There are a set of criteria that the IRS and state agencies use to determine if movers are classified correctly. It all starts with control. At a very basic level, this is the determining factor for whether an individual should be classified as an employee or an independent contractor. For the most part, it would be difficult to classify a helper as an independent contractor. Especially if they work directly for your company and you pay them an hourly wage.
A driver can be classified as an independent contractor if there are certain criteria that are met. It’s not enough to just call them a contractor and issue them a 1099 at the end of the year. So let’s take a look at what a true independent contractor would look like.
A driver that is a true independent contractor would typically match these criteria:
- Company pays driver a percentage of the move – The driver that is a true independent contractor would be paid a percentage of the move, by the mile or even a flat rate. If a driver is being paid by the hour, chances are they should be classified as an employee.
- Driver hires and pays their helpers – If the driver is a true independent contractor, they would hire and pay their own helpers. If the helpers are being paid an hourly wage by the company, then the driver would probably be considered an employee as well.
- Driver owns or leases the truck – Most of the time a true independent contractor driver would own their own truck or lease the truck from the company. If you are providing the truck to the driver they would most likely be viewed as an employee.
- Driver will pay fuel, tolls & expenses – The driver would also pay their own expenses such as fuel, tolls, maintenance, hotels and any other expenses associated with the job.
- Driver can experience profit or loss – One of the determining factors by the IRS is whether or not the individual can gain profit or suffer loss from the job. As an independent contractor that is paying their own expenses and being paid a percentage of the move, they may make more money on some jobs and less on others (profit/loss). An employee does not have this risk, they are paid the same amount no matter what.
- Driver can accept or reject jobs – We already discussed that the main factor is control. So a true independent contractor would have the ability to turn down moves without the threat of being fired.
For a full explanation on determining the status for paying movers, read this IRS REPORT.
Employment Tax Guidelines: Classifying Certain Van Operators in the Moving Industry
Paying movers as W-2 Employees you would be responsible for:
- Social security and Medicare tax
- Withholding federal and state income taxes
- Providing worker’s compensation coverage
- Contribute to unemployment insurance fund
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[The following is the full transcript of this episode.]
Hey, my friend. It’s Louis Massaro, CEO of Moving Mastery and founder of Moving Sales Academy. I’ve been getting a lot of questions for a few months now about the right way to pay your movers. Should they be W-2 employees, or 1099 contractors? And we’re gonna go through the benefits, the pros, the cons, what you need to look out for, what truly makes somebody an independent contractor, and this way you can make a decision on how you wanna go about it. Alright? If your moving company is just starting out, you may want to start with them as an independent contractor, but then at some point you may wanna move to having them be an employee. But let me lay out the pros and the cons, let me lay out what a true independent contractor relationship looks like for a moving company, and then you can make the decision for yourself. Alright? This is a very, very, very, very important topic and it’s not something that I take lightly, and I wanna make sure that I give you great information on this, alright? So first of all, you need to understand that it’s all about control. When determining if somebody’s a W-2 employee or a 1099 contractor, it’s all about control. Who has control over that individual? Does the company control everything they do or does the individual control everything they do?
That’s the basis for the determination of “Should they be classified as an employee or should they be classified as a contractor?” Now, the reasons that you might want to classify them as a contractor is because you pay them whatever rate you pay them, and 1099 them. You’re not paying for FICA and employment tax and unemployment. You’re not paying for all that, so there’s not as much cost associated with a 1099 employee. A lot of companies will look at it and say, “You know what? It’s much easier, I don’t have to worry about payroll taxes, it costs me less as a company. Let me just 1099 them, and that’ll be the end of it.” Now, just so you know, there’s companies that… Small, mid, even large companies that I know that have paid employees as independent contractors for a long time and have been able to essentially get away with it, alright? Because there is a certain way and a certain criteria that that individual needs to meet in order to truly pass the test of being an independent contractor. Alright? So first off, thing you wanna understand is that it’s very difficult for a helper to be an independent contractor for you and your company. Alright? So let’s talk about the drivers and how that relates, and how they’re either an employee or they’re a contractor. Alright?
So let’s look at what it would look like if you had a solid, independent contractor arrangement with a driver. These are the things that a company that has this set up correctly would have in place, alright? Let’s go through this list. So they’re gonna pay the driver on a percentage of the move. Alright? If you’re paying your driver by the hour, chances are they’re not passing the independent contractor test, alright? If they’re a true independent contractor, they’re receiving a percentage of the move or a flat rate per move and not being paid by the hour, okay? Next, the driver will hire and pay the helpers, not the company. Alright? So now we’re talking about if you have a driver that’s a true independent contractor, what that would look like. So now you could say, “Alright, is this how my company’s set up right now currently or is this something that I can get set up?” But if somebody’s a true independent contractor, they’re getting a percentage of the move and they’re hiring and paying the helpers. Okay? The helpers aren’t being paid by the company. Number three, the driver also owns or leases the truck. Now, they could own or lease their own truck which they went out and they acquired or, as a company, you can lease them the truck or maybe you have a separate truck-leasing company that leases them the truck.
