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When it comes to workers’ compensation, are you required to carry the insurance for people who are not your full-time employees? For many business owners, this is not an easily answered question.

While state law does not require you to carry the coverage for independent contractors, and a number of employers do not classify those who work for them as full-time employees, there is a catch.

You may think a person doing work for you is not a full-time employee, and that you can save money on payroll taxes, state taxes, and federal taxes, and workers’ compensation premiums by classifying him or her as a contractor. But the government may disagree with your classification, which could cost you a lot of money down the line.

Another catch is that some state laws require you to provide the coverage if the contractors don’t provide it themselves.

Penalties For The Wrong Classification

An employer could face tax fines and a variety of serious penalties if someone classified as an “independent contractor” is later classified as a full-time employee.

The IRS used to make it simple for employers to figure the issue out. If withholdings were deducted from a check, the person was an employee. If not, the person was an independent contractor.

That was before the IRS realized it was losing $30 billion in tax revenue annually because of people being misclassified as independent contractors. As a result, every IRS audit considers whether those who work for an employer were correctly classified as employees or independent contractors.

There is another danger of those who work for you being misclassified. Your general liability insurance may cover you if an independent contractor is injured on the job, but if someone working for you is later classified as an employee, it will not cover damages. Legal damages can sometimes exceed $1 million.

Full-Time Employees vs. Independent Contractors

There are some distinctions between employees and independent contractors:

  • An employee can quit whenever he or she desires without any financial loss, while an independent contractor can earn a profit or suffer a financial loss.
  • An independent contractor does the same work for you that he or she does for others. An employee continues to work for you exclusively.
  • An independent contractor can schedule his or her own work schedule and hours, while an employee has to follow a schedule you have established and work where you want.
  • An independent contractor can hire assistants, pay, and supervise them. He or she usually has all his or her own tools. On the other hand, an employer often furnishes many of the necessary tools for an employee.
  • An independent contractor has his or her own business license, while an employee is usually trained by the employer.

Some insurance carriers require employers to deduct payments for independent contractors for workers’ compensation, unless the contractors have their own insurance. Some employers have found if their contracts specifically state that the purchaser of services does not provide the insurance and is not liable, their carrier cannot do this.

How To Protect Your Business

Some employers protect themselves on this issue in a few different ways ways:

  • They buy the insurance, even if those in charge don’t think they have any employees. A general liability policy combined with the workers’ comp policy will protect both employees and independent contractors. Being prepared before an accident is safe.
  • They require their contractors to have their own workers’ compensation insurance. Make your contractors provide a Certificate of Insurance. Mark the date down on your calendar their policy expires. Request a new Certificate before that date. You should also request their general liability coverage listing on the Certificate. In addition, you should be listed on the Certificate as an additional insured.
  • Provide your independent contractors workers’ compensation Certificate to your own workers’ compensation company. The company will then have no reason to consider the contractors as your employees and charge you an additional premium.

If you have any additional questions about workers’ compensation and the independent contractor, feel free to contact us.