1099 Employees | Transferring Risk Back to Your Subcontractors

BY: Steven Cooper
Senior Sales Executive – Commercial
scooper@bankersinsurance.netcreate new email | (540) 735-1706opens phone dialer
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Businesses utilize 1099 employees often. We see it frequently with our artisan contractor clients such as carpenters, plumbers, and electricians, but most all businesses will utilize 1099 subcontractors at some time. These employees are paid directly for their work and are provided an IRS form 1099 at the end of the year. In doing so, the employer is classifying these workers as subcontractors regarding payroll and tax accounting. However, the insurance industry is required to follow a different set of rules.

Classifying a worker as a 1099 subcontractor for the IRS does not affect their status on a workers compensation policy, and vice versa. It is important to understand how the IRS views employees versus subcontractors, and a discussion with your tax advisor is recommended. But since the contractor has direct control over these workers, the jobsite, and what work is done, most states and their courts (not the IRS) deem them to be employees. This means any payment to them is considered payroll on the workers compensation policy and a premium is charged for it. This often comes to light during a work comp audit when an invoice arrives for the additional premium.

The reason payroll for 1099 employees is added to a workers compensation policy is because courts find these workers to be protected by workers compensation law. Thus, if one of them is injured on the job, the contractor’s workers compensation policy pays for it. It is not a penalty to owe additional premium at audit, rather it is a finalization of the total risk for the insurance company. There are two main ways to avoid workers compensation audit surprises. One is to account for the additional payroll in the first place, realizing your business will be charged for it. But the other is to utilize subcontractors that carry their own insurance.

Subcontract Agreements

It is best to use an insured subcontractor rather than individual laborers for several reasons. Not only will it save on the cost of workers compensation and general liability policies, but it also lessens the likelihood you will be liable for the mistakes of subcontractors. Each contractor should have a written agreement with their subcontractors which includes insurance requirements, and each year the contractor should obtain a certificate of insurance from their subcontractor that demonstrates compliance with these requirements. This certificate, along with a copy of the 1099, are invaluable at the time of audit.

Your insurance agent can provide a sample subcontract agreement, but an attorney should always review your final document. The purpose is not only to establish the relationship of prime contractor (you) versus subcontractor, but also to include risk transfer, ensuring the sub is responsible for any damage or injury they cause on the jobsite and that their insurance pays for these situations. Example insurance requirements include:

Questions regarding subcontract agreements or payroll’s affect on your insurance policies? Contact your Bankers Insurance agent. Not a client of ours? Let us compete for your business! Each client is assigned a personal agent in our office, given their email address, and provided a phone number that rings right on their desk.

See Also

• Take Control of Workers Compensation Costs
• Ensure Your Subcontractors Shoulder Their Own Risk | Risk Transfer
• Independent Contractors versus Employees: IRS Perspective
• How to Manage Subcontractors & 1099 Employees
• Subcontractors and Workers’ Compensation

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