option is to drive more for me.

But then I say, but Joe has an LLC. Okay. What exactly is Joe’s independent business here? That’s the question I’d want to answer. Because simply putting Joe’s trucking LLC on a check, it doesn’t change anything else I described here. The only thing independent about your driver is the name on the check. If that’s your situation, you have a problem. It happens a lot in small trucking companies like microfleets. I see it all the time. Well, I only have two trucks, I’m flying below the radar or the IRS, and I can’t afford to do anything else.

But when I get the five trucks, then I’m going to pay W-2 and I’m going to go legit. And then you get the five trucks, and you’re like, well, I need that money. When I get the ten trucks, I’ll go legit. No. Nope, nope. You can’t do that. And so if you can’t afford to pay them now, you shouldn’t hire them, quite honestly.

That goes into again to another dovetail I’m not going to go into now, but it’s part of it’s a business decision you’ve got to make. If you can’t you can afford them or can you not? But does the driver really have in the example I gave, the driver does not have financial independence.

The driver has very little say over anything. And if the driver says, no, I’m not taking that load, well, they may not work here anymore. So it’s just things to bear in mind that makes them unemployee.

They have no motivation. For example, I in the example I gave you, I paid for the fuel. Well, if Joe decided to leave a little earlier, because his hours he could afford it in his hours, and he drove a little slower, and so he consumed a little less diesel, who just saved money? Did I save money or did Joe save money? Well, I did. I save money because I got less fuel. Let’s say, on the other hand, for some reason Joe’s truck isn’t governed, which would be a thing I would never allow, but bear with me on this.

And Joe’s got the hammer down because he’s got to make time, because he’s behind, or whatever. Besides that, all the other problems it brings to you, they’ll talk about direct financial on fuel. Your fuel mileage goes down, you pay a lot more for fuel. That didn’t cost Joe anything, it cost me money in the example I gave you. Joe’s an employee. Joe’s a W-2 automatic. That’s a very clear-cut W-2 model. So let’s try a new example.

Joe owns his own truck. Joe has a meaningful investment in his business, being his truck. Joe has business expenses. Maintenance of the truck is a big one. Joe can make decisions that affect his profit or loss. For example, keeping up on his preventative maintenance, so he doesn’t have to have roadside repairs that are more expensive. Driving a little slower when he can to save on fuel money, picking where he fuels, all that stuff. Joe’s responsible for running his own business. Maybe Joe makes bad decisions, bad business decisions, and loses money, right?

Maybe he makes good decisions and makes even more money than he would have. Now we’re starting to describe something very different. Now Joe is somebody who’s actually maybe in business for himself.

Does owning the truck make Joe automatically a legitimate independent contractor? No. There’s not one magic factor, but that’s a big factor, and that helps a lot. But compare that to the first relationship I talked about.

They’re not nearly the same thing. Joe has a financial interest in what’s going on. He can stand a profit or loss. He can do work and lose money. He can do work and make even more money than I would have paid someone else to do it because he’s really good at his job. And Joe’s been driving for a long time.

He knows what the smart things are to do. A real contractor has a business. A misclassified employee has a 1099. Ownership, like I said, ownership of the truck is evidence, but it’s not the be-all end-all. Oh, he owns his own truck. Forget it, we’re done. There’s things like financial risk, there’s his investment he’s got in his business, the opportunity for profit and loss, which is a big one for trucking companies for the IRS. They want to see who has the financial relationship here. I’ll tell you right now, if you take that test on our website at trucking payroll, one of the questions you’re going to get asked is drivers going down the road, transmission drops, which is a bad day.

But who just had a bad day financially? Was it the driver or was it the company? Trucking company. That’s a lot of your answer right there. That’s actually ownership of the maintenance of the truck. So the independence really needs to exist in reality.

It really needs to be, and the question I just asked about the transmission, it needs to be the driver that it’s cost money. And if not, then they’re probably an employee. So here’s another one I’ve heard a lot, and it’s actually in pockets of the country, and I’m not going to identify the pockets of the country because I don’t think that’s helpful.

