It’s a tempting offer.
A “job,” but it’ll be paid on a 1099. You’ll be an “Independent Contractor” but you’ll be driving their truck. The best part? No deductions from your pay for taxes, “benefits” or anything else. You keep what you earn.
What does being an independent contractor really mean?
The part that is easily forgotten is that operating as an independent contractor means you’re starting and running a business. You’re now responsible for the things your “employer” isn’t providing for you. And, the whole arrangement may not even be legal.
The IRS will get its share
While the idea of no taxes being taken from your pay check may sound appealing, the IRS is going to get their due. You get to write off your allowable expenses, but since you don’t own the truck, you can’t claim those expenses. You’ll also be responsible for Self-Employment tax.
Self-Employment tax is your usual Social Security and Medicare tax, with one important difference. When you’re an employee, you pay 6.2% of your income for Social Security and another 1.45% for Medicare, a total of 7.65% of your pay. These deductions are listed under F.I.C.A., which stands for the Federal Insurance Contributions Act – the law that set it all up.Your employer pays an equal amount that is credited to your account. But when you’re an Independent Contractor, you are employer AND employee, and you’ll pay both shares. That’s 15.3% of every dollar you earn, before income tax is calculated.
You won’t get a good deal on Income Tax, either. The owner of the truck can write off costs for fuel and maintenance, tags and permits and other expenses. The owner can also claim depreciation, the reduced value of the vehicle as time passes. Your allowable expenses will be much lower. Without those deductions, you could find yourself paying a higher percentage of your income in taxes.
What about “benefits”
You’ll be responsible for your own benefits, too. Government controlled benefits like unemployment insurance may not be available to you if for any reason you lose your job. You may also lose some protections under government offices like the Department of Labor or the Equal Employment Opportunity Commission (EEOC).
Worker’s Compensation is a valuable benefit that employers are required by law to provide. If you’re hurt on the job, your medical treatment is covered and you may qualify for some payment to replace your income while you can’t work. As a 1099 worker, you won’t qualify for this, either. In some jurisdictions, you may be required to purchase your own policy, or an Occupational Accident (Occ-Acc) policy.
Personal or family benefits become your responsibility, too. Unless you have a spouse that provides benefits like medical, dental and vision through their employment, you’ll need to purchase coverage for yourself and your family – or go without coverage.
You’ll be one illness or accident away from bankruptcy.
Employers usually offer short and long-term disability plans. You’ll need to buy your own. Life insurance is often offered for free by employers, who sometimes offer additional amounts of coverage for reasonable rates. Again, you’ll be on your own.
In some cases, drivers have a spouse or family member that provides benefits to the family. Sometimes, they can have additional state and federal income taxes withheld from their pay to help offset taxes that will be due later from the Independent Contractor’s business. It’s an arrangement that can work out well for some, but it can also result in financial disaster if it isn’t managed well.
Of course, a goal of running any business is to use as many deductions as possible to reduce taxable income. Since Income Tax and Social Security Taxes are based on your income, it makes sense to use every expense you can to reduce the taxable amount. If you receive a part of your pay in cash, that’s even better, since there’s no record of taxable income. The practice is illegal, but what the IRS doesn’t know…
Social Security benefits, including disability payments, are calculated based on your reported earnings. When you accept cash payments or use deductions to minimize your tax liability, you may well be decreasing your future Social Security benefit payments. Millions of Americans depend on Social Security for their day-to-day needs once they reach retirement age, or earlier if they are disabled.
The reality of 1099 “employment” is that the costs for everything an employer provides, in whole or in part, passes to you as the business owner. If your revenues (income) are high enough to pay these costs with enough left over for a livable wage, you’re probably engaged in a worthwhile business. For too many drivers, however, paying for these benefits would bring the pay to an unacceptable level, so they choose to do without them.
That’s trading risk for cash. It can work, temporarily, if nobody gets hurt, no one gets sick, everything goes perfectly, at least until tax time. Unfortunately, when a family is involved, things don’t always go so smoothly. Kids get hurt. Spouses get sick. Drivers get injured on the job. Life happens. So do taxes.
At tax time, potentially higher income taxes and self-employment tax can take an unexpected bite from the family budget. Borrowing or using credit cards puts you further in debt, but may be your only option to pay up. Failing to pay only adds interest and penalties, and you’ll be squaring off against the country’s largest bill collector, the IRS. You may also find yourself paying penalties for not making quarterly estimated tax payments.
There are undoubtedly drivers and truck owners that are perfectly happy with a 1099 arrangement because their individual circumstances make it work out for both. Before you agree to such a deal, however, it’s important to consider what employment benefits you won’t be getting and how you’ll replace them. Remember, the truck owner isn’t offering a 1099 arrangement because it’s better for you.
It may seem like an opportunity to increase your income and other aspects of the “job,” like the equipment or routes may seem attractive.
Choose wisely.
Cliff Abbott is an experienced commercial vehicle driver and owner-operator who still holds a CDL in his home state of Alabama. In nearly 40 years in trucking, he’s been an instructor and trainer and has managed safety and recruiting operations for several carriers. Having never lost his love of the road, Cliff has written a book and hundreds of songs and has been writing for The Trucker for more than a decade.
