1099 Truck Drivers: Real Owner Operator vs Employee Explained – Season 2, Episode 8

We’ve spent the last several episodes telling you about the dangers of paying truck drivers as 1099 contractors. But I don’t want you to walk away thinking 1099 is always wrong. Because it isn’t. There are plenty of legitimate 1099 owner-operators in trucking.

The question is whether you’ve actually hired an independent business or whether you’ve hired a driver and decided to call them an independent business. 1099 is not the problem. Calling an employee an owner-operator is the problem.

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 more drivers without losing control. I’m Mike Ritzema, owner of Superior Trucking Payroll Service, and your host. At Superior Trucking Payroll Service, our mission is simple: to help trucking families.

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

We’ve spent several episodes talking about 1099 versus W-2. We’ve talked about rules and mistakes, we’ve talked about costs, we’ve talked about how companies get caught doing this wrong.

Today I want to talk about the other side of this. When does paying a driver 1099 actually make sense? And specifically, what does a real owner-operator relationship look like?

So let’s start here.

There’s absolutely nothing inherently wrong with using independent contractors.

The problem comes when you start with a conclusion. You say something like, “I want to pay this driver 1099.” And then you try to construct a relationship around the decision that you made. That’s backwards.

You first have to look at the relationship. What does this person actually do? Who controls the work? Who has financial investment in their work?

Who bears the business risk? Who has the opportunity to make more money by that truck running better? And then you determine how the relationship should be classified. And we’ve talked about this.

You don’t make somebody an independent contractor by just handing them a 1099. That’s not how it works. And you don’t necessarily make somebody an independent contractor by putting independent contractor at the top of their agreement. Or even telling them to form an LLC.

That doesn’t work either. The tax form does not create the relationship. The relationship determines the tax form.

So I hear a lot from companies, from people I talk to: “Yeah, I want to pay my drivers 1099.” Well, great. Put them all in business. Have them all get their own trucks and have them all pay for their own maintenance and their own fuel. Even if they run it through your fuel card and you deduct back.

So that they have the incentive to try and make more money that way. They have the risk. They have all those things. “Oh, I don’t want to do that.” Okay, well, then they’re supposed to be W-2. So if wishing made it so, right?

But that’s not how it works. You don’t get to decide the tax part of it, and then that’s just how it works. It does not go that way. It’s the other way around.

You have to see what they do, and then that determines which tax form you use and how they are treated, whether they’re employees or contractors.

So what the paperwork says, if it doesn’t match reality, the paperwork doesn’t help you.

So let’s talk about what a real owner-operator looks like.

The simplest way I can explain it is they’re running their own business. They aren’t simply doing a job for your trucking company. They’ve got investment. They’ve got real financial investment.

They have expenses, they have risk. They have decisions that they have to make. And their decisions can affect whether they make money or lose money.

Maybe they don’t own the truck. Maybe they’re making payments. They should be responsible for fuel, repairs, maintenance, insurance, all these things. But they have a real financial interest in how efficiently that truck operates.

So that’s very different from here’s our truck, here’s our fuel card, we pay for the fuel, we’ll fix the truck, we’ll pay for the insurance, here’s where you’re going, this is the route we want you to take. And at the end of the week, we’re going to pay you X amount a mile. And, oh, you’re a 1099.

Those are very different things.

An owner-operator should have something to own and something to operate.

Think of it that way. Because the owner-operator, a real owner-operator, will probably be more conscious about their fuel spend than someone driving a company truck. And someone who has no financial interest in the fuel mileage or fuel cost for that matter. If your driver’s an employee, they’re not going to be, you’re going to tell them where to fuel.

You’re going to say, “But get fuel at this truck stop and this truck stop alone, because that’s where we have the best deal.” An owner-operator is going to fuel wherever they want. It’s up to them. The price may be more expensive to fuel there, but they may decide to do it, but that’s up to them. And then they lose money by paying extra for the fuel.

Or they may run their truck faster, which decreases the fuel efficiency, which costs them more money. They make those choices, versus a company truck is going to have a lot of that chosen for them.

Same thing with maintenance, like who’s going to maintain the truck and what they’re going to fix and when they’re going to fix it will be up to the owner-operator. But with a company truck, it’s all done. The company decides, “Hey, we’re switching out tires on that truck now,” or “We’re going to do this or that, and we’re going to have this company do it.” Things like that. Who’s choosing the maintenance provider?