But I hear this a lot. Everybody does it. Everybody pays 1099. First of all, that’s not true. Everybody at your table at the truck stop might do it, which is you and one or two other people, but not everybody. And secondly, if everybody did, that wouldn’t make it legal.

If everybody ran a red light, does it make it legal? No. Same thing. There are practices in trucking that have been around forever. Sometimes they’re good practices. Sometimes they’re mistakes that have been repeated long enough that people just stop questioning it. And the 1099 driver classification can fall into that category.

Trucking company hires their first driver, someone tells the owner, just 1099, and that’s what the smart trucking companies do. And so they do. And then they, like I told you before, they get the second driver and then they get to driver 10.

Nobody ever goes back and says, was that really the right thing to do? Because that’s how we’ve always done it. It’s not a compliance strategy. That is a recipe for disaster. I’ve seen it. There’s we’re going to do a future episode about how companies get caught. This is the beginning of that story. That’s the way we’ve always done it. All the things we’ve talked about, they agreed to it. They had an LLC. So their bookkeeper told them to do it.

It’s your business. You do what you want. The bookkeeper can tell you whatever they want, the accountant can tell you whatever they want. It’s still up to you. You’re the one who bears the cost if this goes sideways. So keep that in mind.

All the people giving you advice, you’re it’s your financial life on the line. It’s your I want to think of a way to say this nicely, but it’s your rear end on the line here. They’re just volunteering to give you risk. So that’s up to you.

You’re going to do what you’re going to do. But these other people, a lot of people, oh, someone told me. Then you go talk to that person, oh, someone told me, and you go talk to that person, oh, someone told me. You never really get to the original source. Think about that. Now, let’s acknowledge the obvious reason that companies pay drivers that maybe should be W-2 is 1099. It looks cheaper, right? There’s no Social Security and Medicare tax, which is 7.65% of the first about $180,000 in wages. So if you’re paying a driver $80,000 a year, you’re going to save shoot five grand just in Social Security and Medicare tax.

I’m rounding off. There’s no unemployment tax. Save another $400 a driver a year. You may not have workers’ compensation insurance. You may be able to get an occupational accident or none at all. I would never suggest none at all to anybody, even with legitimate 1099s. Oh my goodness, don’t ever do that. But at least it’s your decision now.

There’s a lot less compliance, a lot less administration. Even by making the 1099, you don’t have all the employment laws you have to deal with. Discrimination, uh warrants if you’re a bigger company than laying people off. Just all of the things, OSHA, all that, no, you still have OSHA, but all of those things that you have to do for employees that you don’t have to do for contractors. You can let them go whenever you want without fear of reprisal, if they’re really contractors, things like that. I get why that’s all better.

You just write the check, issue the 1099, and you’re done. That all makes sense to me. But those savings only exist if the worker is actually a contractor.

If the person should have been an employee, you didn’t discover some clever trick to reduce your labor cost. You created a liability. Misclassification doesn’t eliminate the cost, it just moves the cost into the future. And a lot of times there’s penalties and interest that go with that.

We’ve got a chart that I will put on our website at truckingpayroll.com in the show notes. If you go to the podcast and you’ll see the episode. And I’ll show you all of the penalties that come along with failing to properly classify an employee.

Actually, they’re not all of them, they’re most of them. There’s more. And you can do the math really quickly and see what that would cost you.

But I get the savings are tempting. Trucking rates have been terrible for three and a half years, and they’re just starting to get better, four years, and they’re just starting to come around in the last six months. So it’s not like you were sitting on piles of money and just deciding to keep it for yourself.

I also get that the math gets pretty significant. When I talked about that five grand for some paying them 80 grand, then you add another 400 in unemployment tax. $5,400 an employee? Right. Or right? Times 10 employees is 54 grand. That could be in your pocket. That’s an easy way to think about that. It’s not true, but it could be. That’s what people will think. So it just adds up over time.

You started with one driver, now you have 10, and now you have 20. But that bill comes due. And we’ll again we’ll talk about it in a future episode of how that happens, but that bill is going to come due, especially if you’ve got any success.

