Workers Compensation: 1099 Employees & Workers Comp

Businesses are required by law to have workers compensation insurance for their employees. However, the need for this essential coverage can be a bit confusing to businesses that engage the services of independent contractors, also referred to as 1099 employees or 1099 contractors.

Since 1099 contractors aren’t direct employees of your business, you may skip their coverage on your company’s workers compensation policy. However, this is not the best practice for your business.

According to the U.S. Bureau of Labor Statistics, independent contractors accounted for roughly 6.9 percent of the labor force in May of 2017. Those numbers have only increased throughout the COVID-19 pandemic. The better you understand the differences between independent contractors and employees, the better you can protect your business with the right insurance protection – Not only to comply with local and state laws but also for the additional benefits workers comp insurance offers employers.

What is the Technical Difference Between Contractors and Employees?

The differences between the two are anything but simple. According to the IRS, the differences between the two are measured in the following three categories.

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  1. Who has behavioral control of the worker? This includes things like instructions provided, tools supplied, evaluation systems used, and training of the worker.
  2. Who has financial control? This may include things like reimbursement for expenses (more common with employees than independent contractors), method of payment, and who provides the equipment (most businesses provide equipment for employees while independent contractors provide their own).
  3. What is the relationship between the two? Businesses often provide employees with benefits, such as health insurance, retirement benefits, etc. This is not usually the case with independent contractors. Also, most 1099 contractors are engaged for a specific project or predetermined length of time while employees are more permanent and long-term in nature.

Because tax requirements are different between the two, the IRS takes the misclassification of workers seriously. When it comes to the insurance needs of your business, the differences are subtler.

Protecting Your Business: Risks for Businesses When Working with 1099 Status Workers

In addition to the IRS penalties associated with misclassifying workers, which can be substantial, employers who fail to secure proof of workers compensation insurance for their independent contractors will have the cost of that contractor added to your own workers compensation payroll which will increase the cost of your policy. However, providing this essential protection to independent contractors provides additional protection to the business. Workers compensation, while created to protect workers, also serves to protect businesses in the event that workers are injured, become ill, or are killed because of the work they perform on behalf of your business.

You might wonder how workers comp insurance protects businesses. The answer is simple, it reduces the risk of crippling financial repercussions if an employee (or contractor) is injured while working for you and it spares you potential legal problems in your state should you not provide the required coverage. These problems include massive fines and, in some states, imprisonment. So, do you need workers comp for 1099 workers? The simple answer is yes.

Check Your State Requirements and Work with a Trusted Agent

Some industries, such as the construction industry, often maintain workers compensation insurance for all contractors on large job sites. However, some states have specific requirements for which types of contractors require workers compensation protection.

Our advice? Work with a trusted insurance agent, like our team at Arnold Insurance to help you make the best decision for your business when it comes to insurance coverage and answer all your burning insurance questions.


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