Should your truck drivers be 1099 or W-2 employees?
There are a lot of factors to consider when it comes to employee classifications, and truck drivers are no exception. So the question is, should truck drivers classify as W-2 or 1099 employees? The answer is not always so black and white, but there are some general guidelines that can help you make this decision as the business owner. In this blog post, we will cover some of the advantages and disadvantages of both W-2 and 1099 employment for truck drivers. We will also provide some tips on how to make the right decision for your business.
What is A 1099 Employee?
A 1099 employee is one person or an entire company that you hire to do a specific job for your business. The job and all its parameters/requirements, such as pay rate, time frame and contract length would be covered in a contract that you and your 1099 employee sign. This is often why 1099 employees are referred to as contract workers. In trucking specifically, the 1099 employee would be classified as an owner-operator or independent contractor.
Here are some advantages with utilizing 1099 employees for your trucking company.
- Simplified taxes. With 1099 employees, the responsibility of paying taxes each year falls on the employee, not the employer. As the employer, you would only need to provide a 1099 tax form that shows the employee’s earnings for the tax year.
- Lower business costs. When a company’s employees are 1099, employers do not have to provide benefits. Cutting costs in benefits like health insurance can be especially beneficial to newer companies that are still getting established and might not have the full ability to provide coverage just yet.
Another business cost that can be reduced in certain scenarios are equipment costs. When working with some owner-operators, they will supply their own trucks and trailers for hauling. If the equipment were to go down and need repairs, the owner-operator would be responsible for the repairs instead of you (this all depends on the contract terms of course). However what needs to be mentioned when utilizing owner-operators and their equipment is the employer will still need to pay insurance to cover the drivers operating under their companies authority.(Of course this is worked out once again in the contract and leasing agreement.)
- Greater staffing flexibility. Using 1099 employees allows employers more control in the hiring and letting go of workers. In the trucking business the amount of work can fluctuate often. Having more leeway in how many employees you keep on can be a great advantage here. With independent contractors you hire them for just the specific job and after the job is finished you are not financially responsible for them anymore. This also can save money, no more paying employees when there’s no loads to haul.
Here are some disadvantages with utilizing 1099 employees for your trucking company.
- Bargaining and Higher Payouts. 1099 positions generally cost more to fill. Their contracts often come at higher costs compared to a W-2 position. This fact is because 1099 employees typically have more power over their pay. They can often negotiate their contracts. This can be very beneficial to the employee but more of a disadvantage to the employer.
- Less Loyalty. When using 1099 contracted drivers there tends to be more turnover with your drivers. Due to the contract nature of 1099 work, drivers can finish their contract and then move on to a potentially better opportunity/contract. This can be a disadvantage to an owner because they may have to spend more time finding new independent contractors or owner operators to fill contracts. They also may not be able to count on employees for the long term.
What’s the Difference Between an Owner-Operator and an Independent Contractor?
When it comes to Owner-Operators and Independent Contractors there are a few key differences on how they operate. One difference is in the title. The title of Owner-Operator is more of a trucking industry term while Independent Contractor is more of an IRS term and used for taxes. A more important difference is Owner-Operators generally own their own business. This can mean they have the ability to operate under their own authority if needed. Meanwhile, Independent Contractors are typically drivers that cannot operate under their own authority so they drive under another contracted company’s authority. Independent Contractors also often have to lease equipment from the company where Owner-Operators supply their own equipment. In the end, both are self-employed and are not direct employees of the company they are working for. They both are responsible for their own taxes and typically work on a contract basis.
What is A W-2 Employee?
In a simplified phrase a W-2 employee is “an employee who receives a W-2 form from their employer”. This W-2 form mentioned is used to report an employee’s annual wages and taxes withheld by the employer. A W-2 employee is typically someone who works for a company on a full-time basis. Their work is not contracted like that of a 1099 employee but more permanent. The employees also have an agreed upon wage and receive company benefits. In the trucking industry they often carry the title of “company driver”.
Here are some of the advantages of utilizing W-2 employees for your trucking company.
- Loyalty/Reliability. More times than not. W-2 employees are more reliable than 1099 employees. Data shows they are less likely to quit without notice or miss deadlines. This may be due to the fact that they receive more benefits than 1099 and their pay is more steady. Also they tend to meet deadlines more often due to being more supervised as direct hired company drivers.
- Work Assignment Ease. Having company drivers can help bring ease to fulfilling load contracts and assigning work. Having W-2 employees readily available can help expedite the process of getting a driver lined up for a load. Compared to working with 1099 employees, there often is an extra step of contacting the driver, signing the contract, then getting them on the road.
- Control Over Pay. W-2 employees generally do not attempt to negotiate pay as often as 1099 employees. When working as a W-2 employee the wages are set and agreed upon. 1099 contracts can sometimes come with wage negotiation depending on the load. Simply put, you will not have to negotiate what you pay out as often.
Here are some of the disadvantages of utilizing W-2 employees for your trucking company.
Taxes. As the owner, you will be responsible for withholding taxes. For each W-2 employee you will have to withhold medicare and social security taxes as well as pay payroll taxes for each one. This will come with more paperwork and administrative work and may require your company to hire a payroll solution.
More Costs. Your best employers that retain drivers typically offer a benefits package. These benefits are what attract a lot of drivers to these companies. However, these benefits you may provide will cost your business some money. As the owner you will have to make the decision if this cost is worth covering to attract future employees. Another cost to business owners is insuring your drivers operating under your authority. Just like owner-operators driving under your authority your company drivers will also need to carry insurance while on the road. One key difference with insuring 1099 and W-2 employees is with 1099 drivers you can negotiate a percentage of the total payout to go towards insurance costs. For example you can take the total payout from delivering the freight and negotiate it where 75% of the pay goes to the owner-operator and the other 25% goes to insurance premiums and your other business costs.
So Which One is Best For Me?
In this post we highlighted the differences between 1099 employees and W-2 employees and provided some of the advantages and disadvantages for both types. As the business owner the best way to decide which is best for your business, 1099 or a W-2 employee, is by sitting down and creating a business plan. The plan should include both short-term and long-term goals for your business. Using this business plan it should then become easier to pick the type of employees that helps your business grow and flourish. That being just W-2 employees, just 1099 employees, or a mixture of the two.
After you decide which type of employees are right for your business, you may find that your next step might entail finding a great factoring company to back you up and help you reach your business’s full potential. Utilizing a factoring company like Provident Commercial Finance is a great way to ensure you get your money when you need it most.
What do you think? Share your thoughts below!
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