What Happens When a 1099 Truck Driver Is Misclassified? – Season 2, Episode 7

Let’s say you’ve been paying a driver as a 1099 contractor. Maybe you’ve been doing it for six months, maybe three years. Maybe you’ve done it with 20 different drivers.

And then somebody decides that the driver wasn’t actually an independent contractor. They were an employee.

What happens next?

Because you don’t change them to W-2 on Monday and pretend that the last three years never happened. Misclassification isn’t just a problem going forward. It can also be a problem going backward.

And today, I want to walk through what that can actually look like.

Welcome to the Driven for Success podcast. This is the podcast for trucking company owners and executives who want to build a better business and make better decisions while keeping their drivers and growing the business.

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.

A quick shout-out to J.B. Hunt. They actually cited our Driver Pay Index in an article that they wrote on their website. And while J.B. Hunt is not a client of ours, and I will never pretend that they were until they become one, we’re glad that they’re able to use that data to help explain to other people how trucking works.

So if you want to see the Driver Pay Index for yourself, it’s at TruckingPayroll.com/DPI. We update it very early every month so you can see what happened in the prior month. We hope it’s helpful.

So we’ve been working through a series on 1099 versus W-2 for how to pay truck drivers. We’ve talked about the differences between them. We’ve talked about whether you can legally pay a driver as a 1099 and what those situations might be. We’ve talked about some of the biggest mistakes that companies make. Last episode, we talked about how trucking companies get caught.

Today, we’re going to take the next step in this journey. Now you’ve been caught, or someone has challenged the classification. Now what?

The first thing we have to know is who decides that the driver was misclassified.

One thing that makes this confusing is there isn’t a single government agency who has unilateral decision-making on this, which is unfortunate because it would be nice if we had one set of rules to live with.

Instead, we have multiple sets of rules depending on what state you’re in, or which tax agency within the state or the federal government, things like that.

The Department of Labor has rules for whether the person is an employee under federal labor law. The states have their own departments of labor, and they have unemployment, and then there’s workers’ comp and things like that. And the rules do not have to be identical, and they are not.

So when somebody says, “The government says he’s an employee,” my first question would be, “Which government are we talking about here?”

And I don’t mean some government in Europe, obviously. Is it the U.S. federal government? Is it the state? Is it the locality? Which branch of it is it? And what purpose are they doing that for?

It’s really important.

For federal tax purposes, the IRS generally looks at things like behavioral control, financial control, and the relationship between the parties. The Department of Labor uses a different labor analysis under the Fair Labor Standards Act of 1933. And the states can have their own tests.

And like all these things, they can move around a little bit and become more employee-centered or more 1099-centered depending on who’s in office. It’s not a political commentary. It’s just the way it is.

So you’ve got the IRS versus the Department of Labor at the federal level, two completely different organizations who could come up with two different rulings on whether somebody’s an employee or not.

Then you’ve got the state and their Department of Labor and their unemployment agency. You’ve got workers’ compensation laws and workers’ compensation boards and insurance agents and insurance carriers and all that kind of stuff.

And you’ve got the state wage and hour agencies, which are usually part of the Department of Labor. But even they can get involved. Even at the county level, they can get involved.

So you just don’t know. You’ve got all these different laws, and they all have to use them all to figure out what’s going on. And it’s no fun.

There isn’t just one 1099 test. There are multiple laws asking slightly different questions.

And that’s really the thing, is you really have to satisfy them all to be a 1099—or a great, great many of them. But I would say all of them.

Here’s something that trucking companies often miss: the driver doesn’t necessarily need to wait for your company to get audited.

A worker can go to the IRS and have them determine the status of the worker. There’s actually a form for this. It’s called a Form SS-8. I have seen it. It’s about three or four pages. It asks very simple, easy-to-understand questions.

And the worker can go to the IRS and basically say, “I was treated as an independent contractor. Here are the facts. Was I really an employee?”

The business can file an SS-8 too if they’re not sure how to classify a worker.

But let’s think about what that means.

You might have had a driver who happily accepted 1099 pay for two years, three years. Maybe they wanted to be 1099. Maybe they even said, “A condition of my working for you is that I’ll only be paid 1099.”

