As a general contractor, you’ve reached a new milestone: your business has grown and you need to hire independent contractors to help you with certain projects. Great! But here comes a speed bump: do you need to purchase workers’ compensation insurance for them, too?
What does the IRS say, and where do state laws leave you? And when it comes down to it, how do you tell the difference between your employees and your subcontractors?
Although it would be great if there were simple answers to these questions, the reality is that there’s a lot of gray area in federal and state laws. But it’s not impossible to untangle the rules, so read on to find out all the answers.
Do Subcontractors Need Workers’ Comp?
Subcontractors need workers’ comp insurance if they have employees, a contractor’s client or state law requires it, or their own health insurance won’t cover work injuries.
Why is that?
- If they have their own workers, they’ll need workers’ comp since that’s the law in every state except Texas.
- If your client requires all workers on a project to get a workers’ compensation policy—from the general contractor down to the part-time workers—you’ll want to make sure they have this so you can keep that client. Clients may request this to protect them from possible lawsuits if there are work-related injuries that result in medical costs. Subcontractors may have to show clients a certificate of insurance to prove they indeed have this insurance.
- If your state requires you to include all your subs in your workers’ comp payments, then you will need to make sure they get coverage. If it’s discovered during your workers’ compensation audit they don’t have it, you’ll owe your insurance carrier their premiums. However, in many states, business owners are not required by law to provide workers’ comp coverage for subcontractors. But if you fail to do so, you run a risk: if a sub is injured on the job, you could be held liable, and your own workers’ comp policy would be charged. So, it’s best to give your agent or broker a call to check on what you need to do.
- If subcontractors’ health insurance doesn’t cover them for work injuries, then it’s possible they could sue you for injuries. Private health insurers aren’t obligated to cover work injuries, so it’s better for everyone to have comp insurance.
Even for sole proprietors with no employees of their own, a workers’ comp policy would pay for medical costs and lost wages if they can’t work. Many independent contractors, therefore, purchase their own policies, even if it’s not required by the state.
What Classifies Someone as a Subcontractor?
Someone can be considered a subcontractor if they:
- Control their own workflow: A subcontractor gets to decide where and when to do the job, what tools to use, and who will be helping them. If they can’t do these things, they may be an employee.
- Make their own financial decisions: They decide what materials or equipment to purchase, what types of skills they should develop (and invest in), and any other expenses that may be needed. They’re also the ones to profit (or lose) from their own work. Employees, on the other hand, don’t typically control where the money goes—and who stands to profit.
- Control their own benefits and pay rate: If a person has their own benefits—like health insurance, a retirement plan, etc.—and sets their own wage, they’re a subcontractor. If they get benefits from a business, such as insurance or paid vacations and their compensation is determined by that business, they are likely to be an employee.
- Get 1099s and pay own taxes: Subcontractors will get a Form 1099-NEC from their contractor. They pay their own quarterly taxes, social security, etc. For employees, the business owner must withhold payroll taxes from their paychecks. An employer will give employees a W-2 Wage and Tax Statement at the end of the year, which they will use when they do their taxes.
What Is the Difference Between Independent Contractors and Subcontractors?
Subcontractors and independent contractors are hired and paid by different entities. A subcontractor is hired by an independent contractor. Meanwhile, an independent contractor is hired by a client.
For example, a general contractor who hires a plumber to work on the apartment complex he’s building, is hiring a subcontractor. Meanwhile, the general contractor is an independent contractor because they’re hired by the apartment complex.
What Are the Steps for a Subcontractor to Get Workers’ Comp?
Let’s say you’ve got a new subcontractor that comes highly recommended, and you want to integrate them into a project you’re managing. What steps do you take to ensure they are covered?
The first thing to do is to make sure they are indeed subcontractors and are not considered by law to be your employees. We’ve talked above about some of the ways you can differentiate between the two. Be sure to check on any local laws passed by workers’ compensation acts in your state.
Find Out If Subs Have a Policy
If your 1099 worker has their own workers’ compensation coverage, they should be able to show you a certificate of insurance, given to them by their insurance provider.
Be sure that their coverage is valid for the dates during which they worked on your project, and be sure you have a copy of the certificate to show your insurer at your audit. It’s a good idea to hang onto all certificates of insurance for at least seven years.
Add Them to Your Policy if Necessary
If they do not have their own policy, you may want to add them to your policy for the duration of their work with you. This practice will pay off if they are injured and incur medical bills. A single injured worker can make the difference between success and failure on a job if they are not covered and you are deemed liable for their injury.
Even if your client does not require it, it’s worth a call to your insurance agent or broker, who can answer your questions and get you on the road to full coverage for both employees and any other individuals you hire to work on a project.
Know Your State Laws
In some states, you may find that your insurer is required to include your 1099 contractors in your workers’ comp payments if they are discovered during your workers’ compensation audit. If an independent worker files a workers’ comp claim and does not have their own insurance policy, your insurance may be charged.
Maintain Your Files
Be diligent in keeping all documentation related to your projects and your insurance coverage, including any certificates of insurance you collect over the year. Having this material organized and ready for review can make your annual audit go far more smoothly and quickly.
Use Software to Manage Workers’ Comp
To make it all super simple, use software like Hourly to manage your payroll and workers’ comp policy. Hourly’s easy and efficient interface can help you stay compliant and take away many of the headaches associated with managing a business.
Do Subcontractors Need Workers’ Comp in Pennsylvania?
Like many states, Pennsylvania doesn’t require self-employed workers to carry workers’ compensation insurance, but there may be benefits for individuals in doing so.
The state does mandate that small business owners provide detailed information proving that the subcontractors they work with are truly independent. If the insurance company decides that a sole proprietor is actually an employee, they will be charged for that person’s premium following a workers’ compensation audit.
Are 1099 Employees Covered by Workers’ Comp in Florida?
Florida business owners in construction are required to carry workers’ comp for every single employee, including contractors. Florida’s workers’ compensation law specifically does not allow independent workers in the construction industry. All Florida workers in construction must either be business owners or employees—and all employees need workers’ comp.
In non-construction trades, there are specific requirements that independent contractors must fulfill to be considered anything other than an employee. These include maintaining a separate work facility, holding bank accounts in the name of the business, and receiving compensation from multiple clients.
Protect Everyone with Workers’ Comp
It’s usually in everyone’s best interest for subcontractors to have workers’ comp—whether it’s their own policy or your business’s. This protects them from injuries and lost wages, and you from costly lawsuits.
So now that know all there is to know about insurance for subcontractors, all that’s left to do? Call your insurance broker and make sure all your bases are covered.