Work Comp for Employers

Worker's Compensation Insurance for Businesses Explained

(Everything you need to know - and more)

Workers Compensation for Businesses

As a business owner, you have enough to worry about, and whether or not you are properly covered with workers' compensation insurance shouldn't be one of them. You should, however, have a general understanding of your responsibilities as an employer in this area.

An independent insurance agent is also a great resource and can help answer any further questions you may have. Your agent will also find you competitive pricing with adequate coverage so your workers' compensation policy won't be astronomical.

What Is Workers' Compensation Insurance?

Workers' compensation insurance is a policy taken out by an employer or subcontractor to pay for injuries that they or their employees sustained while working. This policy is mandatory in some states, and some contracts may even require it to do business with them. 

The bottom line is that you don't want to be responsible for medical expenses out of pocket should you or an employee get hurt on the job. Leaving the cost up to the insurance company is the best way to avoid financial ruin.

Owners, Members, Officers, and CEOs

If you are an owner, member, officer, or CEO of a company, you have the option of excluding yourself from your workers' compensation policy. This, in return, will not require you to include your annual payroll for yourself, thus saving you some much-deserved cash.

As a result of this exclusion from your own workers' compensation policy, you will not have coverage under your policy should you get hurt while doing business. That is what your medical insurance is for. 

The choice to exclude yourself from your own workers' compensation policy is entirely up to you, but most business owners do this to avoid paying the additional premium.

What You Need to Know about W-2 Employees

The IRS takes both W-2 and 1099 employee classification very seriously. An employee should be classified as a W-2 worker if they are required to work certain hours and days set by the employer. If they are paid on an ongoing continuous basis for a job with no end in sight, then they need to be a W-2 employee. 

If the employer requires them to be present at meetings, events, or other work functions, then this again is a W-2 employee and should be filed as such. 

All W-2 employees have a portion of their taxes paid by the employer, which is also the reason why some employers try to classify a true W-2 employee as a 1099 subcontractor. Don't fall into this trap. It will cost you a lot more in the long run.

All W-2 employees are included in an employer's workers' compensation policy and classified according to job duty type.

What You Need to Know about 1099 Subcontractors

A true 1099 subcontractor is self-employed, pays their own taxes, and will not be included on an employer's workers' compensation policy as long as they provide the proper certificates of insurance showing their own coverage. 

Now if you are the employer and you are lenient on requiring certificates of insurance on your 1099 workers, then you are in for a big surprise when audit time comes around. 

An employer does not need to pay workers' compensation premiums on a 1099 worker as long as they get proper documentation from the subcontractor that shows proof of their own workers' compensation policy. 

As the employer, you need to make sure that each subcontractor has limits equal to or greater than your own policy limits because that is what most insurance companies require. 

You also need to make sure the certificates of insurance they hand you are current and legitimate. Remember, ignorance doesn't pay off here. If you fail to comply with your workers' compensation audit, they may not be so forgiving. 

Not collecting proper certificates and not complying with safety procedures and meetings could result in the cancellation of your workers' compensation policy. If your policy gets canceled, it is like a credit score to other insurance carriers on the market. 

They talk to one another and aren't so willing to give you a shot at a new policy without a high price tag for the potential risk. It's best to keep a good reputation with your insurance companies so that your bottom line won't be affected.

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What You Need to Know about Workers' Compensation Audit

Preparing yourself for a workers' compensation audit is as easy as being proactive instead of reactive.

 Items that may be required in an audit:

1.) Certificates of insurance from any 1099 subcontractors you've hired throughout the policy term

2.) All W-2 employee tax filings

3.) Classifications of each worker with job duty descriptions for each

4.) Payroll for each W-2 employee and 1099 subcontractor that has been paid out in the policy term

5.) Documentation of any and all safety procedures implemented and mandatory meetings attended

6.) All subcontractor agreements signed and dated 

  • Subcontractor agreement: A subcontractor agreement is a contract worked up by your legal counsel that lays out the terms and conditions that the subcontractor is performing for your business. It also puts in requirements like what needs to be included on the subcontractor's certificate of insurance.

7.) All hold harmless agreements signed and dated by all subcontractors hired

  • Hold harmless agreement: A hold harmless agreement is an agreement worked up by your legal counsel that is signed by the subcontractor stating that they will hold your business harmless should they get injured while doing a job for you or as a result of doing business with you.

