NEMT Drivers: 1099 or W-2? How to Classify Your Drivers in 2027

Paying drivers on a 1099 looks cheaper. There is no payroll tax, no workers’ compensation premium, and no overtime math. But the IRS, the Labor Department, and your state each decide for themselves whether a driver is an employee, and the facts of NEMT work point one way. This guide shows how each test applies to a typical NEMT driver, where broker contracts fit in, and what it costs to get it wrong.

Are NEMT drivers employees or independent contractors?

The label you choose does not decide it. The IRS says that if an employer-employee relationship exists, it makes no difference how it is labeled, and it does not matter whether the person works full time or part time. What matters is whether you have the right to control what the driver does and how.

Here is how the usual facts of NEMT driving line up against the three IRS categories: behavioral control, financial control, and the type of relationship.

How the driver works	Points to an employee (W-2)	Points to a contractor (1099)
Vehicle	Drives your van, on your insurance	Owns, maintains, and insures the vehicle
Trips	Takes the trips you dispatch	Finds and chooses its own jobs
Rules	Follows your policies and your broker’s	Decides how the work gets done
Training	Completes training you require	Uses its own methods
Pay	Hourly, daily, or per trip, with no real chance of loss	A contract price, paying its own costs, able to lose money
Customers	Works only for you	Serves other customers and markets itself
Relationship	Open-ended and ongoing	A set job or period

A typical NEMT driver falls in the left column on almost every row. The rest of this guide explains why, and what a driver in the right column looks like.

How the IRS decides

The IRS weighs all the facts in its three categories, and no single factor settles it. Some points carry extra weight for NEMT:

• Training. When a business trains a worker on how to do the job, the IRS calls that strong evidence of an employee, and periodic training on procedures and methods even stronger evidence. NEMT drivers need training before their first ride and refreshers after. See NEMT driver training.
• Detailed instructions. Instructions on when and where to work, what equipment to use, and what order to follow point to an employee. The more detailed they are, the stronger the point.
• Key activity of the business. If the worker performs a key part of your business, you are more likely to have the right to control that work. Carrying riders is the whole business of an NEMT company.
• Written contracts. A contract calling a driver an independent contractor is not enough, and the IRS does not have to follow it.

IRS Publication 15-A (2026) gives two driving examples of contractors. In one, a cab driver rents a cab for $150 a day, pays the costs of running it, and keeps all the fares. In the other, a trucking operator is paid by the ton delivered, owns or rents all equipment, pays all costs including insurance, and sometimes hires its own drivers.

NEMT work usually looks different. You bill Medicaid or the broker under your own enrollment, and you pay the driver. The driver does not keep the fare or find the rider.

If a case is truly unclear, either you or the driver can file Form SS-8 and ask the IRS to decide. The IRS says a determination can take at least six months.

How the Labor Department decides (as of September 2026)

The Fair Labor Standards Act sets minimum wage and overtime. It uses its own test, which asks whether the worker depends on you for work or is in business for themself. The federal rule has changed several times.

Date	What happened
March 11, 2024	A six-factor rule at 29 CFR part 795 took effect
May 1, 2025	Field Assistance Bulletin 2025-1: investigators stopped applying the 2024 rule and returned to Fact Sheet 13 (July 2008). The 2024 rule still applies in private lawsuits.
February 27, 2026	A proposed rule would replace the 2024 rule with the 2021 analysis, led by two core factors: control over the work and the worker’s chance for profit or loss
April 28, 2026	Comments on the proposal closed

As of September 28, 2026, the proposal is not final, so the 2024 rule remains in the Code of Federal Regulations. Whichever version applies, the core questions are the same for NEMT: who controls the work, and can the driver make or lose money through business decisions.

Two points from Fact Sheet 13 (March 2024), which explains the 2024 rule, come up often with drivers:

• Receiving a 1099 or being paid off the books does not by itself make a worker a contractor, and signing an independent contractor agreement does not either.
• A worker paid a fixed rate per hour, day, or job who works more hours or takes more jobs to earn more is generally not exercising managerial skill.

