Employee or contractor: classifying NEMT drivers under IRS and labor rules

Three tests, three agencies

Driver classification is not one decision. Each agency applies its own test to the law it enforces, and a driver can fail one test even when you think you passed another. Plan around the strictest test that reaches your company.

The paperwork does not settle any of these. The IRS says the substance of the relationship governs rather than the label, and that full-time or part-time work makes no difference. Virginia’s Workers’ Compensation Commission says paying someone on a 1099 does not define their employment status, and Tennessee’s Bureau of Workers’ Compensation says the same about a 1099 issued in place of a W-2.

How the IRS looks at a driver

The IRS question is who holds the right to direct the driver’s work and the way it gets done. It sorts the evidence into three categories and says there is no magic number of factors. This is how each category tends to play out for NEMT work.

Behavioral control. Telling a driver where to be and at what time, which equipment to use, and the sequence of stops all suggest an employee, and detailed instructions signal more control than loose ones. A manifest that sets the pickup order, a door-to-door assistance policy, and a rule to call dispatch before leaving a no-show are instructions of exactly this kind.

Training carries extra weight. The IRS calls job training strong evidence of employment, and repeated training on how the job should be done is stronger evidence still. NEMT drivers train before their first ride and again on a schedule. MTM’s standard provider agreement requires a driver training program that covers fraud, waste and abuse and HIPAA. Virginia requires the broker’s driver course, or the provider’s own course once the broker approves it in writing, before anyone carries a Medicaid member.

Evaluation counts too. The IRS says a system that measures the details of how work is done points toward an employee, while one that measures only the end result can point either way. Reviewing each driver’s on-time rate, route, and complaints measures how the work is done.

Financial control. Contractors usually make a real investment, carry costs nobody reimburses, offer their services to the market, and can lose money on a job. Employees usually get a regular wage. A driver in your van, on your fuel card and your insurance, has nothing at risk. Per-trip pay resembles a per-job fee, but method of payment is only one factor, and a driver with no investment and no chance of loss still fails the rest of this category.

Type of relationship. An open-ended arrangement with no end date suggests employment. So does work that is a key activity of the business, and carrying riders is the core activity of a transportation company. Benefits such as paid time off point the same way, though leaving them out does not prove a driver is a contractor. A written contract calling the driver a contractor does not bind the IRS.

For a genuinely close case, Form SS-8 gets you an official IRS ruling on one worker. Expect the answer to take six months or longer.

The Labor Department’s test, with its September 2026 status

Under the federal wage law, the question is economic dependence: does the driver run a business of their own, or rely on your company for work. The federal rule behind that question has shifted repeatedly since 2024.

• The 2024 rule. A six-factor test at 29 CFR 795.110 took effect March 11, 2024. It weighs opportunity for profit or loss, investment, permanence, control, whether the work is integral to your business, and skill and initiative. It has not been repealed.
• Enforcement since spring 2025. Field Assistance Bulletin 2025-1 (May 1, 2025) told investigators to stop applying the 2024 rule and to use Fact Sheet 13 from July 2008, informed by Opinion Letter FLSA2019-6. The bulletin also says the 2024 rule remains in effect for private lawsuits.
• The 2026 proposal. On February 26, 2026, the Department proposed rescinding the 2024 rule and replacing it with a test that gives the most weight to two core factors: how much control the worker has over the work, and whether the worker can profit or lose based on initiative or investment. Comments closed April 28, 2026. The proposal has not been finalized.

A typical NEMT driver comes out as an employee under every version. The 2024 rule treats supervision by device or electronic means as a sign of control, which describes GPS tracking and in-app trip status. It exempts actions whose only purpose is meeting a specific legal requirement, but actions that serve your own safety or quality standards beyond that can still count. The 2008 fact sheet investigators use now starts its factor list with whether the services are an integral part of the business, and in an NEMT company, driving riders is the business.

Once a driver is an employee under the FLSA, the wage rules follow. Minimum wage is measured across every hour worked in the workweek, overtime starts after 40 hours in a workweek, and required training counts as work time because attendance you require is not voluntary under 29 CFR 785.28. The driver overtime guide covers the hours and regular-rate rules.

State ABC tests

Some states drop the balancing and treat any paid worker as an employee until the company proves three things.

The company must prove all three parts:

1. A. You do not control or direct how the driver does the work, either on paper or in practice.
2. B. Transporting riders falls outside the kind of work your business normally does. New Jersey also accepts work done away from every one of your business locations.
3. C. The driver regularly runs an independent business doing this same kind of work.

Part B is where NEMT companies fall down. A company formed to transport riders will struggle to show that rider transport is outside its normal line of work. In these three states, treating ordinary drivers as contractors is very hard to defend.

Penalties go well beyond unpaid taxes. In Massachusetts, misclassification that breaks the wage laws brings the criminal and civil penalties of chapter 149, section 27C, including debarment, and the president, treasurer, and managing officers are personally liable. New Jersey can award a misclassified worker as much as 5 percent of their gross pay from the last 12 months, fine the employer up to $250 per misclassified employee for a first violation and up to $1,000 for each later one, and issue a stop-work order when wage, benefit, or tax laws are also broken. Its guidance also treats a demand that a worker set up an LLC to get hired as a possible form of misclassification.