But the driver would have to have a significant financial investment into the vehicle for them to be considered a true independent contractor. Driver will also pay their fuel, tolls, and expenses. Remember you’re paying them a percentage on the job. They’re paying their own helpers. They’re paying to either buy or lease the truck. They’re also paying for tolls. They’re also paying for fuel, maintenance, whatever other expenses go along with that truck, and the job itself, they’re gonna be paying that. Number five, one of the indicators is the driver can experience profit or loss on the job. As an employee, you don’t have the risk of having a loss on the job. You go and you perform the move and you get paid pretty much usually an hourly rate. As an independent contractor, you’re receiving a percentage of the move. Well with that percentage that you receive, that’s all you receive, now you need to pay for your helpers. So it’s up to the driver to determine, “How much am I gonna pay the helpers? Do I need two men? Do I need three men? What am I gonna… How am I gonna pay them?” It’s also, “What am I gonna spend on equipment and fuel?” The driver will have the potential to either make money or lose money.
If it’s… If there’s no possibility of profit or loss, then chances are they probably should be classified as an employee. Number six, the driver can accept or reject jobs. Remember this is all about control. Control is really the main thing that’s looked at, and when I say when it’s looked at, this is by the IRS or this is by state agencies, alright? They govern this. So if the driver has complete control over what they do, which means you offer them a job and they can either accept it or not accept it without the possibility of getting fired, then they have control in that area and they’re considered an independent contractor. So the things that you wanna remember are that might be easy to just pay somebody 1099 and it also could be easy to say, “You know what, I don’t wanna deal with it. I’m just gonna make everybody a W-2 employee.” But when you do that, you also have much higher expenses, you’re paying all the employment tax that goes along with that, there’s worker’s comp and everything else that comes along with having an employee. So you may be able to set them up as an independent contractor, but it takes more than just saying, “You know what? I’m gonna cut them a check, and send them a 1099 at the end of the year.”
If you wanna do it correctly, these are the types of things you need to have set up. Also, in this… Down below I’m gonna put a link to an article written by the IRS, it’s a 32-page document specifically for moving companies on how to determine if this individual, ’cause you have to look at it individual by individual, should be an employee or should be a contractor. As an employee, they would receive a W-2. As a contractor, they would receive a 1099. There’s major penalties and fines if you’re misclassifying employees. So for example, if you have your movers and they come in, and you have drivers, and you have helpers, and you’re paying them all an hourly rate, they report to you, they go on your truck, you tell them exactly what to do, you tell them exactly when to be there, they’re pretty much acting like employees, but you’re paying them as a 1099? That’s a risk. There’s a possibility that the IRS or a state agency could come in and say, “You’ve been misclassifying those employees.” They look at your records. How long have you been misclassifying those employees? Then you have to pay the back tax plus fines, penalties, and interest on that. So I’m not telling you which way to go. Alright? You can have your movers set up 1099 and have it done correctly, but there’s extra steps involved.
It’s not just a matter of “Here’s the move, I’m just gonna 1099 you versus W-2.” No, you need to understand the key components that truly makes them an independent contractor or truly makes them an employee. So go ahead and click on the link down below, and take a look at this document. It’s a 32-page document, it’s not an easy read. I broke down most of the basic things you need to know in this video, but if you’re serious about setting up independent contractors, and you’re a business that is established, and you want to grow, and you’re planning on being in this business, and you don’t wanna get side-swiped all of a sudden. Three, four, five, six years down the road, all of a sudden the IRS or a state agency comes in and says, “Let’s see your books.” It could be catastrophic. We paid our employees… We paid our movers as employees because I wanted to have the control over what they did. I wanted to be able to make sure that they did things exactly the way we wanted them, and we paid additional money in paying their taxes and overtime and everything else, and that’s why we charge higher prices to compensate for that. So just make sure you’re informed. Make sure you’re doing it correctly. Again, W-2 employee can be correct, 1099 employee can be correct, but it’s not just a matter of giving them a 1099 that makes that legitimate.
I understand it’s lower cost if you’re getting started and that’s how you need to get things going, but within a year of being in business, you need to either set this up correctly. So you either need to go, “Alright, I’m gonna start paying them as employees,” or “I need to go through the process of truly making them an independent contractor. I need to lease them the truck. I need to pay them a percentage on the move. I need to allow them to then hire and pay the helpers.” You need to do this correctly. This is a big, big deal, alright? I hope this was helpful. If you have any questions at all, always leave them in the comments below. Until I see you next week, go out there every single day, profit in your business, thrive in your life. I’ll see you later.