One of the questions that many drivers ask is why they aren’t paid by the hour or with a set salary like other U.S. employees. Some surveys have shown that drivers, mostly over-the-road haulers, quit not because they believe they are being paid less than they deserve but because they cannot be sure how much they will earn during a week or month. Without knowing how much they will bring home, they find it difficult to budget. This is especially true for drivers whose routes often include high congestion, areas with poor driving conditions because of weather, and those whose customers have extended loading and unloading times.
The story begins in the early 1930s when the United States was coming out of the Great Depression. Farms were producing a lot of food, and the country needed many trucks to deliver produce and meat to consumers who were just getting back on their financial footing. There was no refrigeration in those days, so truckers drove as much and as quickly as they could before the food spoiled. There was little regulation either, and drivers drove as many hours as they could, some driving to exhaustion before pulling over to the side of the road and continuing their route after a short nap. Truckers were often paid by the mile, but they were fine with it because they made more money than if they were paid a minimum wage, which came along in 1938 as part of President Franklin D. Roosevelt’s New Deal.
In 1938, the Fair Labor Standards Act, also known as the Minimum Wage Law, mandated that employees, with a few exceptions, would be guaranteed a minimum wage per hour. This minimum wage would help put money in consumers’ pockets, protect workers from unscrupulous employers, and, more importantly, inject money into an economy that was still recovering from the Great Depression.
Everyone was on board with the idea of exempting truck drivers from the minimum wage laws. First, truckers themselves preferred it because they could make so much more money. In the 1930s, there weren’t as many cars on the road as today, especially in rural areas and outside big cities; in some cases, trucks had much of the roads to themselves. Second, FDR favored it because there was a starving nation to feed. He wanted as many trucks on the road as possible. Third, the trucking companies were happy with the situation because they only paid when the driver produced. This lowered their business risk and maximized their profits because an idle worker did not have to be compensated. However, nothing in the rules prohibited carriers from paying by the hour, and some did choose to do so
Fast forward to 1980, when, in an environment of deregulation, Congress passed the Motor Carrier Act, which did away with the Interstate Commerce Commission (ICC)—formed originally in 1887 to regulate railroad transportation among states—and deregulated the trucking industry. (The ICC would not be completely abolished until 1995.)
With this deregulation, however, Congress did not remove trucking’s exemption from the Minimum Wage Law. Truckers were still being paid by the mile, but there was a problem looming for drivers. New hours of service (HOS) rules, which came along as part of the Motor Carrier Act and subsequent additions, essentially put a cap on how much a truck driver could earn by limiting their driving hours.
And that’s where it stands today.
Actually, the ICC promulgated the first federal Hours of Service regulations in the Motor Carrier Act of 1935. The regulations remained largely unchanged from 1940 until 2003, except for an important amendment in 1962. Prior to 1962, driver Hours of Service regulations were based on a 24-hour period from noon to noon or midnight to midnight. A driver could be on duty no more than 15 hours in a 24-consecutive-hour period. In 1962, among other rule changes, the 24-hour cycle was removed and replaced by minimum off-duty periods. A driver could “restart” the calculation of his or her driving and on-duty limitations after any period of eight or more hours off duty. (For more details, see the August 25, 2005, Federal Register.)
One of the arguments drivers make for being covered by minimum wage is that they should not be penalized for situations beyond their control.
One comparison, for example, is that factory workers are still paid even if they’re idled while a machine is being repaired. Office workers are also paid even if they don’t have an immediate task to perform. Economists also argue, as did Adam Smith, the ‘Father of Capitalism’ in his 1776 book Wealth of Nations, that workers are not actually selling their labor to a company but their ability to provide labor when called upon.
Carriers contend that they should not have to pay a driver for non-driving tasks such as filling their fuel tanks and waiting at warehouses, because drivers are paid to drive. This has changed for some drivers recently with compensation such as detention pay.
Carriers also contend that in a capitalistic economy, workers are free to work where they please and that no one is forcing anyone to drive a truck if they don’t wish to do so. They say the working conditions and pay-by-mile are well known to anyone who makes the effort to learn about the industry before they join it.
PER DIEM PAY AFFECTED BY NEW TAX LAWS
The new tax law Is good news and bad news for company drivers, but mostly good news for owner-operators, lease operators, and those who operate under their own authority, according to Jim O’Donnell, CEO and founder of Trucker Tax Service, while motor carriers themselves will make out very well, too.
Nothing changes for tax year 2017, noted O’Donnell, who specializes in tax filings for over-the-road drivers receiving a W-2 from their employer. But starting in 2018, “W-2 drivers will no longer be able to itemize their expenses; nobody is going to be able to itemize come next year. The average aggressive driver who’s out there 300 days a year has about $15,000 in per diem deductions that he’s entitled to. Then he takes the rest of his expenses that he has throughout the year starting with, say, a cell phone and anything else he may have purchased—work boots, gloves, bed linens for the sleeper, anything—all the way down to the $3 air freshener. You add all that up and our average company driver has about another $3,000 worth of expenses. All totaled, the average company driver was entitled to about $18,000 in deductions.”