Insurance, the owner-operator will generally at least have physical damage if they owe money to people or if they choose to, and probably bobtail. I know the liability insurance has to go through the motor carrier, and I understand that. And the cargo insurance generally goes through the motor carrier. But other insurances they should be able to pick who they want to use for it.

And they’ll have other business expenses too that a company driver just won’t have.

So it really comes down to the real possibility of profit or loss.

There’s no way an employee loses money driving a truck. Uh, you’ve got to pay them, employees have rights, you have to pay them minimum wage, for example. But an owner-operator could legitimately lose money on a run. If you want to count the maintenance in it, if it’s just a backhaul that’s crummy because you got the money on the headhaul.

Okay. Well, that’s going to happen.

So that’s one of the biggest differences I see is the employee driver generally gets paid for driving the truck, and the trucking company carries basically all of the business risk. The engine, the motor blows, right, which does happen, that’s a bad day for the company. When the tires need to be replaced, it’s on the company. When fuel goes up and man has fuel gone up, that’s on the company.

The employee still gets a paycheck, and it really doesn’t change much with any of those events.

An owner-operator is different. All those things we just talked about, those all go on the owner-operator. If they burn too much fuel, that affects the owner-operator’s financial well-being. If the truck isn’t maintained, that’s going to affect the owner-operator’s well-being.

If the truck sits, if they don’t run, that affects them. It doesn’t affect you as much as the owner. But as a driver, it doesn’t affect you at all. If the truck works, you get paid.

The end.

So if a driver can’t really make or lose money from their own business decisions, how much of a business do they actually own?

That’s a summary of what we’re trying to say here is that an owner-operator has the ability to make more money than a driver if they take really good care of their truck and they fuel at the right places and they drive the right speeds, etc., etc. But they also have risk and they can make less money. So an employee driver is going to make the same either way. And that’s a big difference.

And so that’s where the risk comes in. That’s when a government agency is assessing risk. That’s what they’re looking at is can the driver increase or decrease their own financial well-being on this trip easily? And do they have risk?

And so you’ve got to be able to demonstrate that.

So let’s talk about control. This gets a little bit murky with trucking. Well, the motor carrier has rules they have to abide by, and you’ve got customers and safety requirements and pickup and delivery appointments and regulations to no end. So those rules don’t make somebody an employee.

It’s really about are you controlling the result or are you controlling the person? If there’s a difference between saying this load has to be picked up in Grand Rapids and delivered in Atlanta by Tuesday morning, and treating somebody exactly like one of your company drivers in every meaningful respect.

But there’s another difference to say is to be picked up at this time and delivered in Atlanta on Tuesday morning, and this is the route you’re going to take, and these are where you’re going to fuel these things. Right? That’s a whole different thing. So the independence has to exist.

As long as the driver, for an owner-operator, picks up the load and delivers it, the rest of it’s on them, you have a better chance than you do with telling them exactly the route they have to take and all these sorts of things. It can be tricky because they do sound a lot the same. And for some companies, you’ll let your employees self-manage because you’ve had this driver for 15 years. This driver knows this route, they know what to do.

So you don’t have to tell them to fuel at such and such a truck stop. They’re just going to do it anyway. And they’ve done that load a hundred times, and so they know what to do. But again, if you’re telling, if you’re micromanaging them, as I’m one way to say it, they’re probably an employee.

Another thing, too, is since we’re talking about government regulations, I just want to get this out of the way. If you look at the 20-point test for owner-operators – or, I’m sorry, the 20-point test for whether somebody is an employee or a contractor that the IRS sometimes uses, you’ll see on there the ability to work for multiple people. That does not apply in trucking. It’s part of why the, we’re going to talk about this, but why the guidelines are not set in stone.

It’s not, of the 20-point test. If you have 11 of them that say they’re an employee, then they’re an employee. And if 11 of them say they’re a contractor, then they’re a contractor. This is part of why.

Is we all know that a truck driver cannot just work for ABC trucking during the day and XYZ trucking on the weekend or something like that. There’s all the work of all the DOT things and the drug tests and the writing out your hours that you worked for the last company and all those things, right? So while that would matter if you were a painter, it might matter if you were in construction. It doesn’t, that doesn’t apply here.

So I just want to get that out of the way too. Don’t let that be the thing that says, “Oh, we can’t have owner-operators because they only can work for us.” That’s not that’s not going to be an obstacle.

