All too often, truckers who make the transition from being an employee to an owner-operator are not as informed as they need to be about the tax laws that govern the industry. This lack of knowledge can, unfortunately, create major headaches for truckers. Find out from the professionals at the Trucker CFO — a provider of trucker tax services and trucker bookkeeping services — how to avoid common mistakes truckers make that can cause problems and cost money.
Trucker Tax Liabilities
Employee paychecks have deductions for federal income tax, state income tax (depending on the state) and FICA. FICA is the way we pay into Social Security and Medicare. But when you become an owner-operator, it becomes your responsibility to make these payments yourself on a quarterly basis.
A lot of new owner-operators get caught off guard by the self-employment tax. In their first year in business for themselves, they might not make much money, and for that reason they might think they don’t have to pay much in taxes. But if an owner-operator has any self-employment income, they have to pay at least some taxes.
The trucking accountants at the Trucker CFO recommend you set aside somewhere between 20% to 30% of your net pay. Once you begin working with our CPAs for truck drivers, we can help you determine how to make accurate estimated payments that are much more closely tied to your actual earnings. This way, you won’t owe as much at the end of the year.
Our trucker tax service professionals work with you to set up your budget and better understand tax payment schedules so you won’t make any of the six mistakes we outline below.
Mistake #1: Filing W2s and 1099s Separately
As a trucker, whether you have a W2 and a 1099 because you have made the transition mid-year from employee to independent contractor or owner-operator, or because you are a part-time employee of a company and an independent contractor at the same time, both of these documents must be filed together as part of your personal income tax return.
Sometimes drivers come to our truck driver tax service with their 1099 and tell us they’ve already filed a tax return on their W2 earnings. Unfortunately, this causes a lot of additional work and expense. Your personal tax return should include all your W2 income and all your business income, as well as any K-1s that come from other pass-through entities.
Never file your personal tax return until a professional has evaluated all income coming from both W2 and other business sources — it can result in penalties and other unpleasant situations.
Mistake #2: Making C-Corp and S-Corp Elections too Soon
Our trucking accountants recommend that owner-operators get settled into their operation before making a C-Corp or S-Corp election because these types of entities add additional administrative costs. You really need to have six to 12 months of operational history so that our CPAs can properly evaluate if it’s cost beneficial. Sometimes you can’t wait due to different requirements for motor carriers or other reasons, but advise that you delay these decisions whenever possible.
Ideally, truckers should start in a company driver position to get experience driving a truck and learning about how the costs associated with that truck will impact them. Once they become an independent contractor, they should stay in that position for six to 12 months before they look for an owner-operator position. From there, they may want to operate as a sole proprietor or set up an LLC. All this needs to be done before making the decision to jump into a C-Corp or an S-Corp.
At the Trucker CFO, our business advisors work with truckers to help them make these important decisions at the right time.
Mistake #3: Not Using the Best Tax Service for Truck Drivers
There is no shortage of fly-by-night tax prep services. While most are probably not technically dishonest, neither are they particularly knowledgeable about tax preparation for truck drivers (or anyone, for that matter).
Seasonal tax preparers go through three or four weeks of training before they start preparing taxes. They don’t understand taxes very well, let alone the nuances involved in tax preparation for truck drivers.
Truckers should make sure they have a tax preparer who understands tax law and all the deductions available to them in their industry. For instance, there have been a lot of changes with per diem, particularly since the tax cuts became law in 2017.
Per diem, which applies to owner-operators and independent contractors, can be a foreign concept to those who don’t understand trucking taxes. Owner-operators are eligible to receive a per diem deduction for the amount of time they spend away from home, but this amount changes from time to time. At the Trucker CFO, stay current on these changes and we know precisely how to calculate this per diem rate.
The per diem deduction can result in a tax savings of many thousands of dollars. And if you are married, it’s double the individual rate. Talk to our trucking accountants to see if you qualify for the per diem deduction.
Mistake #4: Taking a Mileage Deduction Incorrectly
As a trucker, if you don’t use a CPA that specializes in helping truck drivers, your tax preparer might mistakenly take a mileage deduction for the amount of miles that the owner-operator has driven during the year. This is incorrect, however; employees who get W2s are no longer allowed to take this deduction, and owner-operators are entitled to both mileage and maintenance deductions.
A mistake like this can result in an audit flag that may cause issues down the road.
At the Trucker CFO, our CPAs for truck drivers prepare your tax return in a way that minimizes your audit exposure as well as your tax liability.
Mistake #5: Operating Without a Partnership Agreement
When you start a business, you have to deal with concepts such as how to split the income among partners. A common mistake, however, is misidentifying a partnership. We see truckers that believe they are in a partnership with a motor carrier, but they have not yet set up any specific type of business entity with their state. Thus, there is no partnership agreement in place, and this will govern how that relationship will work come tax time.
A whole host of issues is enmeshed in how that income is split, how it is reported on tax returns, and whether other 1099s need to be filed when there is no partnership agreement in place.
If you want to operate as a partnership with somebody with whom you have a good relationship, make sure you are confident the relationship can make it through difficult times.
Also, make sure you have a business entity in place and a partnership agreement. That way, if you’re unable to work through some issues, there’s a legal document in place that will effectively make the decisions for you and be less likely to result in a fissure in the relationship.
Mistake #6: Listening to “Truck Stop Accountants”
Truckers frequently talk to others at truck stops, over the CB radio, or on trucker chat rooms on Facebook who may have advice to give about trucking bookkeeping, trucker accounting, and taxes. However, you must remember that it is highly unlikely they are CPAs for trucking companies.
It is best to rely on the expert trucking accountants at the Trucker CFO for all your tax, bookkeeping, and accounting advice.
Best Tax Service for Truck Drivers
If you’re a trucker and you have just realized you have made some of these mistakes, give us a call here at the Trucker CFO. We’ve seen it all. We’ll answer your questions, and we’ll probably ask you some of our own. We’ll also work with you to put a plan in place to help you avoid making mistakes in the future.
For the best advice from top CPAs for owner-operators, independent contract drivers and fleet owners, contact the team at the Trucker CFO. You can connect with us via email, [email protected].