Then the relationship ends badly, as they often do.

Now they’re looking at their taxes. They’re talking to somebody, or they want to file for unemployment, or their spouse is on them about what they owed for taxes. And now classification becomes an issue.

Their previous agreement with you doesn’t necessarily settle the question.

A 1099 does not make them an independent contractor. An independent contractor agreement does not automatically make them an independent contractor either.

If only it did.

The actual relationship matters.

You know, you can even get the driver to re-sign the agreement every year saying, “I’m a vendor. I am not an employee. I waive all employee rights,” so on and so on and so on, signed in blood, notarized by six different people.

It’s not going to matter. You can’t waive those employee rights.

And as we all know, if you’ve employed drivers before and they don’t work for you now, a lot of times that situation ends badly.

The driver felt cheated about something. I’m not saying you cheated them. I’m saying they felt cheated. But now they want their justice.

And so we have to deal with that.

And they’re like, “I want to punish the company I used to work for, for whatever perceived violation of my rights.”

Well, one of the ways I can do that is go file an SS-8 with the IRS. Pretty passive. It doesn’t take me long to do, and they’re going to get in trouble.

That’s no fun.

So a driver can agree to be paid like a contractor, but that doesn’t automatically make them one.

So now we’ve got tax things.

Let’s say the IRS determines the person was really your employee, which, again, based on the prior episodes we’ve done, there’s ways that they’re going to get there.

You know, if they’re driving the company truck, and the company pays for fuel, and the company pays for maintenance, and all that kind of stuff, the IRS will probably determine that person was an employee.

So now the first problem we have is a tax problem, because employees and independent contractors are taxed differently. It’s not nearly the same.

With an employee, the employer has responsibilities for withholding federal income tax, Social Security tax, Medicare tax, federal unemployment tax, and then you’re going to have state unemployment withholding issues coming behind that because the IRS will talk to the state.

But none of this was handled like an employee payroll because you thought this person was a contractor, or at least you hoped they were a contractor.

And this is why the IRS can reach backwards.

The IRS says that when a business misclassifies an employee and doesn’t have a reasonable basis for doing so, the business may be held liable for employment taxes for that worker.

What’s that in English?

You’re going to owe back taxes for all the money you should have paid in for that employee.

Now, there are special rules that can affect exactly how those taxes are calculated, and there may also be circumstances where the employer qualifies for relief. So I’m not going to tell you that every misclassification case produces the same bill. It doesn’t.

But there’s a concept here that you need to understand.

Changing the driver to W-2 fixes tomorrow. It does not automatically fix yesterday.

You know? It’d be nice if it did, but you’re still going to have the time that they were paid as a contractor that they should not have been. And you’re still going to have federal and state exposure.

And you’re going to want to get somebody involved in this probably professionally to help you with it, to help manage it.

It does happen.

The penalties are significant. You’re going to want to watch out for that because it can be a lot.

I’m going to post an article on our website at TruckingPayroll.com, and I have a graphic in there that lists out all the penalties, because there are a lot. And they can be really punishing, especially if you didn’t pay anybody W-2, so you never filed the tax forms that the IRS now requires you to file, which means they can go back to the beginning of time looking for you.

So you want to watch out for that.

And the exact calculation is going to depend on the facts of the matter, how long the people have been employed, how many people it is, and all those kinds of things.

But it can potentially be a lot of money.

So what happens to the driver’s taxes now?

The driver’s been filing tax returns as a self-employed person for all these years, even if they agreed to it when they got along with you and now they’re changing their mind.

They got 1099s from you, and they’ve generally been responsible for their self-employment tax.

But if they’re actually determined to have been an employee, there’s a mechanism for dealing with that too.

The IRS has a form for it: Form 8919. Look it up. It’s scary and bad. Not the words, just the consequences.

That form can be used in certain situations when workers are treated as independent contractors but should have been treated as employees to report their share of uncollected Social Security and Medicare tax.

So we’ve got a mess here now.

The trucking company’s filed returns saying contractor. The driver had filed returns basically saying contractor. They were self-employed.