So back to where we were going here.

Another mistake people make is well, who owns the truck? And it is important, but it’s not the whole test.

Owning a truck doesn’t magically make someone an independent contractor. And not every legitimate business relationship looks identical. You have to look at the whole investment, who pays for the expenses, who makes the decisions about the business, things like that. So did we create something where who owns the truck matters?

We did, but it’s something, but it’s not everything. So because you could have the guy could own, sorry, the driver could own the truck, but have no say over anything. There could be some lease agreement that says the driver’s responsible for the truck, but they still have no risk because you bought out all the risk in the lease, and it’s actually the trucking company that leased them the truck and said, “Okay, we’re going to include maintenance and everything, and we’re going to pay you $2 a mile for every mile you run, but we’re going to charge you this much for the truck and this much for maintenance,” and comes out to exactly – you’re going to get 55 cents a mile every single time. There’s no risk.

And it was made with the trucking company, so that’s helpful, but it’s not enough because the driver still has no risk.

Owning a truck is evidence of a business, but it isn’t magic. It’s not the single thing you can rely on as your single source of defense and think it’s going to fly. So just keep that in mind.

Well, let’s look at an example. We’ve got two drivers. Driver number one drives your truck. You buy the fuel, you maintain the truck, you insure the truck, you decide where they’re going, what they’re doing.

The driver shows up and gets paid for driving. The driver has very little, if any, money invested in the operation. If freight rates collapse, as they sometimes do, unfortunately, the driver may still get the same cents per mile. Or they’ll still get some cents per mile, but they know what they’re going to make on the load when they go.

The load’s a thousand miles, they get X per mile, that’s what they’re going to get. That’s an employee relationship.

Now let’s look at driver number two. They own the truck, they’re responsible for their own operating costs, their decisions affect their profit, which is a big one. They’re operating under an agreement with your company, but they have meaningful independence in how they operate their business. If they manage fuel poorly, it hurts them.

If they have a major repair, it hurts them. If they operate efficiently, they benefit. That’s much closer to what we mean when we talk about a genuine owner-operator. Same industry, both drive trucks, completely different business relationships.

The question isn’t whether they drive a truck. The question is whether they’re working for your business or running their own. That’s a big deal. Driver number two there was running their own business.

Okay, I briefly touched on this. Let’s talk about lease purchase.

Lease purchase, it could be a whole podcast series, and I would bring in people that do more of it than I do. But I don’t think you can say every lease purchase driver is an independent contractor. Again, you’ve got to look at what are they leasing? Do they have control over the maintenance?

Do they have control over all these other things? Uh, one of the things I would look at too would be do any of these lease purchase drivers actually ever get the title to the truck? Do any of them ever pay it off? What you don’t want is a lease purchase agreement where it’s a wink-wink thing.

Like, “We’re leasing it to them.” Not good. Because the driver actually has to take title of the truck. At some point, there needs to be the purchase. And so, because you can build a lease purchase relationship and you can even say, “All right, we’re going to lease purchase this truck, but we want to make sure that you’ve got money for maintenance, so we’re going to withhold maintenance escrow of 15 cents a mile, and we’ll take your repairs out of that.” And you can submit receipts against it.

You can do things like that. Still okay because it’s an escrow account and it’s going to go back to the driver when everything’s said and done. So you absolutely can’t until the truck’s paid off because you don’t want the if you’re the trucking company, you don’t want the driver to lease purchase one of your trucks and just run it into the ground, run it until it’s got bald tires and needs well past preventative maintenance, and the motor’s starting to make that sound like it’s not going to last longer. Then they just turn it back in and say, nah, I’m going to quit.

So I understand why you’d have the maintenance escrow and things like that in there. But you again, that actually has to become realized into a purchase from time to time, more than not. And the driver needs to have the again the incentives of my fuel efficiency matters and things like that. Otherwise, they have no risk.

And if they have no risk, they’re an employee. Really, that’s an easy way to say it. It’s a little bit of a generalization, but the risk, an owner-operator has risk, an employee generally doesn’t, as far as the business goes. And a truck payment doesn’t automatically turn an owner or an employee into a business owner, if only it did.

But it helps, and again, you can lease purchase and they can be owner-operators, but just not every time. And don’t do the lease purchase as a defense. Again, don’t, as I said before, don’t start with saying I want to pay them 1099, and then say, Well, I’ll make up a lease purchase agreement. That’s not how it works.