That all disappears under the new tax laws. However, also under the new rules, the standard deduction everyone gets has almost doubled to $12,000, which should help with the disappearance of itemization. But it doesn’t go far enough, O’Donnell contended.
There is a workaround, he explained, and it has to do with per diem payments—of which there are two kinds.
“Up until now, drivers could take per diem as a deduction, reducing their taxable income, which would put more refund money in their pocket. Then there’s the per diem that a company can pay drivers as part of their wage,” O’Donnell explained. “Up until this year and as we complete 2017 taxes, it will still be the case. If a driver is paid per diem, and he makes 40¢ a mile, 10¢ of that could be per diem wage, which is not taxed. If the average drivers out there are driving 450 miles a day, 10¢ [per mile] of that, or $45 per day, is per diem,” he said. “The company just pays it to him almost like a 1099 worker, like an owner-operator. If he’s out there 300 days, that is about $13,500 of his total wage that is not taxed.”
Under the old tax law, “we would add that per diem back in because if he itemized, he must show that as income,” O’Donnell noted. “But the $18,000 in deductions that we had easily offset the $13,500, so it made sense to itemize.”
O’Donnell continued: “I have already heard from one client that his company is going to bump the per diem pay to 16¢ a mile, which is just enormous. It becomes 40% of their gross pay per diem, and they don’t have to claim that on their taxes. Again, that same driver who’s at 40¢ a mile and drives, say, 450 miles a day and 300 days a year is going to make about $54,000. From that $54,000, he doesn’t have to claim about 40%, or $21,600. Now, he’s only claiming $32,400 as his income, and the rest of that ($21,600) stays in his pocket. It’s literally reimbursement pay. The company then writes that reimbursement payoff as part of its expense. Everybody wins in that respect—if the company chooses to do that.
“I can’t imagine that every company out there won’t fall in line with that eventually, because it’s a benefit to everybody,” he added.
As for owner-operators, the new tax law should put more money in their pockets. Assuming an owner-operator is grossing $150,000 and nets about $50,000 on his Schedule C (profit and loss statement), he will get a 20% break, and only $40,000 will get taxed. He’s going to save about $10,000.
“That will be a big savings for the owner-operator or lease operator, the guy who has his own authority, or a small trucking company,” O’Donnell noted. “All of those guys will benefit from this new tax law. It’s only the company driver who’s going to take the hit unless his company raises his per diem.”
DRIVERS: ARE YOU AWARE OF THE EXTRA 401(k) TAX CREDIT? IF NOT, READ ON...
Roughly 64% of U.S. workers may be overlooking a tax credit this year for contributions made to their retirement accounts, according to the 18th Annual Transamerica Retirement Survey.
The Retirement Savings Contributions Credit is a non-refundable tax credit that may be applied up to the first $2,000 of voluntary contributions an eligible worker makes to a 401(k), 403(b) or similar employer-sponsored retirement plan, or a traditional or Roth IRA. The maximum credit is $1,000 for single filers or individuals and $2,000 for married couples.
“The Saver’s Credit is a tax credit in addition to the benefit of tax-advantaged savings when contributing to a 401(k), 403(b) or IRA,” noted Catherine Collinson, president of nonprofit Transamerica Center for Retirement Studies. “Many eligible retirement savers may be confusing these two incentives because the notion of a double tax benefit seems too good to be true.”
The credit is available to workers 18 years or older who have contributed to a company-sponsored retirement plan or IRA in the past year and meet the adjusted gross income (AGI) requirements:
- Single filers with an AGI of up to $31,000 in 2017 or $31,500 in 2018 are eligible;
- For the head of a household, the AGI limit is $46,500 in 2017 or $47,250 in 2018; and,
- For those who are married and file a joint return, the AGI limit is $62,000 in 2017 or $63,000 in 2018.
- The filer cannot be a full-time student and cannot be claimed as a dependent on another person’s tax return.
“Workers who are eligible to receive the Saver’s Credit are at risk of missing it if they use the wrong tax form. If you are eligible to claim the Saver’s Credit, you should use Form 1040, Form 1040A or Form 1040NR. The Saver’s Credit is not available on Form 1040EZ,” Collinson explained.
Another important and potentially overlooked opportunity is the IRS Free File program, she noted. Workers who are eligible to claim the Saver’s Credit are also eligible to take advantage of this program, which offers federal income tax preparation software for free to tax filers with an AGI of $66,000 or less. Twelve companies make their tax preparation software available through this program at www.irs.gov/FreeFile, though certain restrictions may apply, Transamerica noted.
Unfortunately, about 55% of workers polled in the Transamerica survey are unaware of this offering.