But now we’re going to go back and say, “Just kidding. It’s actually all wages.”

And that’s why I keep saying this throughout the series. This isn’t about whether everyone agreed to call the driver a contractor. The government cares about what the relationship actually was, not just what you and the driver called it.

So there’s a whole lot of stuff we can talk about here. I’m not going to go into all of it because this podcast would be two hours long.

But this Form 8919 means that they’re going to come back to you for your half of Social Security and Medicare as the employer that you should have paid.

There’s other issues too.

The driver’s taxes actually can be affected because if they filed self-employment, they were a Schedule C, and they might have deducted things they wouldn’t have deducted. But they’re going to get half of the Social Security and Medicare tax back.

They’re probably going to come out about even. It depends on everybody’s situation.

But you’re going to end up paying.

And Social Security and Medicare, your half is 7.65%.

So if you pay a driver $60,000 a year, I don’t have this math in my head, but it’s about $4,500, a little more than that.

That’s just Social Security and Medicare.

That’s not into that they should have withheld federal income tax. That is not anything with the state or localities yet.

So just alone there, $4,500 plus late fees, and you’ve got federal unemployment, which will be $300 because you didn’t file on time with your state, plus late fees.

And you’ll have the state yet too, which will probably be another $300 plus late fees.

That’s one driver for one year.

So again, we’ll put something up on the website about how to figure this all out.

Now we’ll go beyond the IRS.

The driver leaves, and they file for unemployment. And your response is, “They weren’t an employee. They were an independent contractor. I’ve even got a contract.”

And the state says, “Okay, let’s take a look at that.”

And then they go ask the driver, “So tell me about the relationship.”

So now you’re having a worker classification discussion with the unemployment agency.

The agency then determines that these drivers should have been employees, if that is the case.

Now you’ve got unemployment tax issues, and that can be assessments for prior periods because now the state’s involved.

And this is one reason I don’t love the argument that I’m going to make for a defense here: “We’ve done it this way for 10 years, and nobody has said anything.”

That doesn’t prove the classification was correct. It just means nobody had challenged it yet.

And if you say that to the IRS—or the state or the IRS—they’re going to say, “Great. Let’s go back 10 years and go review all those pays for all those drivers.”

Now you’ve just dug yourself a bigger hole.

So a former driver files for unemployment, even though you fired them for being just a terrible driver, an unsafe driver, any of those things. It doesn’t matter. They’re mad. They want their sense of justice.

And then you come back and say, “You know, the driver was a contractor. We have a contract. They even made an LLC.”

Well, they’re going to take that information and go right back to the person who filed for unemployment and say, “This is what the company says.”

And then they’re going to get the chance to respond, and they’re going to say, “Well, yeah, I formed an LLC, but they made me be a 1099,” or whatever.

“I can’t waive those rights.”

And they’ll probably get some professional advice at that point.

It can get ugly really fast.

And then the state can also be like, “Okay, so you, the trucking company, have paid this driver as a contractor for the last three years. How many other drivers do you have? We want to see your books.”

Because the state smells money here. Money they feel they should have collected before, they want it now.

So you’ve got to be really careful with this stuff.

And it’s why I beat this drum so hard, because it’s a little better now, maybe potentially, by paying them 1099. But it can be a lot worse later when somebody figures it out.

And eventually, laws of large numbers, somebody’s going to get wise if you’ve got enough drivers and have done it for enough time.

So, “We’ve always done it this way,” is not a worker classification test. It is not a defense.

In my opinion, it actually makes it worse because then they’re talking about, “How long have you done it? Who else have you done it for?”

Those are the next two questions from the state.

And you’re like, “Uh-oh.”

So now we’ve got another place where classification matters.

That’s workers’ compensation.

The driver gets injured. The question now becomes: Was this driver really an independent business, or were they your employee?

You know, it could come up in your workers’ comp audit because they’ll want to see payments to drivers reported as contractors, and then they’ll want to ask, generally, did they have their own coverage?

And when you can’t produce coverage for them, and depending on your relationship with the insurance carrier and the rules that that insurance carrier has, you could have problems there too.

