1099 or W2? How does it affect business insurance?

Feb 01, 2011

This is a common issue being raised by an increasing amount of businesses these days, especially in the construction trades. Although, it is not exclusive to construction as the General vs. Sub contractor relationship exists everywhere in business. As it relates specifically to general liability and workers compensation insurance though, there can be a great deal of rammifications, and costs, associated with how an individual is classified.

Many employers, in an attempt to avoid payroll taxes and other employee-related expenses (health benefits, etc.) will elect to call an individual a "subcontractor" (ie: 1099) rather than a salried employee (W2). While there may be other issues surrounding an improper classification beyond insurance, that's all I'll discuss here. To properly classify someone as a true independent subcontractor, they must meet several criteria as set forth by the IRS that have to do with the amount of control over job performance and outcome that the individual has. Obviously, the employer is attempting to avoid, in addition to any payroll tax expenses, paying liability and workers compensation  insurance on these individuals. By declaring them as "subs" they hope that their insurer will exempt them from any payroll audit and thus reduce their premium costs. Many an employer has been caught in this failed attempt, however, as their desire to lable these workers as subs...and their actual qualifications as a true subcontractor, can sometimes differ. The result is a general liability or workers compensation (or both) audit that uncovers employees that failed to qualify and are subsequently included as employees, and additional premium is owed. I urge you to review the website of the IRS for a full discussion on this topic ( start here: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html ) to help you determine how to proceed and avoid a costly payroll audit. Audited payrolls for insurance that generate additional premiums are typically due in full, compounding the problem.

While your business insurance agent can assist you in proper classification of employees, ultimately its up to the employer to research and classify workers correctly. We can tell you the costs associated with either path you take, but come payroll audit time it will be up to you and the worker to either satisfy the requirments or not. I have had many a disgruntled employer presented with an insurance bill for workers that were issued 1099's only to have their sibcontractor status denied, and premium charged. Find out ahead of time and classify correctly as once the year is over, its impossible to go back and change a workers status.

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