Ok.. I am a geek and find this whole matter very, very interesting....

IRS v. Trucking Independent Contractor History - GLG News


IRS v. Trucking Independent Contractor History

October 19, 2009

• Analysis by: Jay Thompson
• Analysis of: 'Contractor' Lable Provokes Legal Disputes
• Published at: online.wsj.com

Summary

The trucking Independent Contractor (IC) pool is a big one. Surveys show that one-third of truckers are IC’s and 80%+ of them are leased to fleets. The biggest player is FedEx Ground - hence the long-time target on their back by the Internal Revenue Service (IRS), States and unions. Other big numbers come from the Intermodal sector, which is also under fire. I agree with my esteemed colleague John Schultz and offer the following overview.
Analysis

As Independent Contractor programs ballooned through the ‘90’s, we assisted in creating hundreds of contracts for fleets. Our questionnaire addressed basic financials to be paid (pay rates), services to be offered (fuel, license plates, truck sales, insurance, etc), regulatory compliance (DOT, IRS, etc.) and a bunch of legal risk-mtigation mumbo-jumbo (from transport attorneys).
While we worked with major fleets, our company picked up and ran distressed trucking companies. We always favored refrigerated and flatbed companies, which were some of the first with large IC concentrations. Some private fleets we started working with were Monfort Beef, Leprino Foods (cheese) and Cargill (Excel) Beef. Each were very professionally run, but only Cargill’s fleet is still going today.

The small distressed trucking companies we picked up were in trouble. One saying is so true in that if there are problems in one part of a business, there will be others. It is common for companies in trouble to “put-off” addressing compliance issues and taxes, so we got to know the Denver IRS folks. While there were some problems with aggressive approaches in the mid-‘90’s, we also saw the “kinder-and-gentler” IRS. Depending on the agent, the IRS can be here to help. Here is some of the guidance offered:

The IRS operates to “20 General Factor Common Law Rules” to assist all businesses in identifying between an “Independent Contractor” and an “employee”. This is done to clarify who is responsible for the payment of payroll taxes, social security, etc.

The IRS looks favorably on positive answers to the following ten questions when dealing with IC / owner-operator classifications:

1.) Does Contractor have a significant investment in their business? (Weighed heaviest)

2.) Can the Contractor realize both a profit and a loss? (Weighed a close second)

3.) Does the Contractor hire, direct and pay helpers?

4.) Does the Contractor own (or is purchasing) their own equipment?

5.) Does the Contractor have fixed / recurring liabilities? (Fuel, maintenance, taxes, etc.)

6.) Is Contractor pay based on worked performed, commission, or trip basis?

7.) Can the Contractors services affect his own reputation?

8.) Does the Contractor pay for or attend free, fleet orientation / training courses?

9.) Are the only files kept by the Fleet on the Contractor for DOT purposes?

10.) Does the Contractor have the ability to pick or turn down loads?

Fleets like FedEx Ground can answer in the affirmative for all of these, but some argue about number 10. Their routes are an asset (can buy / sell), so that’s makes that one more positive. It’s a similar model to many of the companies who run routes for mechanics' tools like Snap-On, supermarkets like for off-branded potato chips, mobile window repairs, home food delivery, home appliance repairs, etc.

Other fleets like UPS contract out excess freight to fleets with IC's during the Holidays (pulling UPS trailers). Many well-known fleets with well-run IC programs include Con-way Truckload, Schneider National, Swift Transportation, JB Hunt, Knight Transportation, Landstar System, Werner Enterprises, US Xpress, Crete Carriers, Quality Distribution, Kenan Advantage, Dart Transit, Marten Transport, most Household Movers and thousands of others. Then again there is the port / rail Intermodal marketplace involving some already noted plus Pacer and Hub.

Most complaints are from current or ex-contractors who never paid taxes on their 1099ed income and got in trouble with the IRS, others who opted out of Workers Compensation and got hurt and even others who applied for unemployment benefits who never paid into it. Many fleets offer referrals to help get Contractors taxes done and also offer occupational accident insurance (some require OC/AC) in lieu of Workers Comp. Many contractors at FedEx Ground and other fleets actually end up with multiple trucks where they pay their employees’ payroll / Social Security / unemployment / Workers Compensation taxes.

