Are Taxi Drivers Independent Contractors?

The classification of a taxi driver as an independent contractor or an employee is a determination with financial and tax consequences. The level of control a company exerts over a driver is a primary factor in this classification, influencing tax withholding, benefit eligibility, and what expenses can be deducted. The complexity of this issue has grown with the rise of app-based ride-hailing services, which present new variations of the traditional driver-company relationship.

Defining Employment Status

An independent contractor is considered to be in business for themselves, controlling the means and methods of their work with an opportunity for profit and loss. These individuals are free to work for multiple companies or clients simultaneously.

In contrast, an employee performs services for an employer. The employer has the right to direct and control the details of when, where, and how the work is done, and often provides the necessary tools and sets work hours.

The fundamental difference is the degree of control the business has over the worker. If the business has the right to direct and control how the service is performed, an employer-employee relationship likely exists. The more detailed the instructions the worker must follow, the more likely they are to be an employee.

The IRS Common Law Test for Taxi Drivers

The Internal Revenue Service (IRS) uses the common law test to determine a worker’s status for federal tax purposes. This test examines evidence across three main categories to assess the degree of control and independence. The IRS looks at the entire relationship and weighs the different factors to make a determination.

Behavioral Control

This category focuses on whether the business has the right to direct and control how the driver does their work. If a taxi company requires a driver to work specific shifts, accept all dispatched fares, or follow prescribed routes, this suggests an employee relationship. A company mandating a strict dress code also points toward employee status.

Conversely, a driver who sets their own hours, is free to decline fares, and can choose their own routes generally exhibits the independence of a contractor. The ability to work for competing taxi services or use their vehicle for personal transportation without restriction further supports this classification. The key is not whether the company exercises control, but whether it has the right to exercise it.

Financial Control

Financial control examines who directs the business aspects of the driver’s job. A factor is who owns the vehicle. A driver who owns their car and is responsible for costs like gas, insurance, and maintenance has a strong indicator of independent contractor status, as they have a personal investment and bear the risk of loss.

The method of payment is another aspect of financial control. A driver who leases a taxi from a company for a flat fee and keeps all the fares they earn is operating more like an independent business owner. In contrast, a driver paid a salary or a set percentage of the fares collected, with the company handling most expenses, looks more like an employee.

Relationship of the Parties

This category considers how the driver and the company perceive their relationship. A written contract defining the worker as an independent contractor is a relevant factor, though it is not solely determinative. The IRS will look beyond the contract to the actual facts of the relationship.

The provision of benefits is a strong indicator of an employee relationship. If the company offers benefits such as health insurance, paid vacation, or a pension plan, it suggests the driver is an employee. A relationship that is expected to continue indefinitely suggests employment, whereas a relationship for a specific project is more characteristic of an independent contractor.

Tax Obligations for Each Classification

The classification of a taxi driver as either an independent contractor or an employee dictates their tax responsibilities and the forms they will handle. For independent contractors, the tax process is one of self-management, while employees have a more automated system handled by their employer.

If an Independent Contractor

A taxi driver classified as an independent contractor will not have taxes withheld from their pay. They will likely receive a Form 1099-NEC or Form 1099-K, which reports the total amount paid to the driver during the year. It is the driver’s responsibility to report this income to the IRS.

A primary tax obligation for an independent contractor is the self-employment tax, which covers both the employee and employer portions of Social Security and Medicare taxes. To meet this obligation, independent contractors are required to make estimated tax payments to the IRS on a quarterly basis.

An advantage for independent contractors is the ability to deduct business expenses on Schedule C of their tax return. For a taxi driver, common deductions include vehicle-related costs (calculated using either the standard mileage rate or actual expense method), tolls, parking fees, dispatch fees, and the business-use portion of their cell phone bill.

If an Employee

A taxi driver classified as an employee will receive a Form W-2 from their employer at the end of the year. This form details their total wages and the amount of income, Social Security, and Medicare taxes withheld from their paychecks. The employer is responsible for remitting these withheld taxes to the IRS.

The employer also pays its own share of Social Security and Medicare taxes, as well as federal and state unemployment taxes. This system simplifies tax compliance for the employee, as their tax obligations are handled through payroll deductions.

A trade-off for this simplicity is that most employees cannot deduct unreimbursed business expenses, such as for their vehicle or uniforms, on their federal tax returns. This makes accurate classification impactful on their tax liability.

State-Level Tests and the Rideshare Context

While the IRS common law test provides a federal framework, many states have their own, often stricter, tests. These rules can mean a driver is an independent contractor for federal purposes but an employee under state law, adding complexity in the rideshare economy.

A prominent example is the “ABC test,” where a worker is an employee unless the company proves all three conditions: (A) the worker is free from the company’s control; (B) the work is outside the company’s usual business; and (C) the worker is engaged in an independent trade. This test is more difficult for companies to meet than the IRS test.

Rideshare platforms have brought this issue to the forefront. Companies argue their drivers are independent contractors, but regulators point to the control exerted through the app—such as setting fares and monitoring performance—as evidence of an employment relationship. The application of these tests to this business model continues to be a subject of legal and legislative debate.

Consequences of Worker Misclassification

Incorrectly classifying a driver as an independent contractor when they should be an employee can lead to financial and legal consequences for both the company and the worker.

For the Employer/Company

A company that misclassifies employees can be held responsible for back employment taxes. This includes the employer’s share of Social Security and Medicare taxes, plus federal and state unemployment taxes. The company will also likely face penalties and interest charges from the IRS and state tax agencies.

For the Worker/Driver

A misclassified driver may have overpaid on self-employment taxes by paying both the employee and employer portions of Social Security and Medicare. They can file an amended tax return to recover these overpayments. A driver who believes they are misclassified can ask the IRS for a formal determination by filing Form SS-8, which prompts the agency to review the relationship and issue a ruling on the worker’s status.