Misclassifying consequences:

If there is one thing as a business owner and employer that you want to steer clear of, it is penalties incurred from the IRS. All it takes is one disgruntled 1099 subcontractor who states that you were requiring them to be at certain places at certain times and the IRS will fly into your business faster than the roadrunner on Red Bull. 

This has resulted in hundreds of thousands and even into the millions of dollars for some companies in back taxes and penalties simply because they didn't know or understand what a 1099 worker truly was. 

There is a 20-point checklist that the IRS likes to go by to determine worker status. It is safe to say that if your 1099 subcontractor has even one of these points, you should classify them as a W-2 employee and call it a day. 

20-point checklist:
Actual instruction or direction of a worker: If you are telling a worker when, where, and how to work, then the IRS would most likely classify them as an employee and not a 1099 subcontractor.
Training: If you are having to train the worker in any form or fashion, that would be classed as an employee by the IRS.
Integration of services: integrations of said services shows that the worker is an employee and should be classed as one.
Personal nature of services: If the services are rendered personally, then this indicates lack of control and may be indicated when worker can hire a substitute with permission from the employer.
Similar workers: If you have similar workers doing similar job duties, then this is an indication of employer control over the job and should be classified as a W-2 employee.
Continuing relationship: If the relationship between the employer and the worker is consistent and ongoing, then this shows a need for a W-2 employee and should be classed as such.
Hours of work: If there are set hours that are required to complete the task at hand, then this is a job for a W-2 employee and not a 1099 worker.
Full-time work: Full-time work indicates control by the employer because it does not allow the worker to obtain other employment.
Work on premises: If the worker must do their work on your premises, then employer control is implied and should be classed as a W-2 employee.
Order of performance: If the order in which the worker performs their tasks is set by the employer, then you guessed it, this should be classified as a W-2 employee.
Submitting reports: If the worker has to account for their actions by submitting written or oral reports, then this indicates employer control and should be classed as a W-2 employee. 
Method of payment: Payment method by the hour, weekly, or monthly implies employee-employer relationship and should be classified as such. If the worker gets paid from commissions or contracts, then they can qualify as a 1099 worker. 
Payment of expenses: Payment of any expenses or reimbursement is considered employer control and indicates a worker to be classified as a W-2 employee.
Tools and materials: If an employer furnishes tools or materials, this again indicates employer control and should be classed as a W-2 employee. 
Investment: If there is a substantial investment made by the worker in facilities used to perform job duties, then this indicates a 1099 worker.
Profit or loss: The potential for profit or loss by the worker indicates 1099 worker status. 
Exclusivity of work: Working for a number of different people at the same time indicates 1099 worker status. 
Available to general public: If the worker's services are available to the general public, then this usually indicates they are a 1099 worker.
Right of discharge: The employer has a right of discharge. The 1099 worker cannot be fired as long as they are keeping up their end of the contract. 
Right to quit: The right to quit at any time indicates an employee-employer relationship and should be classified accordingly.

Workers' Compensation Definitions and Terms

  • Certificate of insurance: This is proof of coverage that is provided by the insurance company or agent of record for a policyholder such as a 1099 subcontractor.
  • Experience modification rate: This is a number used by insurance companies to gauge both past cost of injuries and future chances of risk. The lower your businesses experience modification rate is, the lower your workers' compensation insurance premiums will be.
  • Classification code: This is the code that is assigned to each job type or duty per employee or business operation on a workers' compensation policy that determines the risk type and premium amount. The riskier the job duty or operation, the higher the premium.

Safety Procedures for Workers' Compensation Insurance

As an employer, you can require your W-2 employees to go to mandatory safety meetings on a consistent basis. Also, by keeping your work environment or jobsite up to code, and safety regulations followed by proper training (including OSHA), then you could save some big dollars on your workers' compensation premiums.

Factories normally have a big sign on their factory floor that states how many days have passed without an injury. Requiring your W-2 workers to stick to the standards of the company and follow safety guidelines is not only avoiding employee mishaps but also saving your bottom line. 

The Benefits of an Independent Insurance Agent

As an employer, you have enough to consider and many hats to wear. Let your independent insurance agent handle the details of your commercial insurance policies and do what you do best, run your business. An independent insurance agent can find you competitive rates with comprehensive coverage so you have the best of both worlds. 

When an employee needs to file a claim against your workers' compensation policy, your agent is there to make sure the process goes smoothly and that everyone is taken care of. From start to finish, your independent insurance agent is by your side. 

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IRS. (2019). Independent Contractor, (Self-Employed) or Employee.