1099 vs. W-2 Truck Drivers: What Does a Driver Actually Cost You? – Season 2, Episode 5

I hear this argument all the time. I can’t afford to put my drivers on W-2. Okay. But have you actually done the math on this? Because there’s a difference between what you pay a driver and what it actually costs you.

There’s also a difference between saving money and simply shifting the cost onto somebody else. A 1099 driver isn’t cheaper just because you stopped calling some of the costs yours. Today we’re going to put some numbers to it.

Welcome to the Driven for Success Podcast. This is the podcast for trucking company owners and executives who want to build a better business, make better decisions, and keep drivers 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.

We’ve been talking about 1099 versus W-2 for the last few episodes. We’ve talked about what the difference is. We’ve talked about what can legally make you a 1099 driver. We’ve talked about some of the biggest mistakes that companies make when it comes to worker classification.

Today let’s talk money. Because everybody says eventually. Yeah, I’m like, that’s great. But W-2 employees cost more. And they’re right, they do cost more.

But the question is exactly how much more?

Let’s start with a comparison. It’s not a good one, but we’ll start with it anyway. Let’s say you’ve got a driver making 70 grand a year. If he’s a 1099 driver, you might look at that and say, My cost is $70,000. Easy peasy, right?

There’s nothing else to it. You wrote him a check and you’re done. If he’s W-2, you’ve got payroll taxes, which include FICA and unemployment. You’ve probably got workers’ compensation insurance. You might have benefits or retirement plans, maybe some paid time off.

And then somebody suddenly says, see, that’s why I pay my drivers 1099.

But we’re already making a mistake here. We’re comparing a tax form to an employment relationship. And as I’ve said throughout this series, a 1099 is a tax form. It is not a business model. I will say it again, spoiler.

And you don’t get to eliminate legitimate business costs just because you change the form you hand somebody in the beginning of the year. The question isn’t whether a W-2 driver costs more, the question is what you’re actually getting for that cost. You focus on gross wages as your cost, and you might see payroll taxes as extra and over and above. But that’s not really how that works. And we’re going to get into it more later in this episode.

But the costs really need to be evaluated against a relationship. It’s not an elective thing to pay somebody 1099 versus W-2. There are rules about it, and you can’t just declare that they are 1099 contractors instead of W-2 employees. Much like in the old TV show, The Office, when Michael Scott declares bankruptcy, if you’ve never seen it, it’s pretty funny. He just runs out in the office and yells, bankruptcy, really loud repeatedly, and thinks that’s declaring bankruptcy.

You can’t just do it. So you it’s really the relationship that matters here.

But at the same time, we’re here to talk about money.

So let’s talk about the first real cost here. FICA. Again, to for people my age that watched Friends when it first came out, when Rachel got her first check. Who is this FICA guy and why is he taking all my money? Right?

It’s the easiest number. It’s Social Security and Medicare. Unless you’re paying your drivers over about $170,000 a year, that’s going to be 7.65% on the wages. 6.2 of it is Social Security, 1.45 is Medicare if you really need to know that. But on $70,000, that’s $5,355.

It’s a lot of money. It’s over $100 a week. Right? The employee has that withheld, and then you have to match it. And that’s before we even get to unemployment or workers’ comp or benefits or anything like that.

You’re already over $75,000 on paying them $70,000. It’s real money, right? $5,000 a year plus. It’d be disingenuous to pretend that that doesn’t matter. So it does matter.

It’s $5,000, especially when you scale and you’ve got 20 trucks, that’s $100,000, right? Over that, actually. But notice something, we’re not at $90,000 from the $70,000 we paid, and we’re not at $100,000 from the $70,000 we paid the driver. We added $5,000. And if that worker is legitimately self-employed, those Medicare and Social Security taxes, they don’t magically disappear.

It’s not like that the government doesn’t get the money. Just who pays them changed. Because a self-employment person has to pay both sides of the self-employment tax. FICA is really 15.3%. It’s not 7.65%.