Either they’re going to jack your premium like crazy because you had unreported wages, or they’re going to cancel you and say, “We don’t want to do business with this company.”

Or they’re going to say, “Nope, they weren’t covered.” And then there was an accident, and now you’re personally liable because someone else determined they were supposed to be covered, but you’ve had them specifically exempted, and the coverage that they said they had didn’t stand up.

All these things.

And these are big, big dollars now.

I’ve said it before, and I’ll repeat it here. I’m pretty sure when my wife had our kids, they asked if it was a work-related incident because the hospital gets to charge more money for those workers’ comp cases than they do for health insurance things.

So they always want to ask about that.

So the 1099 does not make employment risk disappear. It may just hide it for a while.

You know, there’s all these ways this can go wrong, and I’ve listed a lot of them.

But if the workers’ comp cancels you in Michigan, I will tell you the penalty for not having workers’ compensation insurance is $1,000 per employee per day.

That’ll put you out of business by the time they find it. It just will.

One year is $365,000 for one employee.

Yeah, it’s never going to work.

So make sure that they’re covered.

And now we go on to wage and hour issues.

This is where things can get complicated because a worker who’s an employee has legal protections that a contractor does not.

Minimum wage laws are one example.

Another example is interstate truck drivers can fall under exemptions for federal overtime, but that doesn’t mean that every federal wage and hour law disappears.

If drivers only run locally, perhaps they would be subject to overtime. It depends on the load, and there’s other things that go into it.

But I’m just saying there’s other ways it can go into there.

Things in Michigan, where I am, you have ESTA, the Earned Sick Time Act. You know, maybe they’ve got some eligibility for that. They had sick time that you didn’t pay them, and you were supposed to.

Other states have similar laws now with paid sick time.

There could be things in your employee handbook, benefits that you offer. Now that they are employees, they’re subject to those benefits, right?

Which leads us right into the next thing, and it kind of goes to the main theme here, which is misclassification isn’t just one problem.

It’s one decision that creates several problems in several places.

So what about employee benefits?

What if your employee should have had health insurance and you never offered it to them because you said they weren’t an employee?

Man, oh man, that’s a problem.

You’ve got all kinds of liability just sitting there.

So usually that’s bigger companies, to be fair. If you’ve got 10 trucks, you probably don’t offer group health insurance. If you do, good on you.

It’s usually bigger companies that have that.

But I have seen companies with well over 100 trucks that 1099 all the drivers, and it makes my heart sink because that’s just a powder keg waiting to explode.

And so you’ve got all this stuff, and you’ve got all these plan documents you signed for the health insurance and for all the other benefits, even like 401(k) and a match.

You didn’t make them eligible for that, you know.

And you’ve got to go back and fix it, and it all costs money.

Fortunately, it’s just civil things, so you can fix it with money, but it’s not just a little money sometimes.

You know, the tax bill may be the easiest part of this problem to calculate because we can actually math that out.

The other things, you just don’t know when it’s going to stop.

And that’s the problem.

All right, so now that I’ve sufficiently bummed you out, this is probably the part I’d be the most concerned about as a trucking company owner.

Let’s say one driver raises the issue, and let’s say that a tax agency determines that the driver should have been an employee for their entire time with you.

Here comes the next question, and I referred to it earlier.

What other drivers are out there?

Maybe you had 15 or 50 or 150 drivers that you’re paying the exact same way, and you’ve been doing this for years.

The math multiplying, man, that’s hard.

That’s going to work against you pretty significantly.

You know, dealing with one driver’s payroll taxes if you’ve got 50 drivers is annoying, and it may be a little painful.

But multiply this out times 50 drivers times 10 years. You’re already at 500. Fifty times 10, right?

And then the penalties and all that kind of stuff too.

Ugh.

It’s horrible.

And so it’s something you really want to avoid.

The most expensive driver in the misclassification case may not be the first one. It may be the second one or the fifth one.

Because now, once you establish that one driver worked, someone else is going to ask the same questions.

And it’d be very easy for a driver—first of all, we all know drivers talk to each other.