Because then you’ve got the money to pay. And here’s another problem that we run into with all of this 1099 W-2 stuff. We talked about it a little bit, but you can’t really just say we passed the IRS test. The 20-point test, we got X, we’re good. The IRS has rules for federal tax classification. The Department of Labor has rules for determining status under federal wage and hour law. States have their own tests, both as Department of Labor and probably through their unemployment. All these people who have these tests need money to function.

And all their tests are different. And they’re all some states have significantly more restrictive tests, like I talked about California with AB5. So when someone tells me my accountant says our drivers can be 1099.

Or I’ve heard this a few times. My insurance agent said I my drivers can be 1099. And my question is based on what?

This isn’t something about how you enter into QuickBooks at the end of the year or something like that. It’s not even really a payroll decision. It’s a legal classification. Sorry, it’s a legal classification question. 1099 versus W-2 isn’t a payroll decision. It’s a worker classification decision. Payroll, I’ll tell you here, we process the back end of it. And if our client tells us pay this person 1099, we don’t ask a lot of questions beyond what we need to know because we’re the vessel.

We just we’re just moving the money for them and showing them the board and issuing the 1099 at the end of the year, sending out pay stubs and things like that, and all those sorts of things for 1099 people. And we’re happy to do it, but it’s not us making the decision. We’ll generally advise you if we think you’re going down a bad path, but it’s your path. Like we can’t make you pay W-2. We’re not the government, we don’t have that authority, nor is it our obligation to have to turn people in. That’s not going to help anybody do anything right.

So we are not the department determining your legal status of your workers. And your payroll, for those of you who do payroll in-house, say you’re a good-sized trucking company, you’ve got a full-time payroll person. It’s not their job to determine whether somebody should be 1099 or W-2. You should have your attorney or your CPA or an employment specialist, maybe an HR, maybe somewhere else, maybe an external person. They need to review these relationships if they’re even close to being borderline. It’s just not worth the aggravation of finding out you’re wrong later when you could have just solved this problem pretty easily.

So here’s what I’d do if I owned a trucking company using 1099 drivers. I’d stop asking, can I 1099 my drivers? And I’d ask, what makes these drivers independent businesses?

Write that answer down. Not they prefer 1099, not they sign an agreement, not they have an LLC. Oh my goodness, please, not that. Not this is the way we’ve always done it. Not the guy at the that I know told me I could do this. What facts about the actual relationship between you, your company, and the driver, the when the way you’re operating the business makes it independent from yours? If that’s an easy question to answer, great, you’ve got something to look at, maybe. If it makes you uncomfortable, pay attention to that.

If you can’t explain why they’re contractors without using the word 1099, you probably need to look a little bit closer. So, can you legally pay a driver 1099 contractor? Yes. There are absolutely legitimate independent contractors in trucking, and there always should be, as much as I get to decide. But you’re not creating one by deciding to issue a 1099 to that driver.

You’re reporting a relationship that already exists. And whether that relationship is truly independent depends on the facts. Who controls the work, who has financial risk, who is the opportunity for profit and loss, and is the driver really operating a business? That’s where the conversation needs to start. The goal isn’t to find a way to make your drivers 1099, the goal is to classify them correctly. Over the next few episodes, we’ll keep digging into exactly what it means for trucking companies because getting this wrong can be a lot more expensive than getting it right.

Again, if you’re even curious a little bit on our website at truckingpayroll.com, it is absolutely free. There’s a 10, you go to the trucking success tools, I believe it’s under resources on the menu. Go, and there’s one in there. Should I pay my driver W-2 or 1099? It’s not the universal, absolute truth of like a government listens to me, if only they did, right? But it’s going to help you go in the right direction.

And I encourage you to do it. And if you take the test and you disagree with the findings, let me know. Let’s have a conversation about it.

Because my goal here is not to get you to make things harder for you. My goal is to be helpful. So we’d love to have that conversation.

I think those are worth having. And so next week we’re going to keep going into again what this all means for trucking companies. We’re going to talk about the consequences. We’re going to talk about how it happens. And hopefully, you find this all to be helpful.

If you have found it to be helpful, give us likes. Please share it with a friend that might find it useful to you. Keep on trucking. We’ll talk to you next week.