The difference is the employer pays half and the employee pays half. When you’re self-employed, you pay both sides. And so, yes, you get some expenses against it potentially, and I understand all that. However, you’re really putting more of the burden on the driver than you are on the company, like it’s supposed to be in that case, if the driver is really an employee. 1099 doesn’t make Social Security and Medicare taxes disappear, it just changes who pays them.

It’s hard because a lot of people too won’t realize it till the end of the year. And they’ll be like, yeah, well, I’ll be paid 1099 and they get this huge tax bill at the end of the year when they go see their accountant or CPA, or they go you buy TurboTax or whatever. And all of a sudden they’re like, Well, I made 70 grand. Okay, I had 20 grand in expenses I can write off. That leaves me 50 grand in profit.

Great. I’ll pay tax on 50 grand really isn’t that much. I’ve got a couple of kids or whatever. But the self-employment tax on that is, right? That’s 15.3%, which is $7,650 they got to pay at the end of the year when they thought they weren’t going to owe much of anything.

That’s a bad day. And that’s the day they’ll usually come back to you. We’re going to talk about in another episode of how companies get caught. This is one of the ways. So keep that in mind.

Now we’ve got unemployment tax. You’ve got federal unemployment, you’ve got state unemployment. Federal unemployment, generally, if you’re compliant with your state stuff, is 42 bucks a year. It’s six-tenths of a percent of the first $7,000 in wages, if you want to nerd out on this, like we do. But I always think of it as just $42 a year because every driver that works for you in more than a couple months is going to make that, right?

So $42 a year in employee. State unemployment really varies. Much like your insurance, it’s your experience that sets that number. A good working number for what we’re talking about here is about $300 a year. It moves around again.

Some are higher, some are lower. Some pay a higher percentage on a lower wage number depending on the state you’re in. Some pay a lower percentage on a higher number. Again, different states do it different ways. In Michigan, a new company pays 2.7% of the first $9,000 in wage.

So that’s a little that’s less than $300, but other states pay more. So and your experience rate matters. If you’ve had a bunch of unemployment claims that got paid, your rate’s going to go up and you’re going to pay more on everybody, which stinks. And also, part of this too is besides that cost, if everybody that works for you is 1099, which again, that’s a horrible idea, especially if you have office people. The office people, there’s no planet on which they’re 1099.

But let’s say somehow for you they are. You also have the cost of filing all these forms and keeping track of it all, quite honestly. That’s additional cost, too. It’s not so big that you’re it’s going to change the decision, but we don’t do payrolls for free. So, and we’re the ones who would do that for you.

So I get it. Like that’s additional cost, you have to pay us. If you had five people working there, it’s 60 bucks a week. If you have 25, it’s more than that, obviously. Less per person, but more in total.

So I don’t want to pretend that it doesn’t cost you money because it does.

But let’s talk about a different way of thinking about this. Why does unemployment insurance even exist? It’s because employees can lose their jobs for reasons that aren’t their fault. And you’re paying into a system that provides some protection for the employees when that happens. You can look at it as an expense, but it’s really part of the employment relationship.

And it comes down to a central theme too, which is, again, part of how you get caught, is employees have rights that contractors don’t. And that’s where all these expenses come from. The employees have the right to file for unemployment if they get let go. The employment, the employees have rights for that you’ve got to pay the Social Security in for half of it. All the other costs we’re talking about, it’s why that’s the difference between contractor and employee, because the employees get to get, they have to get these things for the most part.

We’ll talk about the ones that are optional, but a contractor, you don’t do any of that for. And so it’s part of being an employee. So think of it this way: some of the savings from 1099s are really just costs and protections that you’ve shifted away from your company and onto the employee.