So if one driver gets determined to be an employee who had left your employment, they’re going to call their buddies and say, “Hey, remember when we used to work for ABC Trucking over there? Yeah, I got a settlement because I was supposed to be an employee, and you were doing the same job.”

You know that’s how it works.

It just does.

Because they all have the similar contracts and similar equipment arrangements and similar lack of control over the finances or whatever.

Yeah, this is the math.

And so this is the math that will cause a whole bunch of problems because now they’re employees, and employees have rights.

So what do you do if you think you have this problem?

First off, don’t panic. Panic never helps.

But don’t ignore it either.

Don’t assume you can solve this entire problem by changing everybody to W-2 by the next payroll.

But start figuring out what you actually have.

Who are you paying as independent contractors, and how does each relationship work?

Who owns the truck? Who pays the expenses? Who buys the fuel? Who’s responsible when the transmission drops? How much control does your company exercise?

Things like that.

We have a test on our website, absolutely free. It’s under Resources. Go to, I think, Trucking Success Tools and “Should I Pay My Driver 1099 or W-2?”

It’s not legally binding anywhere. If only I could make it so.

It will give you a better idea.

Start with that, and then talk to your CPA. Talk to your payroll people. Talk to your employment attorney. Talk to your workers’ comp agent. All those people.

And figure out what to do.

So it’s always better to fix a classification problem before someone else decides to fix it for you.

I think it’s a Japanese, Chinese proverb: “The best time to plant a tree, if you want to sit in the shade, was 30 years ago, and the second-best time is today.”

So get all this work done.

It’s not that much.

And in your soul, you probably really know if they’re supposed to be contractors or not, you know, and get it done.

If you do need to change them, I would change them as quickly as I could.

My unsolicited advice—well, you’re listening, so I guess it’s a little solicited—is I’d go back to the first of this year, and I’d at least get their FICA fixed up because you could end up paying it anyway.

So just something to consider.

You don’t have to do it that way. You could do the first of next year. You could change them for, you know, September ’25. That’s fine.

But a review before an audit is much better.

If there was an audit coming later, you could say, “You know, we reviewed that ourselves. We made the same determination that you did, so we’ve already fixed it,” which will lower the penalties and will also buy you some goodwill from the auditor.

They won’t throw—they may not throw the book at you.

I can’t promise they won’t.

But when you show them your work and say, “Yeah, we agree. We reevaluated our compensation system and our classifications based on the relationships, and we’ve determined that those people should be employees, and so we’ve changed them to employees, and we’ve been following that through for the last year or two or whatever,” that buys you a lot of love from them.

They may not go back farther than that.

Also, if you’re paying them as an employee, their unemployment’s going to be good, so you’re not going to get stuck in the unemployment audit because you’ll be like, “Yeah, they’re an employee.”

And then you’re fighting a different fight.

My gosh.

The best time to fix a classification problem is before someone else decides to fix it for you.

Yes.

The opposite of that is the worst time to fix a classification problem is after someone decides to fix it for you, of course.

Here’s what I want trucking company owners to take away from this entire series.

1099 versus W-2 is not a choice.

It’s not, “What does the driver want?”

It’s not, “What’s cheaper?”

1099 is cheaper. It just is.

It isn’t, “What does everyone else in trucking do?”

And I’ve seen that in pockets of the United States, by the way, where they’re like, “Oh, everybody pays their driver 1099.”

I don’t want to name cities. I don’t want to name subsections of trucking that do that.

The IRS can do their own work.

But I do see it.

But this is all a legal classification based on the actual relationship.

And if you get that classification wrong, the problem may not appear immediately.

You may run that way for years.

Everything may look fine until one driver files for unemployment, or gets injured, or files an SS-8, or gets smart and talks to an attorney.

There are attorneys out there that look for these cases, just by the way.

Some government agency starts asking questions, and then you’re not deciding how you want to pay that driver anymore.

You’re explaining why you paid them what you did.

1099 can look cheaper right up until someone decides the driver was never a contractor in the first place.

Then it’s much more expensive.

Next episode, we’ll keep moving through the 1099 versus W-2 issue and talk about what trucking companies can do when they realize they need to make a change.

Thanks for listening. We’ll see you next week.