Make the lease purchase agreement first, and again, have people graduate from it and get titles to trucks. And by the way, put that on your social media because that shows people that you actually have lease-purchase people that actually work. Because as we all know about lease purchase too, there are a lot of trucking companies that use this as a mechanism to keep drivers on keep them around and tell them they own their own truck or they’re going to own their own truck, but then they don’t. Then it’s just enough work to maybe make that payment, but you might put them behind, and now they’re behind on their payments because they don’t run enough.

There’s all kinds of stories. You can your social media can be full of them if you go look for it. So just be careful with lease purchase in general.

Quick tangent into free advice for a driver if you’re listening. If you’re thinking about doing a lease purchase agreement with a trucking company, have the trucking company present to you some of the drivers who’ve actually taken title to the truck and ask them how it went. And then I’ll also ask, hey, I want to talk to a driver who started a lease purchase agreement about six or eight months ago. I want to see how they’re doing.

Just besides that. A trucking company, if you’re listening and thinking I’m rooting against you, I promise you I’m not. A good trucking company that does lease purchase will be able to produce these things and say, look, we actually do lease purchase and it actually works. And our drivers end up getting financial independence that they wouldn’t have gotten another way.

Okay, end of rant.

Here’s one thing I want to caution you about. Don’t listen to this and go, okay, we’ve got this big checklist now. They own a truck, they buy fuel, they signed a contractor agreement. Three checks, we’re good.

Thanks. It’s not how it works.

There isn’t one magic factor. There’s not one magic amount of information that gets you there. Like I said, with a 20-point test, it’s not like if you have the majority, you swing one way or the other. They’re going to look at the relationship as a whole.

Some facts may point towards employee, some other facts may point towards independent contractor. And quite honestly, that’s going to happen a lot, especially if you’ve got the lease purchase going on and things like that. And that’s why classification can get complicated.

And depending on which law we’re talking about, the analysis itself can be different. Federal tax rules aren’t necessarily identical to federal wage and hour rules, which I know is surprising to you that the federal government doesn’t have all their ducks in a row, no matter who’s running the administration. So and state law adds a whole other layer on top of this.

So if you’ve got a situation that’s close, it’s not something I’d want to guess at. Get somebody qualified to look at your specific arrangement, talk to a transportation attorney or a labor attorney if you need to. It’s worth the 500 bucks, 1,000 bucks, whatever now, to save yourself all the pain later.

Worker classification is a facts and circumstances question, not a checkbox exercise.

If you want to start with something for free, go to our website, truckingpayroll.com, and then go to resources. And I think we’ve got something about trucking success tools or quizzes or something we talk about. We have one in there. It’s should your driver be paid 1099 or W-2?

We’ll ask you trucking questions and we’ll give you what our opinion is of it. Again, we’re not attorneys. We put a disclaimer in there. I wish that my pronouncement of whether they should be 1099 or W-2 would be accepted by the IRS all the time as law.

It’s not. But at least it’s going to get you down the road. And if you and if I if the test that you take clearly shows the driver should be W-2 and you’re paying them 1099, that’s something you’re going to want to look at. Because that’s probably not going your way.

If someone called me and said, “Mike, can I pay this driver 1099?” I wouldn’t start with the tax form. I’d start asking all the questions we talked about. Whose truck, who pays for fuel, maintenance, etc. How is the person paid?

What control does the company have over the driver? What decisions does the driver get to make? And can they increase their profit? Because usually, when you start answering those questions, the picture becomes clearer.

Not always, but usually.

And there’s one question underneath all of them. Did you hire a driver or did you contract with another business? And that’s the distinction I really want you to think about. 1099 isn’t bad automatically. W-2 isn’t good automatically.

They’re classifications.

The goal isn’t to find the classification that costs you the least. The goal is to correctly identify the relationship you actually created.

If you’ve hired a driver and you control that driver’s work like an employee, calling them an owner-operator or having a contract does not change that.

But if you’re contracting with someone who is genuinely operating their own trucking business, taking meaningful financial risk and exercising meaningful independence, then it should be, and maybe it should be. That’s exactly the situation where independent contractor relationship makes sense.

Don’t try to turn a driver into a 1099. Build a real business-to-business relationship.

That’s it for today. For Driven for Success. Thanks for listening, and I’ll see you next week.