Do I Need Workers’ Compensation Insurance for 1099 Employees
Legally, workers’ comp is not needed for 1099 employees. However, if the employee lacks coverage, you may be held liable in case of injury.
Also, if a state or federal authority determines your 1099 workers are not in fact independent contractors, they must be reclassified as employees. That also means you’re required to provide them with workers’ compensation insurance.
As you can imagine, it’s far better to understand this at the outset, rather than at the end of a costly litigation process.
If you think this sounds complicated, you’re right. Understanding workers’ comp for 1099 employees and how it affects your business is critical. In this blog post, we’ll explore the situation and help you answer the question of whether you need workers’ comp for 1099 employees.
What is a 1099 Form?
A 1099 form is a series of tax-related documents that shows income from a non-employer source. This form differs from a traditional W-2 form in many ways.
For one, it only includes compensation and does not include deductions for things like FICA. This is because independent contractors are responsible for paying all their withholdings and hirers are not.
Who receives a 1099 Form?
A 1099 form is provided to independent contractors by the companies that contract them for their services. For instance, freelancers often receive 1099s from those who hire them.
The same is true for professionals in certain industries, like independent semi-truck drivers and even construction workers in many cases. These workers will receive a 1099 form at the end of the year from every business/customer that hired them during the preceding tax year.
Workers’ Compensation Insurance Requirements for 1099 Workers
A common question from business owners hiring contractors is: Do I need workers’ comp for 1099 workers? The answer is: it depends. Let’s break it down.
First off, there’s no such thing as a 1099 employee. You have employees, and you have independent contractors.
Employees receive a W-2 at the end of the year, while independent contractors get a 1099 form. According to state and federal regulations, you don’t need to provide workers’ compensation insurance for independent contractors.
Issues arise when business owners hire independent contractors but treat them like employees.
If this happens and the worker gets injured or sick on the job, authorities might rule they’re actually employees. This means you’d have to reclassify them and provide workers’ comp insurance, along with facing potential fines and penalties.
To sum up: employers aren’t required to have workers’ compensation coverage for independent contractors.
However, every state has its own workers’ compensation rules and regulations.
For instance, Ohio’s Bureau of Workers’ Compensation advises that most contractors and subcontractors consider getting their own 1099 workers' compensation insurance plan to cover medical costs and lost wages.
The Bureau recommends liability insurance or workers’ comp to protect yourself and your workers:
“If an independent contractor or subcontractor controls the selection of materials, traveling routes, and quality of performance of another worker, that independent contractor or subcontractor is considered an employer and, as such, is required to provide workers' compensation coverage for that worker.”
Here’s another example. Florida doesn’t require that most 1099 workers carry their own workers’ compensation insurance, although the state does mandate it for most businesses. However, anyone working in construction or related fields must carry workers’ compensation.
The reality for Business Owners
Having in-house employees has its advantages, but bringing in independent contractors has its own set of benefits.
Hiring specialty contractors gives you more staffing flexibility and often results in higher-quality work completed more quickly.
Often, 1099 workers are more friendly to company finances. Paying a contractor a specific rate can be cheaper than an annual salary with benefits and other hidden costs. However, if an independent contractor gets injured on the job, it might end up costing your business more than anticipated.
Understanding workers’ compensation laws is crucial for small business owners. It helps protect your business, prevent mistakes, and ensure that contract workers receive the necessary support if they get hurt on the job.
The benefits of Workers’ Compensation Insurance
Whether you’re a 1099 worker or an employer wondering “do I need workers’ comp for 1099 employees,” this type of coverage is invaluable. It offers quite a few benefits, including:
Peace of mind for workers who suffer workplace injuries
Coverage of medical expenses, lost wages, and disability benefits
Avoidance of fines and penalties should an accident occur and the powers that be rule your independent contractors are actually employees
Risk mitigation if you’re involved in an audit
For employers, it might make sense to provide coverage for 1099 workers.
Should I consider Independent Contractor Workers’ Compensation Insurance anyway?
Accidents happen, and they can occur whether you hire in-house employees or independent contractors.
If you find yourself dealing with a 1099 employee injured on the job, and you don’t have business insurance specific to workers’ compensation, you may end up with a lawsuit in your lap.
Instead of expecting your contractors to achieve the impossible and avoid all accidents, you can:
- Ask them to give you a Certificate of Insurance, which shows they have their own workers' compensation policy in place.
