1099 vs W2 Truck Drivers: Who Actually Decides? (Trucking Company Owners Guide) – Season 2, Episode 2

You don’t get to decide whether your truck driver is a 1099 contractor or a W2 employee. The driver doesn’t get to decide either. You can’t just legally put it in a contract and say that’s how it works. You can’t have the driver sign something that says, “Well, I want to be a contractor,” and have it be enforceable. And you can’t make somebody a contractor just because that’s how you’ve always paid them. You don’t choose 1099 or W2.

The working relationship does. That’s what we’re going to talk about today.

Welcome to the Driven for Success podcast. This is the podcast for trucking company owners and executives who want to build better businesses, make better decisions, and keep their drivers without losing control. My name’s Mike Ritzema. I’m your host and owner of Superior Trucking Payroll Service, where our mission is to help trucking families. This podcast is one of the ways we fulfill that mission.

And today, we’re starting a new series about one of the biggest compliance questions in trucking, and I get it all the time. Should your drivers be 1099 independent contractors or W2 employees? And more importantly, how do you know? I’ve been in trucking for a long time, and this question never goes away. “Can I pay my drivers 1099? “”Well, what if they want to be 1099? “”What if they make LLCs? “”What if they sign an independent contractor agreement? “”What if they lease a truck from me? “”What if everybody else in my part of trucking does it this way? “There are 100 variations of this exact same question, but they’re all trying to answer the same thing.

Is this person operating an independent business, or are they working for your trucking company? These aren’t the same relationship, and changing the paperwork doesn’t necessarily change the relationship. I mean, this comes up all the time because, well, paying W2 costs you more as a trucking company. It just does. I’d love to tell you it didn’t. And so, because every dollar is so important, trucking company owners try to figure out a way to save a buck.

I understand that. I think that’s reasonable. We’ll get into that more. This isn’t one of those ways. plus, they talk to other people, “Oh, I pay my drivers 1099, and it’s been fine. “Well, it’s been fine so far. And again, we’ll get into these things, but these are the kinds of things that you hear when you, when you’re talking to other trucking company owners. you know, “My employees don’t want to be 1099,” which just as a sentence structure is wrong because employees are automatically W2.

That’s what makes them employees. So, but you get the idea, right? Like, you hear all these things, and what I would caution you to do is don’t assume something is legal just because you hear other people do it. to that same extent, for, as a disclaimer, I’m not an attorney. so verify what I’m telling you with other people as well.

So let’s talk about this for a bit.

We’re going to start with the easy side, and that’s what is a W2 driver? A W2 driver is an employee. The trucking company employs the driver. The company runs payroll and taxes are withheld. The employer pays its share of Social Security and Medicare. Unemployment taxes apply, and protection for the employee.

Workers’ comp requirements apply usually and also benefit the employee. And at the end of the year, the driver gets a W2 with all of the year-end summary information on it. And there are obviously costs that come with having employees, and I alluded to that earlier. You know, the workers’ compensation insurance, the unemployment taxes, any of the other compliance measures that you have to do with an employee, those aren’t free. They cost money, absolutely, and it’s one of the biggest reasons some trucking companies want to pay their drivers 1099. But there’s also something else important happening here.

The company is treating that driver as part of its workforce. The driver performs work for the company, and the company has rights and responsibilities that come with being an employer.

Now, just to be clear, W2 does not mean hourly. It’s not just for hourly employees, and trying to claim that drivers, because they don’t get paid by the hour most of the time or not, W2 is not going to go well for you. You know, drivers get paid all the ways they always get paid, mileage, percentage, even salary, minimum payments. You know, all these things are subject to applicable wage laws. So employee classification, you know, and how you calculate pay are 2 different things. So those don’t go together. now let’s talk about the other side of this thing, the 1099 driver.

When people say 1099 driver, what they’re really talking about is an independent contractor. The word independent matters here. An independent contractor is supposed to be operating an independent business.

Think about a trucking company that is hiring another trucking company to perform work. That business has its own risks, its own expenses, its own opportunities, and makes its own decisions. It isn’t simply an employee whose paycheck happens to have no taxes withheld. Excuse the coughing. I’m getting over a terrible cold. You know, an independent contractor should actually be independent, and that part gets lost.