Think FUTA, by the way, FUTA versus SUTA, a quick sidebar. FUTA is federal unemployment, SUTA is state unemployment. State unemployment is where all the claims get paid from, and that’s why your rate changes. FUTA or federal unemployment is really there to provide money to the states when they need it for because there’s been too many filings. When we’ve had economic downturns, I think especially in 2008, we had that economic downturn, and the federal amount the federal government provided money to the states to pay unemployment claims, and that’s what the FUTA is for.

But again, that’s $42 a year. So it’s not a huge deal. It’s honestly it’s a little bit more of the filing and the administrative burden than it is the actual money on that one. But it’s still $42 an employee times 20 employees, $840, right? It’s almost a thousand dollar bill, plus the $300 per driver.

It all adds up. And I think it would be naive of me to suggest that it doesn’t, because all these costs are real.

Now let’s change the math a little bit. I’ve done a series of webinars on there, or webinars and podcast episodes on this. Trucking isn’t like other industries because we have per diem. And you can look at listen to those old episodes. Uh $80 a day can be converted from wage into expense by paying per diem.

So what that does, because we’re the expense part, isn’t subject to all these things we’re talking about. So the payroll tax lowers and the unemployment tax can potentially lower, even though I never figured that in the calculations, because I figure they’re going to get to $7,000 in wages and they’ll probably get to your wage limit in your state anyway. But even just the work comp that we’re going to talk about in a minute and the FICA tax, that’s a huge savings. If you can pay $15,000 a year in per diem, which is easy to do for a driver that’s over the road full-time for the year, that $70,000 in wage becomes only $55,000 in wage. And so the Social Security and Medicare match goes from $5,355 down to $4,207.50.

So you save very nearly $1,150 right there per driver. It’s a huge savings. Plus, you’re going to save on WorkComp as well to whatever your WorkComp rate is. So those are huge savings. And my point of it is we’re it’s not may not be as bad to pay W-2 as you think it is.

It may not be as expensive because now we’ve already cut 20% off that cost just by paying per diem. And the driver gets more of the money in their check as well. So there’s wins on that. Listen to the old podcast episodes. Quick plug, go subscribe.

But those you can see it all right there about how it works. And you can see that you can lower your cost on the conversion here when you’re thinking about how much is a $70,000 paying a driver $70,000. How much does that cost me? Well, we just cut the cost by 20-some percent. You know, and per diem, you can’t pay it to a 1099.

They would they would claim it themselves on their tax form if they were a legitimate 1099 on their Schedule C. But per diem doesn’t make your driver a 1099, it makes a properly paid W-2 driver a little less expensive for you. And so I think that’s great. No, they got to do it themselves. And so that’s it’s important that they they realize that and that the drive, and if you’re a listen to this, you’re an owner operator, man, you should be taking per diem on your tax returns.

Uh if you’re a Schedule C, right in the meals and entertainment. If you are an S Corp or something that pays you a W-2, you pay it through the W-2, that’s the way to do it. So, you know, you hear these things and the people are looking at payroll taxes and they’re going, I can’t afford all that money. You’re just spending all the money I don’t have. But maybe the answer isn’t misclassifying the driver.

Maybe the answer is structuring the W-2 compensation right and doing things like paying per diem to make it more affordable for you. If you’re using a 1099 excuse to pay payroll taxes less, you may be taking a huge legal risk to save money. Credium could have saved most of it for you anyway. So, what I’m trying to say here is if you’re paying 1099 specifically to not pay payroll taxes, you can still be legally compliant and lower that bill by 20 or 30% very easily, and be compliant with the law and sleep better at night. Again, we’ll talk in another episode about how you’re going to get caught, but if you pay W-2, you don’t have to worry about it.

Per diem does not eliminate the entire payroll tax. Let’s be clear about that. Typically it’s about a third. Depends on how well the drivers get paid, and also depends on what the IRS does with per diem rates because at the end of September here, they’re going to announce rates that start October 1st, and they may change them or they may not. Given inflation, I bet they’re going to change them, but predicting what the government’s going to do is a folly.

