Do I Need Workers’ Compensation Insurance for 1099 Employees?

There are two primary types of workers in the world – official employees and independent contractors. 

The general rule of thumb is that the law mandates most businesses provide employees with a range of benefits, including workers’ compensation insurance. 

However, independent contractors (those who receive a 1099 at tax time rather than a W-2) must purchase their own benefits, including workers’ compensation insurance. 

So, the short answer to the question of “do I need workers’ compensation for 1099 employees” is no. However, that’s somewhat misleading. There is a major exception here that could cost businesses tens of thousands of dollars. 

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 do you need workers’ comp for 1099 employees or not.

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

One of the most frequently asked questions by business owners who hire contractors is do I need workers’ comp for 1099 employees? Again, the answer is “it depends”. Let’s break things down a bit.

First, understand that there is no such thing as a 1099 employee. There are employees and there are independent contractors. 

Employees should receive a W-2 at the end of the year. Independent contractors receive a 1099 form. The state and federal governments say that you do not need to provide workers’ compensation insurance for independent contractors. 

The problems start when a business owner attempts to hire independent contractors and then treats them like employees. 

If this is the case and the worker is injured or becomes ill on the job, there’s a very good chance that a state or federal authority will rule that they are not independent contractors, but are employees, meaning that you must reclassify them and provide them with workers’ compensation insurance. You’ll also find yourself facing fines and penalties.

So, to recap: employers are not obligated to have workers’ compensation coverage for independent contractors.

However, each state has its own rules and regulations regarding workers’ compensation insurance.

For example, the state of Ohio’s Bureau of Workers’ Compensation states that most contractors and subcontractors should consider their own 1099 workers' compensation insurance plan to cover medical costs and lost wages.

The state’s bureau suggests getting 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 involved in the construction industry, or an adjacent field must carry workers’ compensation. 

The Reality for Business Owners

Having in-house employees is beneficial, but hiring independent contractors comes with its own perks.

Not only does it offer more flexibility in staffing, but hiring specialty contractors for your small business can lead to better work at a faster pace.

In many cases, 1099 workers are more friendly to company finances - paying someone their specific rate instead of an annual salary plus benefits, and other hidden costs, is cheaper. Although, your independent contractor may end up costing your business more money than you bargained for if they accidentally get hurt on the job.

Understanding workers’ compensation laws can help small business owners like you protect your business, avoid mistakes, and offer contract workers help 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

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Coverage of medical expenses, lost wages, and disability benefits

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Avoidance of fines and penalties should an accident occur and the powers that be rule your independent contractors are actually employees

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Risk mitigation if you’re involved in an audit

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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. 

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Myth: Workers’ compensation is too expensive.

Truth: Workers’ compensation doesn’t have to be expensive. The right carrier can make a big difference.

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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.

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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.

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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.

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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.