Paying drivers per trip does not change their status. If they are employees, the pay must still meet minimum wage and overtime rules, and required training time counts as hours worked (29 CFR 785.27 to 785.29). See NEMT driver overtime and NEMT driver pay.

State ABC tests

Many states use their own test, and some are stricter than the federal ones. Under an ABC test, a worker is presumed an employee unless the business proves all three parts.

State	Law	The three parts the business must prove
California	Labor Code 2775 (effective September 4, 2020), for the Labor Code, Unemployment Insurance Code, and wage orders	A. Free from your control and direction, by contract and in fact. B. The work is outside the usual course of your business. C. The worker is customarily in an independently established trade or business of the same kind.
Massachusetts	General Laws chapter 149, section 148B, for the state wage and hour laws	The same three parts
New Jersey	Unemployment, wage and hour, and wage payment laws, with rules at N.J.A.C. 12:11 adopted May 5, 2026	A. Free from control. B. Outside the usual course of the business, or outside all of its places of business. C. An independently established business.

Part B is the hardest part for an NEMT company to prove. Driving riders is the usual course of an NEMT company’s business, so a driver who carries your riders is doing the work your company exists to do.

The penalties reach past back taxes. Massachusetts applies criminal and civil penalties, including debarment, and holds the company’s president, treasurer, and managing officers liable too. New Jersey says a misclassified worker can be awarded up to 5 percent of gross earnings over the past 12 months as a penalty, on top of back pay. It also says requiring a worker to form an LLC can itself be misclassification.

Other states use different tests for wages, unemployment, and workers’ compensation. Check your state labor department and your state guide. For California specifics, see the California guide.

Why broker rules make drivers look like employees

Broker contracts require you to control your drivers in detail, and those rules reach every driver, whatever you call them.

Virginia’s fee-for-service requirements (DMAS, updated May 26, 2026), which DMAS says belong in every provider agreement, include:

• The broker’s driver training program before any member ride, for every driver
• A uniform shirt or a program ID badge shown at every pickup
• No phone or headphones while the vehicle moves
• Exiting the vehicle to open doors, and giving the level of assistance on the manifest
• Credentialing reviews before the first ride and at least yearly

MTM Health’s standard provider agreement, in the January 1, 2023 version Pennsylvania posts, adds more:

• Your own Driver Orientation and Training Program, with records in each driver’s file (section 5.A)
• Credentials for every driver and attendant, owner-drivers included (section 5.C)
• Drug and alcohol testing before hire, after accidents, on reasonable suspicion, and at random (section 5.C)
• GPS that reports location, trip events, and signatures in real time, and a two-way voice system linking every vehicle to your place of business (sections 4.B and 4.C)

Under IRS guidance, training and detailed instructions are evidence of control. The 2024 Labor Department rule, which still governs private lawsuits, says steps taken only to comply with a specific law are not control. Steps that go further and serve your own safety, quality, contract, or customer service standards may be, and supervising work by device also counts toward control. The 2026 proposal would treat safety standards and contract quality terms typical between businesses as neutral, but it is not final.

Some contracts also set rules for contractor drivers directly. MTM’s agreement:

• Bars subcontracting any service without MTM’s express written consent (section 12.A).
• Makes you responsible for paying every employee and contractor who works under it (section 2.KK).
• Lets you skip workers’ compensation on drivers only if you show a state exemption, contract with each driver’s company in that company’s name, and send MTM the first and signature pages of that contract. MTM may still require coverage from everyone (section 9.F).

Modivcare’s provider requirements, as of September 2026, say workers’ compensation is required in most states if you have employees. See workers’ comp for NEMT drivers and MTM Health.

Medicaid enrollment can matter too. CMS says that if a state recognizes drivers as a provider type, individual drivers must be enrolled (SMD 23-006, September 28, 2023). Virginia requires volunteer drivers to have their own NPI and taxonomy code.

One rule applies either way. HIPAA’s workforce includes anyone whose work for you is under your direct control, paid by you or not (45 CFR 160.103), so privacy training covers these drivers too. See HIPAA for NEMT providers.

What misclassification costs

The bill comes from several directions at once.