And I know that they can’t drive for you today and for someone else tomorrow. That would be getting their own authority, and I understand that the DOT doesn’t allow that. But all the other parts, its own expenses, its own risks, its own opportunities, its own business decisions. We’re going to get into this in future episodes more, but that’s really what it comes down to is, you know, is the driver running their own business, or are they just getting paid to do a job? So, you know, you can’t just—an independent business is different than taking a driver who gets paid 50 cents a mile and calling him independent. It’s not the same.

You know, the owner-operators will have legitimate contractor relationships, and, you know, they’ll own their own equipment, they’ll do their own– they’ll keep track of their own books. they’ll have profit and loss incentives. And again, we’ll get into more of this– more detail in future episodes. But the idea of the profit incentive, an easy way to know about this is if the truck’s going down the road and the transmission drops, which is a bad day. Who just had a bad day? Was it the owner of the trucking company or was it the driver? That’s a great example to help you know if this driver’s got his own business going.

Now, I’m not completely naive about this. I understand that money is tight in trucking all the time. Even with rates coming up lately, which is great, money is still tight. It’s always tight in trucking. It just always is. So 1099 can look to be a lot cheaper than paying W2.

I mean, if I’m treating him as an independent contractor, I don’t have to withhold payroll tax from my– on my side, Medicare, Social Security, federal unemployment, state unemployment. I don’t have to do any of that stuff. I don’t have to worry about, getting in trouble on a lot of discrimination issues. not all of them, but a lot of labor laws won’t apply to you as a contractor. You know, those things don’t—I mean, that all adds up. It does. Workers’ comp insurance, all that stuff.

So if you could get away without having to deal with any of that, would it be better for your business? Yes, it would. I agree. However, would it be? I mean, it’s breaking the law. So misclassification doesn’t save money, it just delays the bill because it’s going to come around.

You know, and I’m not saying that owners are trying to cheat anybody. I don’t put bad intention on you as a trucking company owner, especially the small trucking companies. It’s hard, but this is not the place you want to cut that corner. You know, that’s– it– someone might have told you, “This is how trucking works,” and kind of winked at you. No, this isn’t jaywalking. Like, this is bigger than that.

And so, you know, or you took over for somebody else who paid their people that way. That doesn’t make it right. It means they got away with it for a while, but eventually it catches up. So none of this, these reasons ever establish proper classification and never get you out of this. Nor does ignorance, by the way.

This is one of my favorite things that I hear from clients and prospects and people I come across in trucking. They’ll come to me, they’ll ask me about 1099 versus W2. They’ll say, “Mike, we got this driver. You know, I want to pay him 1099. “”Well, do they drive in your truck? “”Yeah,”Who’s responsible for the maintenance? “”Yeah, we are. “”Who pays for the fuel? “”Yeah, we do. “”Well, then what are we talking about here? “”Well, the driver really wants to be 1099. “And I go, “Oookay. “Well, the driver may have reasons for wanting to do that.

The check will look bigger because there’s no taxes coming out. that sounds great, but it’s not the same thing as earning more money and their preference or even their requirement, even if they say to you, “I will not work for you as a W2. I will only work as a 1099, but I only– I want to get paid 50 cents a mile or whatever, and you pay for the fuel and the truck and all that. “Even if they do all that, it’s still not right. You can’t employ them that way because the the company and the worker can’t just agree to ignore the rules that apply to the relationship. You’re not playing Monopoly at home, where you can say, “Okay, we’re going to deal out all the properties first. “That’s not how this works.

Or all of the fines go into the middle of the board for free parking. That’s what we always used to do when I was a kid. You can’t do that with laws. So, you know, what are you trying to accomplish here? The, you know, the driver’s preference doesn’t override the working relationship, which is where the law comes from. So they, they may genuinely believeThe driver might think, “Yeah, 1099 really is the way to go, and that’s what I want to do. “you know, the driver might even be filing taxes correctly.

I don’t know. I doubt it, but it’s possible. and the agreement doesn’t settle anything. What can happen, too, we’re going to talk about this in future episodes, too, but the driver can roll over on you and say, “I should’ve been paid W2. “And they’ll– The company can say, “Well, they insisted on being 1099. “They go, “Look, man, I’m just a simple driver. I don’t know.