- Include your 1099 workers in your own workers' comp policy. That way, they’ll be protected alongside your other employees.
- Additionally, to protect yourself even further, you can get a waiver of subrogation from your 1099s. This will prevent the insurance company from pursuing a claim against your subcontractors in the event of an accident.
Why Insurance Companies are wary of 1099 Workers
It's important to note that underwriters are often wary of 1099s. Even when you include your 1099s in your workers' comp policy, most underwriters are only comfortable with 25-30% of payroll going to subcontractors. Insurance companies do not like when you have too many 1099s as there are many unknown risks involved. This is referred to as maximum 1099 sub-exposure.
Example: A contractor with $100,000 in W2 payroll for drywall work and $500,000 in 1099s may not find an insurance company willing to cover them.
There are 2 reasons for this:
- Firstly, the subcontractor's insurance may lapse or be fraudulent.
- Secondly, the subcontractor may sub out work that is of a different class code, carrying a higher risk.
To mitigate this risk, a great tip is to avoid invoicing the client for subcontractor work. Instead, have the client pay the 1099 directly and ask for the 1099 to pay you a referral fee instead. This way, you have no liability.
A Real-World Example
By this point, many business owners may still be wondering, “Do I need workers’ comp for 1099 employees?” Again, the answer is “it depends”, but the smart money is on buying coverage.
Why?
Let’s look at a brief example. There was a nurse staffing agency (we’ll leave it unnamed to protect the innocent). The agency had run successfully for many years, but there were some disconnects in terms of how leadership approached risks.
The agency’s leadership had the mentality that 1099 workers didn’t matter when it came to workers’ compensation insurance. After all, no state mandates that employers provide this coverage for independent contractors, right?
In the agency’s situation, it was wrong. The firm was audited, and the owner found himself stuck with a bill to the tune of $139,000. This was in addition to the $55,000 the agency had already paid.
In short, workers’ compensation is always a good idea, even if you believe those 1099 workers are independent contractors and not employees.
Common Misconceptions about Workers’ Compensation for 1099 Workers
Myth: My workers are independent contractors. I don’t need workers’ compensation insurance for them.
Truth: Your workers might be independent contractors, but depending on the work and how they’re treated, a court could very well rule that they’re employees. Then you’re on the hook for insurance coverage and you could be facing serious ramifications for misclassifying an employee as an independent contractor.
Myth: Workers’ compensation is too expensive.
Truth: Workers’ compensation doesn’t have to be expensive. The right carrier can make a big difference.
Myth: Only certain types of 1099 workers need to purchase their own workers’ comp insurance.
Truth: It’s true that state governments only require some independent contractors to purchase workers’ compensation insurance. However, those rules vary drastically from state to state.
Myth: If everyone who works for you is a subcontractor, you’re not obligated to provide them with workers’ compensation insurance.
Truth: Yes, your subcontractors are required to pay for their own workers’ comp. However, if they don’t, that responsibility falls on your shoulders and you may be held liable if they’re injured on the job.
Myth: Only people who receive a 1099 from me are my responsibility.
Truth: This situation is not limited to those who receive a 1099 form from you. You might pay someone for work done via Zell, Venmo, Cashapp, or cash. Regardless, if you’re paying people for work on your behalf, workers’ compensation insurance needs to be a consideration.
Myth: Independent contractors cannot sue my business if they’re harmed on the job because they’re not employees.
Truth: If someone working for you is harmed on the job, they can sue your business, even if they’re technically independent contractors.
Do you want peace of mind when working with contractors?
Let us be your workers' comp insurer. Call or text us at 866-311-9514 for a free consultation or fill out a form to get your instant quote on workers' compensation insurance today.
Note: The information provided in this blog is intended for general informational purposes only and is not a substitute for professional legal or insurance advice. Laws and regulations regarding workers' compensation insurance are complex and vary by state and by specific circumstances. Therefore, readers are encouraged to consult with a qualified legal or insurance professional to obtain advice with respect to any particular issue or problem they might have.
Mordechai Kamenetsky, co-founder and lead agent of Kickstand, is recognized as an expert in workers' compensation. He is passionate about helping small businesses manage risks and lower their workers' comp costs. In his articles, he educates readers and clients on the intricacies of workers' comp insurance.
The question people ask us most often is, “Does my business need workers comp?” This often leads to the second-to-most frequently asked question: ”Do owners need workers comp?”
