Over the last three years, professionals have left their salaried jobs in droves for a taste of entrepreneurship. As a result, we’ve seen a surge of new businesses created—14.8 million to be exact. According to the US Census Bureau, that’s the number of new businesses created from 2020-2022. It’s quite a jump from the 10.2 million businesses formed in the three years prior.
As more people become self-employed independent contractors, they’re seeking coverage to protect themselves should they become injured on the job. In the past, independent contractors and other self-employed professionals had limited commercial insurance options, but today the marketplace has transformed to meet the needs of companies of all sizes.
Do independent contractors need workers’ compensation insurance?
Independent contractors are just as likely to get injured on the job as full-time employees, perhaps even more, as they may be unaccustomed to new office layouts and frequently travel on assignment. Workers’ compensation insurance protects independent contractors from being sunk by medical bills and lost income in the event of an injury incurred while working.
Understanding workers’ compensation requirements can be tricky. If you’re a sole proprietor or an independent contractor, the regulations that dictate who must obtain workers’ compensation insurance vary based on the state you’re doing business in.
Regardless of the state in which you reside, if you’re injured on the job, it’s likely that you’ll be responsible for medical costs and fees related to your injury. Health insurance policies typically exclude work-related incidents. Since companies don’t cover independent contractors under their workers’ compensation policy, you’ll be responsible for lost wages, medical bills, physical therapy, surgery, and more. A serious injury can sideline you and even put you out of business. Even if you’re not required to obtain a policy, you should consider the value that this type of coverage provides.
Having a policy in place is the cost of doing business
Many companies will ask independent contractors for a workers’ compensation certificate of insurance in order to do business. From their perspective, there is no benefit to hiring uninsured independent contractors, only additional risk. Why? Annual workers’ compensation audits require companies to disclose their payroll for employees and uninsured subcontractors, including independent contractors. If an independent contractor does not provide a certificate of insurance, the cost of that contractor is added to the workers’ compensation payroll, increasing the price of the company’s own policy.
Every state has its own set of laws governing workers’ compensation, including various penalties for failing to carry coverage. In Massachusetts, for example, you can face civil fines of up to $250 a day and criminal fines of up to $1500 in addition to jail time. In New Jersey, failure to carry workers’ compensation is considered a criminal offense punishable by a fine of $10,000 or imprisonment for up to 18 months.
Having a workers’ compensation policy in place puts your clients’ minds at ease and helps you remain competitive to retain their business.
What’s the difference between an employee and an independent contractor?
Employees and independent contractors are paid differently, but their relationship with the employer and how they work with them determines how they should be classified.
Workers are typically given a W-2 or a 1099 upon being hired. A W-2 tax form is for workers who are considered employees. When they’re paid, the business withholds and pays various taxes. 1099-employees are self-employed independent contractors who don’t have their pay withheld and are responsible for paying their own taxes. Employees are often misclassified, which can quickly lead to lawsuits. Penalties differ from state to state, but classifying an employee as an independent contractor with no reasonable basis for doing so makes the employer liable for employment taxes.
The IRS offers these helpful categories to determine which type of status a worker should have.
- Behavioral Control: A worker is considered an employee when the business has the right to direct and control the work they’re performing, even if that right is not exercised. This control could include instructions about when and where to work and which tools should be used to perform that work. More detailed instructions usually indicate that the worker is an employee. Less direction reflects less control, meaning the worker is likely an independent contractor. Training a worker also indicates that they are an employee, as independent contractors typically use their own methods.
- Financial Control: If the business directs or controls the financial aspects of the worker’s job, the worker is likely considered an employee. This direction may come in the form of investment in the equipment used to perform the job, reimbursement for expenses, or the way the worker is paid.
- Relationship: The way the business interacts with the worker is key to determining their status. Employees typically receive access to benefits such as insurance and vacation pay, while independent contractors do not. The permanency of the relationship is also an important method of evaluation. Independent contractors are typically hired for a finite amount of time or a specific project or period. This agreement is usually outlined in a written contract, which describes the relationship between the parties.
For companies that still aren’t sure how to classify a worker, the IRS provides form SS-8 to help determine status.
Understanding workers’ compensation from both perspectives
If your business grows and you bring on subcontractors or other employees, even for just one job, you’re now an employer yourself. Make sure you understand what you need to do from the employer’s perspective.
Even if subcontractors have their own workers’ compensation policy, your state still might require you to provide workers’ compensation coverage for them. The cost can vary from state to state, but the average cost of an office employee may be less than 1% of payroll per month. A high-hazard trade can cost as much as 10% of payroll, depending on your specific business. The total cost typically depends on the number of employees, payroll, location of your business, risk level, coverage limits, and claims history.
Having a workers’ compensation insurance policy already in place allows for a smooth transition when you add employees to your business. Obtain a workers’ compensation policy today and gain the peace of mind that comes with coverage.