You know, I don’t know what I signed. “And you can’t, you can’t waive that right. So we’ll talk about it more. There’s a whole episode on how companies get caught with this, and it’s not as much audit out of the blue as you think it might be.

Here’s another twist on that same thing here. “My driver formed an LLC. “Okay. That’s fantastic. The LLC doesn’t turn the employee into the into an independent contractor. You still gotta look at the relationship.

You know, it’s still the same driver doing the same work. So if they’re formed an LLC, and they’re driving for you, and you’re paying them 50 cents a mile, and theyYou buy all the fuel, and you pay for the maintenance and provide the truck and all that, you know, you’re– it’s still W2. It’s still an employee. It it absolutely is.

By the way, an LLC is a designation. LLCs have value in that they limit the liability of the owner’s business to just the assets of the business when done correctly. Their whole– Lawyers can talk about this for hours, but where it’s not.assume you do it reasonably correctly. But all that means is that if you had a trucking company that was an LLC, and you got sued, and you lost, and you lost everything, that they can only take the assets in the business. They can only take the truck, maybe, if that’s in the business. They couldn’t take your house.

They couldn’t take your own– your retirement. Absent unique circumstances like crazy negligence and things like that. Again, talk to an attorney to get all the details, but that’s what an LLC does. But they were a sole proprietor before, which is what they were hired as a 1099, absent something else. They’re still a sole proprietor, still a sole proprietor. Tax-wise, it’s exactly the same for them.

It doesn’t change anything. So the business structure here, them forming an LLC, doesn’t really matter. It’s still the substance of the relationship is still the thing that really drives all of this. And so I get wanting to believe that they formed an LLC, and that’s good enough. It’s not. they’re still—it’s still the nature of the work that matters.

Now, I’m telling you all this and maybe bumming you out. That’s not my goal. It gets a little more frustrating here because the rules are not universal, and that’s what is super annoying. The IRS has their set of rules. The Department of Labor has their set of rules. States can have their own rules.

Shoot, cities probably, and some of the more active cities probably have some of their own rules, and those rules aren’t identical.

You’ve probably heard about California and AB5. That has to do with all of this, and what AB5 basically said was if you do– if you work for a company that’s in the bus- that’s in the same business as you are, you have to be an employee. What they meant is you’re working for a trucking company, and you’re driving a truck, you’re an employee. And there were some huge ramifications out of that, that I can’t really get into here because it would take too long. But, you know, that, that’s one of the things that, for example, California’s done.

But the IRS has had rules forever. They have their 20-point test. We’ll put a link to this in the notes on our website at truckingpayroll.com. Then go to Podcast, and you’ll see the show notes. you know, they’ve got their rules. the Department of Labor has their rules, and the Department of Labor rules change with every administration. We have yo-yoed back and forth through the last 4 administrations for how we define who an employee is and who a contractor is, back and forth and back and forth, and it will continue to do that probably for a while, until such time as you can’t do that anymore. It’s just the way the world is, the IRS has their rules, too.

The states, some of the states have their own rules. It just is how it is, and it’s so, it’s frustrating. I can’t tell you exactly do these things, and you’ll– they can be 1099. I wish I could tell you that. I would share that with you right now. It would be its own episode.

I’d do that one first. But that’s not how it works because every state’s a little different. I can tell you generally what to do, but it may or may not work depending on where you are. So ’cause I’d love to get you a rule like, if the driver owns a truck, they’re a 1099, or if they have an LLC, they’re a 1099, or if they signed a contract or agreement, they got a 1099, and, or if they got the work comp waiver from the state, we have those in Michigan, but they’re hard to get, then they’re 1099. But there’s no magic piece of paper that does that. It’s the whole totality of the task.

And so, like the IRS has the 20-point test, the Department of Labor has their own measures. You can just get hung up on this so easily. And is that super frustrating? Yes, it is. Would it be nice if we could get better, agreement on what is 1099 and what is W2? Yes, it would be.