Who	What you can owe
IRS	Federal employment taxes on past pay. Reduced rates apply under 26 U.S.C. 3509 if the mistake was not intentional. The rates rise if you did not file 1099s, and do not apply at all to intentional disregard.
Labor Department or the driver in court	Unpaid minimum wage and overtime for 2 years, or 3 if willful, plus an equal amount as liquidated damages (29 U.S.C. 216 and 255)
Labor Department penalty	Up to $2,515 per violation for repeated or willful minimum wage or overtime violations (29 CFR 578.3, with no inflation adjustment for 2026)
States	State taxes, unemployment contributions, back wages, and penalties, such as New Jersey’s award of up to 5 percent of 12 months’ gross earnings
Your broker	Contract action. MTM’s agreement ends immediately if required insurance, including workers’ compensation, lapses (section 9.C).

A worked example

Take an example driver paid $38,000 on a 1099 in the most recent year, well under the 2026 Social Security wage base of $184,500. If the IRS reclassifies the driver and the mistake was not intentional, section 3509 sets the federal amount.

Case	Effective federal rate	On $38,000
You filed a 1099-NEC for the driver	10.68%	$4,058.40
You did not file a 1099	13.71%	$5,209.80
Voluntary Classification Settlement Program, if eligible	10% of the 10.68% amount	$405.84

The 10.68 percent is the IRS figure for pay under the wage base: 1.5 percent for income tax withholding, 1.53 percent for the driver’s share of Social Security and Medicare, and your full 7.65 percent share. Without the 1099s, the first two double. Federal unemployment tax can add up to $420 per driver ($42 with the full state credit), and interest, penalties, and state amounts come on top. Multiply by every driver and every open year to see the real exposure.

The IRS offers one form of relief for past years. If you had a reasonable basis for treating drivers as contractors, filed all required 1099s, and never treated anyone in a substantially similar job as an employee for any period after 1977, you may be relieved of the federal employment taxes (IRS Publication 1976, Section 530 relief, revised December 2025). The relief does not make the drivers contractors, and it does not cover wage claims or state law.

When a driver can be a 1099 contractor

A contractor arrangement fits a driver who really runs a separate business. Check each of these before you sign one:

• The driver’s company owns or leases the vehicle, pays its costs, and insures it.
• It sets its own hours, can turn down trips, and serves other customers.
• It has its own credentials, and your broker has consented in writing to the subcontract.
• It is paid a contract price and can lose money on the work.
• In an ABC-test state, you can also prove the work is outside the usual course of your business, which is rare for NEMT.

For payments made in tax years beginning after 2025, file Form 1099-NEC for each contractor you paid at least $2,000 for services. The threshold may be adjusted for inflation starting in 2027. File with the IRS and give the driver a copy by January 31.

How to move drivers from 1099 to W-2

1. List every driver and how each one works. Use the table at the top of this guide. Drivers in the same role should get the same treatment.
2. Check the Voluntary Classification Settlement Program. You may qualify if you treated the drivers as contractors consistently, filed all their 1099s for the previous three years, and are not under an IRS employment tax audit or a Labor Department or state classification audit. File Form 8952 at least 120 days before the date you want drivers on payroll. You pay 10 percent of the reduced-rate tax for the most recent year, with no interest or penalties, and no employment tax audit of classification for earlier years. The relief is from federal employment taxes only.
3. Set up payroll. Collect Form W-4 and Form I-9 from each driver. Withhold income tax, and withhold and match Social Security (6.2 percent each) and Medicare (1.45 percent each). File Form 940 for federal unemployment tax: 6.0 percent of the first $7,000 of each employee’s pay, less a credit of up to 5.4 percent for state unemployment tax paid.
4. Open your state accounts. Register for state withholding and unemployment, and get workers’ compensation in place before the start date.
5. Set a pay plan that meets wage rules. Count waiting time and required training time as hours worked. See NEMT driver pay and overtime rules, and track hours on a driver timesheet.
6. Update your broker files. Keep each driver’s credentials, training, and insurance current under the new setup, and tell your broker about any change its agreement requires you to report.
7. Keep the records. Document how you decided each driver’s status. The IRS tells businesses to document each factor used in the decision.