So don’t make your plans based on what I just told you. Uh absolutely. Per diem doesn’t fix all these things, and I think it’d be ridiculous to claim it. You’re still an employer, you still have employer costs, and your driver has to qualify for per diem, and you have to administrate it right. Absolutely true.

It’s all doable, but you still have to do it. You can’t just take somebody’s wages and call part of it per diem and assume that you’re good. But when it’s done right, you can save a lot of money. Well, drivers that don’t leave the city don’t qualify. The drivers need to travel away from home.

There’s all these requirements. We’ve gone through them in previous podcast episodes. So listen to those or reach out if you’ve got questions. That’s fine too. Go to our website, truckingpayroll.com.

We’ve got a per diem page, we’ve got blog posts about per diem, we’ve got all these things. And if you can’t find what you’re looking for, just ask. We’re going to point you in the right direction because we want to help you.

Now we’re coming to another big variable: workers’ compensation insurance. This can be substantial. This used to be about 15% of wage back when I got into this, and it’s not that much now, but it’s still a lot of money. It’s also one of the reasons that, quite honestly, people $10.99 instead of W-2. They think that I don’t want to mess with the workers’ compensation insurance.

Because a claim with a worker’s comp claim with a driver is usually significant. A claim for an office person might be the equivalent of a paper cut. Might be they turned an ankle walking in the door or something like that. A claim for a driver is usually involving an accident, and it’s usually a hospital visit and it’s usually rehab. So when a not a lot of claims can really change your rates quickly.

So even if it starts at a number that you can live with, you get a couple accidents, that number is going to go up, and you don’t want that. I get that. But if you’ve got an employee driving your truck and the unemployee gets hurt, that’s exactly the risk that workers’ comp insurance exists to take care of for you. Now you compare that to a legitimate independent contractor. That business has expenses, they have insurance and equipment and maintenance and taxes and risk.

So potentially occupational accident coverage can help the situation, but the driver would pay for it in those cases. And occupational accident is not the same as worker’s comp. It’s similar, but it’s not exactly the same. Those costs didn’t disappear for making sure the driver has coverage in the event of a workplace accident. They just moved from you as worker’s comp to the driver as occupational accident.

So keep that in mind. Again, also spoiler, that’s going to be one of the ways things go sideways with you, is one of these claims. But a real independent contractor has business expenses because they’re actually running a business. That’s completely different from here’s my truck, here’s my fuel card, here’s where you’re I’m going, and I’m getting paid 60 cents a mile. Oh, and by the way, you’re a contractor.

We’ve talked about it before, I’m not going to dwell on it too much, but you can’t do that. And workers’ comp rates can vary significantly. If you’ve got a good, what they call loss run, means you can you don’t have high dollar claims or frequent claims, your rates go down. And so it can be cheaper, which by the way is better for you too, just as an aside, because you want you it’s hard enough to hire drivers, you want to be able to work, and when they’re on workers’ comp and they’re laid up, we recovering from an injury, they’re not working. And that’s just another driver you’ve got to find.

So there’s lots of other benefits to keeping your drivers moving in the safe safety culture, let’s call it. Look right over my shoulder here if you’re watching the video, the cost of safety, right? There’s also the cost of being unsafe, is really what it is. The cost of safety is nothing compared to the cost of not being safe.

Now we’re going to talk about benefits. It’s where the comparison gets distorted. People will say, well, I’m paying no W-2, I got to get health insurance at 401(k) and paid vacation and holidays and so on and so on and so on and so on. Not necessarily. Being a W-2 does not automatically mean that you have to get a giant corporate benefits package.

If you’re under 50 employees, you’re not even subject to the Affordable Care Act, also known as Obamacare. So there’s different laws that may depend on your circumstances. And if you’re over 50 employees, you’re an applicable large group and all those things, right? But it also doesn’t mean that you have to pay for all of the health insurance. You just have to make it affordable, which means you’ll probably pay for some and the employee will pay for some if they choose to opt in, which some don’t.

