One of the most common issues when it comes to workers’ compensation insurance is the difference between employees and independent contractors. Because the line between the two can be a bit gray, it’s easy to misunderstand them. However, knowing the difference is crucial when it comes to both federal taxes and workers’ compensation.
The Internal Revenue Service (IRS) has established certain guidelines that define the differences between an employee and an independent contractor. Some states also use specific guidelines to help determine the differences.
The IRS uses three main categories to determine whether a person’s status is an independent contractor or an employee. These categories are:
* Behavior Control – Who determines how the work is done and what materials or tools to use to do the work?
* Financial Control – Who has a significant financial investment at work? Who pays the costs incurred by the work? Who has the ability to make a profit or a loss from the job?
* Relationship of the Parties – Who pays for benefits such as health or vacations? Is there a written contract between the parties that explains who is responsible for what?
the independent contractor
An independent contractor is one who is self-employed. He or she determines how the work is done and what materials and tools are used to do the work, as well as providing them. Because the contractor is self-employed, he incurs all expenses related to the work being performed and may make a profit or loss from the work. An independent contractor usually has some type of written contract with the company he works for that outlines the responsibilities of each party.
According to the IRS, an independent contractor is responsible for their own income tax and self-employment tax. Depending on the business and state, you may be required to pay estimated payments for these tax liabilities. Expenses for the work may be claimed by the independent contractor.
The employee
An employee, on the other hand, is not self-employed, meaning that he or she does not work for himself or herself. The employee, in general, does not decide how the work is done or what materials and tools are going to be used; Usually these are decided and provided by the company. Generally, an employee does not bear the expenses of the job and, other than wages, cannot make a profit or loss from the job. Employee paperwork is often used to help define what is expected of the employee as well as company policies.
The business is required by law to withhold income tax and a portion of Social Security and Medicare taxes from the employee’s wages. You must also pay Social Security, Medicare, and unemployment taxes on those wages. The company is required to provide the employee with a W-2, which shows the amount of tax withheld from the employee’s pay. Work-related expenses can only be claimed by the employee if they are equal to or greater than 2% of the employee’s adjusted gross income.
The need for workers’ compensation insurance
In shorts, yes. Having work accident insurance is a legal requirement. Employers who do not carry workers’ compensation insurance can be subject to heavy fines, lawsuits, and even put out of business.
Even if a business thinks it only hires independent contractors, it still must carry worker’s compensation. Without worker’s compensation, the company takes unnecessary risk in the event that one of the workers is injured. Since in many, but not all, states independent contractors cannot obtain workers’ compensation insurance, it is not uncommon for a worker who is seriously injured on the job to claim an employee relationship for medical benefits. Having workers’ compensation insurance can help protect the company from such cases should the worker be found to have employee status.
Several states have established guidelines to help determine a worker’s status. In California and Arizona, for example, the guidelines closely follow IRS guidelines. Both states assume workers are employed unless and until proven otherwise. In these states, employers must carry workers’ compensation insurance no matter how many employees they have or the conditions of their employment. The amount of control the employer has over the worker is a primary determination of whether a worker is an employee or an independent contractor. Independent contractors and sole proprietors with no employees of any kind for any duration may elect to carry workers’ compensation insurance in these states, but it is not required with the exception of roofers working in California.
In addition to the possibility of paying workers’ compensation for a worker who is believed to be an employee, it is possible that once the worker’s relationship is legally considered “employee”, a company could face various lawsuits for violation of the laws jobs that otherwise would not. have applied. These include wage and hour laws; minimum wage laws; state overtime laws; payroll record keeping laws; failure to withhold taxes, Social Security and Medicare; anti-discrimination laws; failure to carry workers’ compensation insurance; and deliberate understating of payroll to reduce the cost of workers’ compensation insurance. Having workers’ compensation insurance can help reduce the possibility of lawsuits, which can cost thousands of dollars in legal fees, as well as up to $50,000 in fines, penalties and possibly jail time.
The Effect of Contractors on General Liability Premiums
Businesses that have independent contractors or pay their employees on a 1099 and report them as subcontractors typically pay a higher premium than necessary. Contractors are considered a larger liability and therefore cause premiums to increase. If the evaluation of these contractors reveals that they are, in fact, employees, changing their status may lower general liability premiums.
Common sense protection
A business is a great investment. Protecting it is one of the best things any owner can do. Before hiring someone, employee or independent contractor, a business should seek workers’ compensation insurance to protect themselves in the event of a workplace injury. When hiring an independent contractor, request proof of insurance with specific coverage, including worker’s compensation if the state allows it, and verify that it is current. Those who are unable or unwilling to provide insurance information should not be allowed in the workplace. Otherwise, the company is at immediate risk of a liability claim.
Similarly, independent contractors must have their own insurance that includes medical, disability, and, if allowed by the state, worker’s compensation. Doing so not only protects the contractor, but also their livelihood.
If you are a business looking to obtain workers’ compensation insurance or an independent contractor in need of your own insurance, you can get a free quote by completing the form at BizInsQuotes.com. You can also learn more about workers’ compensation insurance and other types of insurance available to help protect your largest investment. So whether you need insurance or are looking for a better deal, visit BizInsQuotes.com and fill out the free quote form.
