Truck Driver Advice: 1099 or W2?
Do you want to become a trucker? If yes then you need to know how to choose between 1099 vs “W-2”? In this article, you will find out about “W-2” employees, how it is different from those who use the 1099 form to file their tax return and the tax benefits for truck drivers.
1. What is a “W-2” Employee?
The “W-2 employee” is a truck driver that the trucking companies hire after agreeing to pay a fixed sum of money weekly/monthly. “W-2” employees get a consistent salary along with other employment benefits.
The employer is required to withhold social security and medicare tax from their salary. They are liable to pay payroll taxes for all the employees.
“W-2” employees receive a W-2 form from their employer. It contains the total amount of taxes deducted from their salary for the 12 months. The employer and the employee make an effort to ensure that their collaboration is long-lasting.
2. Is “1099” the Same as a “W-2”?
No, 1099 is an income tax form for truck drivers to report non-employment income. It is used by truck drivers who work as independent contractors or owner-operators. A company can hire a single truck driver or an entire trucking company for carrying out the job.
Since owner-operators are not employed by the company, they don’t get the benefits that an employed driver is entitled to. They are responsible to report their own income and pay their taxes to the IRS. The trucking companies do not withhold any government taxes from independent contractors.
3. 1099 or “W-2”: What Are the Tax Benefits for Truck Drivers
While preparing your tax return how much tax benefit you enjoy will depend on whether you are classified as a company driver or owner-operator.
According to IRS,
IRS 20 factor test is used to determine whether or not an individual is an employee. These are 20 indicators that decide whether sufficient control exists to consider an employer-employee relationship. Once the status is confirmed then we can move on to compute truck driver taxes.
Tax Obligations
If you are a truck driver working as a “W-2” employee, your employer is responsible to compute and pay taxes by withholding them from your salary. An owner-operator on the other hand has to keep track of their accounting records, figure out the write-offs, and pay estimated taxes quarterly.
Social Security and Medicare Tax
Every individual is liable to pay social security and medicare taxes to the IRS. How you will pay these depend upon whether you are a 1099 or “W-2” worker.
For e.g. Jeremy is employed by “Five-star truck Inc”. The salary was agreed upon. But Jeremy didn’t receive the exact amount of salary that was decided. He went to his boss to ask for an explanation. He told him that as an employer we are required to deduct social security, health insurance, and a few other taxes. We then pay these taxes to the IRS directly.
If Jeremy was self-employed he would have to figure out and pay these taxes himself. The total self-employment tax is 15.3% (12.4% for social security and 2.9% for Medicare).
A “W-2” employee only has to pay half from their salary i.e. 7.65% and the employer will contribute the remaining 7.65%. When you are a 1099 worker you have to pay the full 15.3%.
It is interesting to note that at first glance it might seem that as a “W-2” employee you pay extra tax. If you look closely you will discover that the employer’s portion of SE tax could have been part of your salary. But instead, it is consumed by the payroll taxes.
So we can put it this way that you will be paying 7.56% directly and the remaining 7.56% indirectly to the IRS.
Quarterly Tax Estimate
As an owner-operator, you are required to estimate and pay your taxes on a quarterly basis. But if you are a “W-2” worker then your employer will withhold Medicare and social security taxes from your paycheck.
As we have seen in the above example, Jeremy’s social security and medicare taxes are withheld from his paycheck by the employer and paid to the IRS. Therefore at the end of the year, his tax liability will be more or less paid.
Keeping Records
“W-2” employees are not required to maintain detailed records whereas it is imperative for a 1099 worker to have up-to-date records of their business transactions during the tax year. Proper records of business expenses also help in claiming allowable tax deductions.
It is also important for 1099 workers to calculate their net profit or loss. The net profit or net loss is computed by deducting your cost of sale and operating expenses from your revenue.
Tax Deductions
An owner-operator can claim higher tax deductions as compared to a company driver.
For e.g. a 1099 worker is allowed to claim mileage along with other automobile expenses whereas for truck drivers in general if your cost of fuel is more than $100 and your employer doesn’t reimburse it, you are allowed to deduct the expenses.
For meals expense, if truck drivers travel away from their tax home they can claim a deduction either through per diem rates or actual expense.
Independent contractors are also allowed to deduct the costs of purchasing a new laptop or cellphone along with 50% of their bills subsequently.
Whether you will reap more tax benefits by being a company driver or an owner-operator will depend on a lot of factors. A professional consultant will help you determine what is suitable for your particular situation.