Tax Tips
Employee vs. independent contractor (and competiotion)

By Howard Abrams, PBS Tax & Bookkeeping

Q. I received a call from an owner-operator who currently is a client operating one truck. He asks, “I have plenty of business and want to expand. I want to add a truck and driver, and I want to pay him as an independent driver and issue him a 1099. Is that possible?”

A. That may not be legal in the eyes of the Internal Revenue Service. For truckers, the issue of independent contractor is a constant one. The determining factor is whether the employer has the right to control not only the result of the worker’s service but also the means by which the worker accomplishes the result.

Currently, the IRS uses a 20-factor test to determine whether a worker is in fact an employee or an independent contractor. The test would be satisfied if the worker has a significant investment in the equipment; will incur significant unreimbursed expenses; agrees to perform services for a particular amount of time or to complete a particular result; and is paid on a commission basis.

The services to be performed by the worker must be performed pursuant to a written contract between the worker and the employer. The contract should provide that the worker would not be treated as an employee. As further evidence, the independent contractor should be using their own equipment.

In your case, the driver is driving your equipment and that alone classifies him as an employee. 

Q. My problem is my competition pays their drivers as independent contractors even though they are driving my competitor’s equipment. That puts me at an unfair disadvantage since I have to incur more costs by treating my driver as an employee. Is there anything I can do?

A. If you can show that a significant segment (at least 25 percent) in your industry are paying employees as independent contractors you should be able to do so also.

Q. What else would I need to do?

A. The IRS offers relief provisions in addition to the competition issue. You may also prevail if you can find a related court case or IRS ruling. Or if you were previously audited for employment taxes when you were paying workers as independent contractors and there was no reclassification of workers.

In addition to one of the above, you are entitled to treat a worker as an independent contractor if you have filed all federal tax returns including 1099s on a consistent basis and you have not treated this worker or any others performing similar work as employees.

When in doubt as to whether you should classify a worker as an independent contractor, first request a ruling from the IRS and save yourself from future headaches.

Caution: The above may provide some support for the numerous questions we get in this area. However, do not rely on the above to justify your employee being classified as an independent contractor. You still must have a set of circumstances to support paying someone as an independent contractor. Be certain. Avoid huge penalties. LL


This article is written by PBS Tax & Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter-century. If you would like further information, please contact PBS at 800-697-5153 or visit their website at pbstax.com.

Please remember everyone's financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.

March/April
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