AB 5 is the foremost topic in the trucking industry. How should owner operator truck drivers be compensated in the future? One approach being widely considered is the “Two-Check System”. There are several variations of this approach. The more common is to employ the driver and then cut a separate check to the driver for use of the driver’s vehicle and other driver expenses.
There are serious issues and risk with the “Two- Check System”. The IRS generally considers that all payments to an employee are subject to payroll tax unless a specific exemption applies. IRC 62 does allow a deduction for reimbursement of an employee’s business expenses including the use of an employee’s vehicle. However, such expenses are only deductible by the employer where the employer maintains an “accountable plan” setting forth a qualifying expense allowance arrangement with the employee. As part of the plan, the employee must be required to specifically itemize and substantiate all vehicle and other expenses to be paid by separate check. If the IRS requirements are not met, an audit on all employer deductions will be reclassified as income payments. The employer will be assessed payroll taxes on 100% of the reimbursements going back for years, along with interest and penalties.
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