You also add the problem, too, of when, I’ll use the IRS here, but it applies to the Department of Labor and all these other places, too. When the, when we make a new tax law, there’s very rarely a spot that specifically applies to trucking, because trucking has its own deal. For example, if they said, if the IRS said, “Well, if the worker cannot work for other people while they’re working for this company, then they’re an employee,” well, then every owner operator would be screwed because that’s right in the DOT laws. So thankfully, in that sense that they’re not, it’s not as clear, but, ’cause you wouldn’t want ‘them to clarify it right there, which with the government that’s probably what they’d do. But there’s a series of things that they look at, and they look at the the totality of it all, and they don’t say, for example, with the 20-point test of the IRS, “Oh, if they have 11 of one,” say, 11 answers that point towards W2, then they’re W2.

That’s not how they do it. It’s how severe they are and which ones matter in that situation. And so I wish I could tell you all that. But state laws generally can be more restrictive. as a rule, but not always, the Republican-leaning states are going to be more friendly to the company, and the more Democratic-leaning states are going to be more friendly to the driver, making them an employee. Just putting that out there. I’m not saying it with judgment, but that’s just how it is.

So the classification needs to be based on the real arrangement that’s going on, not whatever contract you sign.

I mean, and it’s, trucking, man, it’s so hard already.Trucking has arrangements you don’t see in normal businesses. You won’t see, for example, in my office, and we’re not a trucking company, we’re a payroll service for trucking companies, but we have multiple people processing payrolls for our clients. They’re all W2. There’s not like, okay, this person’s W2 and this person’s 1099, and this person’s W2. But in a trucking company, you can look, you can have drivers, this driver’s a company driver, this driver is an owner operator and owns their own truck. This driver is somewhere in between.

They’re lease purchasing. Hopefully it’s done right. I could go on about lease purchase all day too. be careful. Talk to another driver that signed that and got through it okay. Just free advice. you know, there’s all these things, and then here’s a driver that’s actually brokered to us and has their own authority. So you can have, you can have 5 drivers in the room, and they all have different status, which doesn’t happen a lot of other places, and so trucking, it’s a little more complicated to try and do this.

So, and you can’t just change it with a title. You can’t just say, “Okay, well, I designate you as an owner operator. “If only it were so. The question isn’t what you call the driver. The question is what the, what does the relationship actually look like? What is it constructed of?

And so that’s, that’s going to be the big deal.

And I’m not going to tell you every driver has to be W2. I think owner operators should be able to be 1099. I think that, and I’ve not seen it be, California’s the closest thing to having a problem with it. an owner operator owns their own truck and pays for their own maintenance and buys their own fuel. And for example, if they drive a little slower because they left a little earlier, and they save fuel money, that money goes in the owner operator’s pocket, right? Yeah. Great.

They should be 1099. I agree. I would fight for you on that. and a driver who gets paid by the mile and has no responsibility for maintenance, financial responsibility, no financial responsibility for the fuel and how much is used, no, no doesn’t have to make truck payments, all that stuff, they absolutely should be W2. All the people in the middle is where it gets tricky.

So we’re going to spend the next several episodes digging into this. We’re going to talk about how worker classification actually works. We’re going to talk specifically about owner operators a lot. We’re going to talk about some of the myths that I hear from trucking companies. We’re going to talk about what happens when a company gets this wrong, and it happens a lot. And we’re going to talk about how did you get caught if you’re paying 1099 versus W2.

I think that’s going to be my favorite episode because companies think, “Well, the IRS has never audited me. I’ll be fine. “If saying it made it so. So with that, we’re we’re going to get into all these things, and as we go through them and you’re listening to the episodes, you might realize, “Hey, I think we have a problem here. “Well, how do you switch drivers from 1099 to W2, and when should you do it? And how do you make that transition without unnecessarily creating chaos with your drivers?

We’re going to talk about all that because it’s one thing to just yell at the wind about 1099 versus W2, but we want to tell you how to fix it if you feel like you need, it needs to be fixed. And so, you know, with all that, I encourage you to subscribe and like and all that stuff, because that way you’re going to get these episodes right away.

But for today, I want you to remember one thing.1099 versus W2 is not a payroll preference. It isn’t something your driver chooses. It isn’t something your accountant fixes by using a different tax form at the end of the year. It’s a worker classification question, and that classification starts with the actual relationship between your company and the person doing the work. You cannot make someone an independent contractor just by calling them one, and no contract will save you either.

In the next episode, we’re going to start talking about how you actually look to determine whether a truck driver should be 1099 or W2, ’cause that’s where it gets interesting.

Until then, drive safe, and we’ll talk to you soon.