Other states use common-law or multi-factor tests, and a single state may apply one test for unemployment and another for comp or wages. Tennessee, for example, applies a seven-factor test for comp coverage. Check each law separately, starting with your state guide.

What broker contracts add

Broker agreements affect classification twice over. They require you to supervise drivers tightly, and some spell out conditions for using contractor drivers. MTM’s standard Transportation Provider Services Agreement shows both. Pennsylvania’s Department of Human Services publishes the version dated January 1, 2023.

State program rules add more control. Virginia’s rules for fee-for-service NEMT (the May 26, 2026 update) require every driver to finish the broker’s training before carrying a member, wear a uniform shirt or the program’s ID badge, never use a phone or headphones while driving, and pass credentialing reviews before starting and at least once a year.

You have to meet these duties. They also put your drivers under detailed rules that you enforce, which is the pattern every test above reads as employment. The broker credentialing guide covers the files brokers review.

What misclassification costs

A reclassified driver produces bills from several directions at once.

• Federal employment taxes. When the error was not intentional disregard, 26 U.S.C. 3509 figures income tax withholding at 1.5 percent of wages and the employee’s Social Security and Medicare tax at 20 percent of the normal amount, on top of your full employer share. If you also skipped the 1099s, those rise to 3 percent and 40 percent.
• Back wages. Unpaid minimum wage and overtime, plus an equal sum in liquidated damages, and the driver’s reasonable attorney’s fees under 29 U.S.C. 216. Claims reach back two years, or three for a willful violation, under 29 U.S.C. 255.
• Civil money penalties. As much as $2,515 for each repeated or willful breach of the minimum wage or overtime rules, under 29 CFR 578.3.
• State bills. Unemployment contributions, state income tax withholding, and state penalties like the New Jersey fines above.
• Workers’ compensation. Whether certain workers belong in the premium base is a common audit dispute, so expect reclassified drivers’ pay to be added. See workers’ comp for NEMT.

States do take NEMT companies to court over this. In October 2024, New Jersey’s labor commissioner sued a New Jersey NEMT company and its owner, alleging that at least 52 drivers had been misclassified as contractors. The complaint points to control that is routine in NEMT: the company assigned riders and routes, had drivers report to its lot and use its vehicles, and sent trip instructions through a mobile app.

Example: the federal tax bill for one driver

This is an illustration with round numbers. In this example, a driver received $40,000 on a 1099 for the year, far below the $184,500 ceiling on 2026 wages taxed for Social Security. After an IRS review the driver is ruled an employee, and the error was not intentional.

The first two rows leave out interest, penalties, federal unemployment tax, and anything the state adds. The total grows with each driver and each tax year still open.

When a 1099 arrangement can hold up

A contractor setup fits a driver who genuinely runs a small transportation company. Before signing one, confirm each point:

• The vehicle is titled to or leased by the driver’s company, which pays its running costs and carries its own commercial auto policy. MTM’s agreement requires scheduled auto policies to list each vehicle insured.
• It sets its own availability, can turn trips down, and serves other customers.
• It holds its own credentials and any enrollment your state or broker requires. Virginia, for example, makes its broker confirm that every volunteer driver has an NPI and a taxonomy code.
• Your broker has agreed to the subcontract in writing.
• It invoices you at an agreed price, absorbs its own expenses, and bears a real risk of losing money.
• Where an ABC test applies, part B is also satisfied, which is rare for a transportation company.

Any contractor paid $2,000 or more for services in a year gets a Form 1099-NEC, for payments made after December 31, 2025. The old threshold was $600.

Correcting drivers who were misclassified

Three federal tools soften the cost of fixing past years.

1. Section 530 relief. You may be excused from the back federal employment taxes if your contractor treatment had a reasonable basis, every information return matched it, and no worker in a substantially similar job has been treated as an employee since 1977. It is tax relief only. The IRS says it does not make anyone a contractor.
2. Voluntary Classification Settlement Program. Eligibility needs consistent contractor treatment, every required 1099 filed for the past three years, and no open IRS employment tax audit or Labor Department or state audit of how you classify workers. Send Form 8952 120 days or more ahead of the switch date. The payment is a tenth of the tax figured at the reduced section 3509 rates on the latest year’s pay. The IRS waives interest and penalties on it and will not audit earlier years on the classification.
3. Form SS-8. For a case you cannot call, ask the IRS for a ruling.

Then set drivers up as employees:

• Get a signed Form W-4 from each driver and complete Form I-9 together.
• Take income tax out of each paycheck, and hold back and match Social Security at 6.2 percent and Medicare at 1.45 percent.
• Budget for federal unemployment tax, charged at 6.0 percent on each employee’s first $7,000 of wages. Paying state unemployment tax fully and on time earns a credit of as much as 5.4 percent; with the full credit, the federal rate drops to 0.6 percent.
• Open state withholding and unemployment accounts, and start workers’ compensation coverage before anyone drives.
• Write a pay plan that counts waiting time and required training as hours worked. Hourly and per-trip plans are compared in the driver pay guide. To see an employee’s full hourly cost with taxes and comp included, use the driver cost calculator.

Where HealthRide fits

Every driver shift in HealthRide produces a timecard, and hours and miles export by driver, so the records behind employee pay are ready when you switch. The driver and timecard reports show each week at a glance, which makes the new overtime math easier to check.