Nothing is certain except death and taxes – This famous quote about taxes originated with Benjamin Franklin in 1789. No matter what line of work you’re in, you’re going to have to pay taxes. It’s important that you know the difference in forms and filing so that you can make the most of your earnings.
For truckers, many have the choice to be either 1099 or W2 employees, so which one is the best choice? What are the benefits and details of each one?
What’s the difference between 1099 and W2 tax forms?
The distinction between 1099 and W2 tax filings is generally the difference of being an employee or a private contractor. Depending on how the individual trucker is set up, he or she might be either.
What is a 1099?
A 1099 is generally associated with someone who is a general contractor. A general or private contractor is someone who does freelance work or is hired as an individual on a contractual basis. Any income over $600.00 must be claimed and there are different types of 1099 forms for different employees.
General contractors pay their own Social Security and Medicare taxes. This is different than being an employee, which the IRS defines as a person who performs a job or service under the control of an employer or entity. Employees’ taxes are taken out automatically and they receive a W2 from their employer on a yearly basis.
A trucker who owns their own rig and takes jobs on a contractual basis would most likely be a 1099 employee. They are referred to as “owner-operators” and own their own equipment, pay their own insurance and licensing. This means they have to pay out the taxes from their earnings quarterly on their own, as they are not withheld by their employer. It’s under the same umbrella of self-employment.
There are benefits of being a 1099 employee:
- More freedom over hours and jobs
- Contractual work can be chosen by the individual
- More overall flexibility
- Opportunities to earn more.
Many truckers choose this type of taxation because of those reasons, but they are also in control of finding their own work and ensuring steady contracts from job to job. However, as a 1099 employee, you must be diligent about filing every quarter and being responsible enough to pay out taxes that aren’t initially deducted.
If you’re used to being a W2 employee, this can be a bit of an adjustment, but the right accountant or tax software can point you in the right direction. As a 1099 employee, you’re not guaranteed a steady wage or hours. You are also responsible for getting your own benefits so if you have a family and need stability as well as health insurance, a 1099 might not be the optimal choice for you.
What is a W2?
A W2 is a wage and tax statement that the IRS requires employers to use to report their employees’ earnings and tax information. A W2 employee is someone who works for a salary or paycheck from an employer. In the case of truckers, W2 employees are drivers who get a steady paycheck and adhere to all requirements of their employer, including hours, training and tax deductions.
Being a W2 employee means you have less control over your individual schedule and hours but means a regular income as opposed to seeking out your own private contracts. In addition:
- You do not have to worry about paying your taxes on a quarterly basis
- Generally more job security.
- Benefits
- Health insurance
- Retirement funds like a 401k
This varies from state to state as each state has its own laws and rules around trucking pay. For truckers that wish to stay 1099 in the state of California, it has become more difficult due to the bill passed by the California Assembly in 2019.
This bill, commonly referred to as AB-5 and changed the determinations between truckers’ classifications as contractors or employees. Under these changes, very specific criteria must be met in order for a trucker to be classified as an independent contract. There has been much controversy over the bill and its fairness to truckers who wish to be 1099 workers.
In Conclusion
The decision to be a 1099 or W2 employee comes down to one’s individual interests and in some cases, their state’s tax laws. The upside of being 1099 is the freedom and potential for higher earnings, but the lack of guaranteed work and benefits can be a drawback.
The security of being a W2 employee and receiving a steady paycheck and benefits such as vacation or sick pay, health insurance and 401k also make it an attractive option. It depends on your specific situation to know which one is really the right one for you.