So it’s not really that you have to offer them benefits.

Now let’s talk about what you really offer, though. Do you offer benefits now to your W-2 people? Well, then you got to count that number. Do you offer a retirement match? Quick thing, driver retention tip, offer retirement plan to your W-2 people with a retirement match.

Cheapest way to keep people, usually, if it’s a 401(k) plan, it has to vest over a number of years and the drivers will stick around to get that. Also, the drivers that know what that is are the ones that you want because they’re the ones who think long term instead of jumping around from place to place. End of sidebar on that. If you offer paid time off, those go into your numbers because you’re going to offer that to the drivers. But don’t build a fake W-2 cost just to justify the 1099 decision you’ve already made.

It is a common thing for people, just being human beings, that they will make an emotional decision and then try and use numbers to back it up. It’s as old as forever, it will continue to go on. It’s why people buy some things they don’t need and then justify to themselves, and I’m no different. I know I’ve done it too. But let’s not build fake costs here.

You don’t need fake costs. You have real costs already, and we’ve already known that the number’s significant. But again, it doesn’t matter because it’s the relationship that defines what tax form they get paid on, not the cost of it. Because it, you know, if they’re an employee, they got to be W-2. And there’s definitions about employees, and we’ve talked about it in other episodes.

So I will move on. Just don’t add numbers in, you don’t need to add in.

Now I want to look at this from the other side. Say you’ve got two people who can do the same job. One is going to be a W-2 employee, the other is legitimately operating as an independent business somehow. Would you expect them to charge the same amount? Probably not.

Because the contractor has things to cover, the employee does not. That’s why comparing a $70,000 W-2 employee to a contractor, you also pay $70,000 is really a bad way to do it. If I’m in business for myself, number one, I’m going to price my services based on my costs as a floor. My taxes, I got to pay. My insurance, my risk.

If I’m supplying equipment, my downtime, my profit, that’s how businesses work. The cost has to be at least enough for me to make money accounting for all those things. And especially the risk, and the taxes are known, the insurance is known, the risk is a real thing, even if we can’t put a number to it. So that’s it’s the reason that, for example, your CPA firm that does your income tax charges you more an hour than if you hired a CPA to work for you. Right?

There’s other costs in it. It’s the same thing with truck drivers. So if I’m an owner operator with my own truck and my own insurance, in my own expenses. Expenses, I’m not going to take the $70,000 job that you’re offering to W-2 for $70,000. It’s going to be $85 or $90, because I’ve got to cover all those other expenses and I’ve got risk.

And that risk needs to have reward. I tell owner operators when I talk to them all the time look, you should be making more than you would get paid as a wage to be an owner operator because you have risk. Because your truck could break down and it’s going to set you back pretty good because loads could dry up and you still have that truck payment. You should absolutely be making more money as a contractor with risk than you should without it. If your 1099 driver can only compete with your W-2 driver by ignoring his own business costs, you don’t have a cheaper business model.

You have a driver who hasn’t done math very well. And that’s never going to be a long-term play for you. That driver’s going to figure it out, or that driver’s going to, you know, let’s say they’re leasing a truck from you, set up a company to lease them a truck to make it look more legitimate. They’re going to stiff you on the lease at some point or leave you the truck in disrepair. And you can sue them and you can get a judgment, but you still got to collect a judgment.

The money’s no good until you collect it. So the driver and the driver’s going to feel scorned by you, and the a lot of courts are going to be sympathetic to the driver because the driver’s going to come in and say, I got set up on this. I never wanted to do this. In fact, I should have been an employee in that. Again, there we go, right?

Now you’re in it. You don’t want any bit of that. You know, I think the part that gets lost here is the truck doesn’t actually care what tax form you use. What does your trucking company actually need? You need the truck move, you need the load delivered, you need someone dependable, you need someone who takes care of the equipment and represents your company well.

