There are many differences between W-2 and 1099 truck drivers. In this article, we'll talk about the main differences between the two, specifically how they file and pay their taxes.
The most significant difference between W-2 and 1099 drivers, is that a W-2 worker is classified as an employee and has taxes withheld from their paycheck prior to the employee receiving their pay. The employer of the W-2 employee is responsible for remitting the various taxes withheld to the appropriate governmental agencies.
A 1099 worker is classified as a contractor, and a 1099 worker does not have taxes withheld from their paycheck. A 1099 contractor would receive the full gross amount as pay. The company who has hired the 1099 worker has no responsibility to remit taxes. The tax remittance or payment of tax is the full responsibility of the individual 1099 worker.
The Form W-2 is what a company issues to an employee at the end of the year and the Form 1099 is what a company issues to a contractor at the end of the year. Both of these forms indicate the amount of money earned by the worker within the given year but the W-2 will include information about how much in taxes was withheld while the 1099 reports only earnings.
Let’s dive into some of the tax differences between these two types of workers based on the tax form they receive.
Are you a self-employed truck driver that needs help with your taxes, accounting, or bookkeeping? Click here!
W-2
In the world of trucking, company drivers are considered W-2 employees. They are the typical, hourly or salaried workers that are hired to perform a specific role. In terms of truck driving, they are given a schedule, a consistent paycheck, benefits provided by the company, a company truck, etc.
Every tax season, employers provide a Form W-2 to the IRS and the employee. On the Form W-2, the employer will report the annual compensation paid to their employee and the taxes withheld from that compensation for federal income taxes, state income tax (if applicable), and taxes remitted for Social Security and Medicare.
When it comes to paying taxes as a W-2 employee, the employer has already withheld federal and state income tax, Social Security tax, and Medicare tax from employees when they pay them. All of these amounts are included on the W-2 form that is received from the employer which is then used to file taxes. Employers must mail Form W-2 to their employees by January 31st of each calendar year.
Filing taxes as a W-2 employee is much simpler compared to filing taxes as a 1099 worker. The filing of an income tax return is the process in which a taxpayer would determine if they had their employer withhold too much tax throughout the year. In the event that tax was over withheld a tax refund would be issued to the W2 employee by the IRS and state (if applicable). If the employee did not have their employer withhold enough in taxes, then the employee would be required to pay the IRS the amount of taxes that are still due.
In terms of deductions, specifically for truck drivers, W-2 company drivers can no longer deduct the Per Diem deduction. Additionally, a majority of W-2 drivers end up taking the Standard Deduction unless they have a lot of medical expenses or if they dealt with a significant loss due to a natural disaster. The Standard Deduction is an IRS-allowed deduction for each taxpayer and/or spouse used to reduce taxable income. There is nothing that a taxpayer must do to receive the Standard Deduction; it is an automatic allowance to each taxpayer when filing their tax return.
1099
1099 workers may not have a single employer and could have been contracted on with multiple customers that they worked for throughout the year. This is because they own their business and contract their services. They’re also responsible for reporting their income to the IRS themselves, paying Self-Employment Taxes (which cover Social Security and Medicare), and paying income taxes. The companies that hire 1099 contractors DO NOT pay or remit taxes on behalf of that 1099 contractor.
The most common types of 1099 truck drivers are:
Independent contractors who source their own loads, use their own equipment, and run on their own schedule, or
Those that opt for longer-term more rigid work arrangements with a specific carrier
A Form 1099 is a document used by companies to report payments made to a contractor for work performed during the prior year. Companies that pay contractors $600 or more during a year must issue the contractor a Form 1099-NEC by January 31st of the following calendar year. The company that issues a contractor a 1099-NEC is also responsible for filing the 1099-NEC with the IRS by January 31st of the following year.
Contractors pay a self-employment tax because the companies that they work with don’t withhold or remit Social Security or Medicare taxes for them. The self-employment tax rate is 15.3%. It’s a little more complicated than that, as only income up to $160,200 is subject to Social Security tax whereas all your income is subject to Medicare taxes.
1099 contractors have a lot more freedom than their W-2 peers when it comes to tax payments and the deductions they can take. It is highly recommended that 1099 contractors set aside 20-25% of their net income to make quarterly estimated tax payments. The IRS does require self-employed individuals to pay taxes quarterly. If this is not adhered to, there is an IRS penalty when filing the tax return on top of a much higher one-time tax payment.
Unlike W-2 employees, 1099 workers are still eligible to deduct Per Diem from their taxes. Additionally, thanks to the Tax Cuts and Jobs Act, they are allowed significant additional tax deductions from the Qualified Business Income Deduction or QBI. QBI is a 20% pass-through deduction calculated using the lesser of your self-employment earnings or your overall taxable income. 1099 workers are also able to deduct health insurance premiums and business expenses on top of their Standard Deduction. Even though self-employed individuals are subject to a more complicated tax filing process, they’re eligible for more deductions as well.
Big Takeaways
For 1099 workers, taxes are not automatically taken out of their paycheck by whoever they are working for.
1099 workers should make sure they’re setting aside 25% of their income to make their tax payments quarterly
1099 workers should take advantage of all available deductions they’re eligible for.
If you’re a new 1099 worker, or still don’t have a very good grasp on how to manage your taxes, let ATBS know and we can help you out!