Treating employees as independent contractors is probably one of the most common and potentially most expensive mistakes made by owner/operators. When you hire a co-driver odds are he or she is an employee not and independent contractor. The rationale for treating an employee as a contractor is simple. It’s less expensive and less complicated to treat an employee as an independent contractor. If they’re an employee you not only have to withhold taxes but you also have to pay half of their social security and Medicare payments, pay federal and possibly state unemployment insurance and take care of all the paperwork that is associated with those taxes. But failure to take care of these issues can be expensive. If the IRS determines that the person is an employee and not an independent contractor you become liable for all taxes you didn’t pay as well as penalties on them.
This same issue can arise with drivers when you hire a driver to drive your truck. Let’s say you’re an owner/operator and you purchase a second truck and hire a driver to drive it for you. There is a thin gray line between an employee and an independent contractor and if he’s operating your equipment he’s already got one foot over that line. Whether the other foot is also over the line or not is probably a decision for your tax professional to make for you. If you do not have a tax professional you should either get one, or submit your situation to the IRS in writing and get a written ruling from them stating that your driver is or is not an employee.
The IRS does have some guidelines to help you decide whether a person is an employee or independent contractor. I will just give you a summary of their rules here and I recommend that everyone get a full copy of IRS Publication 15-A and review it for more detailed information. Basically the IRS states that “The general rule is that an individual is an independent contractor if you, the person for whom the services are performed, have the right to control or direct only the result of the work and not the means and methods of accomplishing the result”.
It can be hard to lay down an iron clad rule about this as every operation is different, but generally a co-driver is not going to meet this definition, and a driver operating your truck probably runs in the 70/30 range with the 70 being on the side of being an employee. There are some other hints we can get from the IRS publications. The following short list of tests from IRS Publication 15-A relate specifically to the instructions that you as the business give to your co-driver or driver. These are all considered things which a business would do with an employee. So if, as the employer you tell your driver or co-driver:
When and where to work.
Co-driver: unless the co-driver is picking the loads and setting the work schedule you are definitely telling them when and where to work.
Driver: this may be a little grayer area with a driver, but unless you gave the driver the truck and turned him loose to find his own company to lease on with or find his own loads, he is probably an employee. If you have your truck(s) leased on to a company, then you have definitely told him “where to work”.
What tools or equipment to use.
Co-driver: again you are providing the tools and equipment – your truck.
Driver: the same answer applies
What workers to hire or to assist with the work.
Co-driver: this test is a little grayer, but could be applied to the use of lumpers. Do you tell your co-driver whether they may or may not use Lumpers? If you do then they meet this requirement for consideration as an employee.
Driver: if the driver is free to hire Lumpers when he/she chooses then they would not be considered employees under this test. If on the other hand you tell the driver when you will and will not pay for Lumpers then you are treating them as an employee.
Where to purchase supplies and services.
Co-driver: these are generally not decisions a co-driver makes. If you determine where to stop for fuel and repairs then the co-driver is an employee under this test.
Drivers: if the driver is free to purchase fuel and obtain repairs wherever they choose then they’d be independent contractors under this test. If you tell them where to fuel, even if it’s just what chain to use, then they would be considered employees.
What work must be performed by a specified individual.
Co-driver: generally you decide the shifts, what the duties of the co-driver are, etc. so under this test the co-driver is an employee.
Drivers: this is again a gray test, but if you dispatch your drivers the act of dispatching them could be considered qualifying them as employees under this test.
What order or sequence to follow:
Co-driver: again the co-driver is clearly under your direction here and so should be considered an employee.
Drivers: here’s another gray test, but again, the act of dispatching the driver could be considered telling them what order or sequence to follow.
While I realize that you can probably argue with the points above the goal of this article is not to lay down definitive rules for you to follow. The goal here is to simply make you aware of the tests that will be applied by the IRS should you be chosen for an audit. It is easy to come up with your own justifications for treating an employee as a contractor, but if you recognized even one item in this list that applies to the way you do business, you need to reexamine your thinking and be sure that it will stand up to scrutiny by the IRS. Failure to pass their test could result in putting you seriously in debt and possibly out of business.