You need to find somebody who isn’t consistently leaving you with another driver to find. That’s the value you’re buying. The tax classification from the relationship you build around that work. It shouldn’t be the starting point. You should design the driver relationship your business needs and then classify it correctly.

Don’t start with the tax form and build backwards.

As an aside, a hidden cost of the W of the 1099 people, especially the ones that you just pay them by the mile. A hidden cost is that if they insist on being 1099, it’s possible that they’re running from another obligation, a tax bill, a child support, a credit card, whatever it is. And by being 1099, because you don’t have to report the new hire and things like that, they aren’t going to be found nearly as quickly. So if you if that’s the case, or they don’t want to pay tax at all and they’re not filing income taxes, which means they’ve already broken their covenant with society as far as we don’t have to like taxes, but we do have to file income tax returns. That is the law.

So same thing with the credit card bill that they didn’t pay, or the car loan they didn’t pay, or the child support that they’re really behind on, because their ex screwed them over or whatever story they have. They don’t want to take accountability for it. Right? That driver is going to be the same driver that feels like you should have paid them detention 50 bucks and you didn’t. So when they get to the truck stop, they’re going to find somebody else who clearly owns their own truck and say, hey, how about I splash 40 gallons of diesel into your truck from my gas card from my company, and you just give me a $50 bill.

And I’ll just act like I just got bad mileage for some reason. They’ll never notice. The self-justification trap is huge and it happens, and it happens more with 1099s. I see it too often to even, it just happens all the time. And so you really want to be careful with that.

A W-2 is less likely to do it because they are fulfilling your obligations to the government and to all the other people who might find them when they realize that they work for you.

So let’s come back to our original question. What does a truck driver actually cost? The answer isn’t the wage, it isn’t whatever numbers on the 1099. For a W-2 driver, you’ve got wages, you’ve got payroll tax, including unemployment, you’ve got workers’ comp, you might have benefits. But if the driver qualifies per diem, don’t forget that either, because total compensation and taxable wages are not necessarily the same number.

And it can make a meaningful difference in your employer costs. And if it’s truly an independent contractor, you’ve got the price that the independent business charges you. And if it’s really that business, that price needs to cover their expenses and leave room for profit, just like you do. These are two different relationships, and they should be priced differently. What I don’t want you doing is saying 70,000 W-2 versus 70,000 driver, look, I saved all these taxes.

Hooray for me. It’s not a serious cost analysis and it’s not representational of what’s going on. That’s looking at one side of the transaction. The cheapest number on the payroll report is not necessarily the cheapest way to run your trucking company, especially in the long term. And I know that for trucking, there’s a short-term need all the time.

I understand that and I don’t want to devalue that. However, if you can think a little farther ahead, it’s just planting seeds that are going to harvest in the future and make your life better.

If you’re trying to decide between 1099 and W-2 because you’re looking for the cheaper option, you’re starting in the wrong place. First, figure out what the relationship actually is. Is this person operating an independent business? Or are they driving your truck as part of your business? Once you’ve answered that, then figure out what the relationship costs.

Use real numbers, use your work comp rate, use your unemployment rate, use the actual benefits that you offer, use the compensation to actually have to pay to attract the driver you want. And if your drivers qualify for per diem, you can include that too. Because yes, W-2 drivers have employer costs. Absolutely, 100% real. But 1099 doesn’t create a magical version of trucking where these costs cease to exist.

And there’s one cost we haven’t talked about today. What happens if you decide W-2 is too expensive and you pay the drivers a 1099 anyway, and then the IRS, the Department of Labor, or your state or somebody else decides that driver was actually your employee. Because now the math gets very different. And that’s what we’re going to talk about in the next episode.

There’s nothing wrong with wanting to lower your driver cost. There is something wrong with pretending a tax form did it for you. I’m Mike Ritzema with Superior Trucking Payroll Service. Thanks for listening to Driven for Success. We’ll talk next week.