Granted there are good fleets and contractors who play by the rules. We have found that those fleets who do still have the periodic complaint are primarily due to IC’s not complying with the rules. However, outside pressure like going on today can change the game rules!

 

So, what is your question? Or what do you find so interesting about the above?

 

I haven't any questions. It is an accounting, tax issue and its treatment that I find interesting (1099 or W2 employees) . Thanks for asking! :thumbsup:

 

Maybe they will crack down on people who use 1099 "employees". They can't meet any part of the regs.

 

I don't know about that guy's analysis. He's taken the 20 questions and rephrased them, changing the meaning in some of them. Plus, he doesn't even address the other 10 questions. Not that it matters, the IRS no longer uses the 20 question test. When the guidelines used by both the Dept. of Labor and the IRS are applied, the issue is certainly not cut-and-dried and I don't think it's favorable to the standard IC situation. Almost all IC's fail the control test which states that IC's must have total autonomy in determining how to complete the task they've been contracted to do. Most IC's must follow certain directions including safety rules, scheduling, and checks and many aren't given flexibility in routing or fueling choices.

U.S. Department of Labor

Unfortunately, beyond the basic "control" test, there is no single, uniform test to determine who qualifies as an independent contractor. The U.S. Department of Labor uses the "Economic Realities" test. The crux of this test is whether the worker is economically dependent upon the business for which he or she works, based on six factors:

* The nature and degree of the control the business has over the way in which the worker is to perform the work (the greater the actual or permitted control, the more likely the worker is an employee);
* The opportunity the worker has to make a profit or the risk of experiencing a loss (the profit/loss risk signifies independent contractor status);
* The investment (or lack thereof) in the materials, equipment, and job supplies necessary to perform the work (investment weighs in favor of independent contractor status);
* The ability of the worker to hire, directly, others to assist him in the job (such ability weighs in favor of independent contractor):
* The degree of skill and independent initiative required (these qualities are indicative of independent contractors);
* The expected duration of the working relationship (workers engaged for an indefinite or long period of time are more likely to be classified as employees); and,
* The extent to which the work is an integral part of the business's practices (workers retained to perform a function traditionally performed by regular employees are more likely to be classified as employees).


U.S. Internal Revenue Service

Until recently, the IRS used the so-called "Twenty Factor" test to evaluate independent contractor status. Following many pleas from labor and business groups (and a little pressure from Congress), the IRS attempted to simplify and refine this test, consolidating the 20 factors into three categories: behavioral control, financial control, and the type of relationship. "Behavioral control" focuses on whether the business has a right to direct and control how the worker performs the task for which he or she is retained. The IRS will look at the type and degree of instructions and training that the business gives to the worker. Evaluation of "financial control" considers whether the business has a right to control the business aspects of the worker's job. Here the IRS will consider how the worker is paid (e.g., a guaranteed salary versus a flat fee), and whether the worker has made any significant investment in the work. In addition, the IRS will evaluate the extent to which:

* The worker has unreimbursed business expenses;
* The worker's services are available to other businesses; and
* The worker can realize a profit or loss.


Finally, the IRS will explore the "type of relationship" between the business and the worker, looking to whether the parties have entered into a written contract describing the relationship, whether the business provides the worker with employee-type benefits (for example, insurance, vacation, and retirement benefits), and whether the services performed by the worker are a key aspect of the regular business of the company. In evaluating the type of relationship, the IRS also will consider the permanency of the relationship, recognizing that employees generally are employed indefinitely and independent contractors more likely are to be retained for a specific project or time period.

If this guy was right, then it would be a simple matter to contest reclassification since most IC programs meet the conditions he mentions. But that's not the way it is. Most defenses are the "safe harbor relief" defense. Section 530 of the Revenue Code stipulates that a company can avoid certain tax obligations if it meets three criteria:

It has a reasonable basis for not treating workers as employees
Is consistent in treating all similar workers as contractors
Consistently files required information returns with the IRS, i.e., 1099's

The defense that truckers rely on, and the one that the ATA counsels its member to use, is that there is a reasonable basis based on the fact that classifying as contractors is the industry standard because it's always been done that way.

I'm not sure this defense is going to hold up. In addition to the Feds, states are being more aggressive in going after IC classifications in order to collect more workers comp and unemployment insurance premiums. You can bet that as budgets tighten further it's going to be a harder fight for carriers to maintain this practice.