1099 Workers Comp Explained: An Essential Guide

January 29, 2024 | Insurance 101, Workers' Compensation

This article was originally published April 07, 2023

One of the most important types of insurance a small business can have is workers’ compensation (also called workers’ comp or workman’s comp). That’s because workers’ comp covers medical bills and lost wages for employees who are hurt in on-the-job accidents—and incidents can and do occur in any type of setting in every industry. Workers’ comp coverage benefits the employee, of course, but also the company since assisting employees with their healthcare expenses builds goodwill and helps the employee return to work sooner.

Workers’ comp can also pay a death benefit to surviving family members if an employee dies at work. This provides tremendous reassurance to employees and their families. Plus, the policy provides employer liability coverage that can protect a business against employee losses not covered by workers' compensation insurance or lawsuits filed by third parties that are related to workplace incidents.

Securing coverage is also crucial because states require virtually all companies with employees to have workers’ comp. If you’re caught without coverage, you can face fines and penalties. That’s true even if you never have to file a claim.

Obtaining workers’ comp insurance is easy. You can buy your policy online with coverage active for your employees as soon as the next day in some instances. However, there is an area that some companies find confusing—1099 and workers’ comp.

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Workers’ Compensation for Independent Contractors: What Various Stakeholders Need to Know

Not surprisingly, the subject of workers’ compensation for independent contractors is important for multiple stakeholders. If you’re a busy business owner or decision-maker, you need the reliable guidance on worker classification and other topics that this article provides. Getting answers to questions like, “Do you need workers’ comp for 1099 employees?” and “Are 1099 employees covered by workers’ comp?” is essential—especially since, as you’ll learn below, the term “1099 employee” is a misnomer! 

As a human resources professional, you’re faced with a whole host of legal issues related to 1099 workers and workers’ comp insurance. Consequently, you probably have questions and concerns similar to those of business owners about the complexities of 1099 status and workers’ comp and the related compliance requirements. You’ll find helpful information here that may answer your questions or give you the background needed for additional research or verification with authorities.

Finally, if you’re self-employed, you certainly have to understand the ins and outs of workers comp for independent contractors. Knowing your rights and responsibilities regarding workers’ comp empowers you to navigate professional relationships effectively. That’s especially important if you tend to have multiple business relationships, as is common in today’s “gig economy.” Potential clients will appreciate that you understand the nuances of workers’ comp and 1099 workers so that they don’t have to invest the time and effort to bring you up to speed. They will view it as a sign of your professionalism.

This article touches on all the above issues and others. If you’re a business owner, human resources professional, or contractor, it is essential reading. 

An Important Note About the Inaccurate Term “1099 Employees”

A conversation about contractor workers’ compensation insurance should start with a clarification about a commonly used term: 1099 employees. The meaning may be clear to people who use it—like when they ask, “Do you need workers comp for 1099 employees?” or, “Are 1099 employees covered by workers comp?”—but the term is inaccurate. 

People who perform work for your company are either W-2 employees or 1099 independent contractors. W-2 employees (named for the form they receive from you annually) are people who get regular wages and benefits from your company. Workers who are 1099 independent contractors get paid for completing specific tasks. 

So, someone is either an employee or a 1099 independent contractor. The term “1099 employee” or references to “workers comp for 1099 employees” incorrectly blend the two descriptions and should be avoided to prevent confusion. Explaining this difference to anyone who might use the term can help ensure that everyone at your company is on the same page and understands the difference between employees and independent contractors. 

Independent Contractors and Workers’ Comp

If your business exclusively uses 1099 workers and not employees, you may be able to get an exemption from the state from having to purchase workers' compensation insurance.

If you have a workers' compensation policy and use subcontractors, be sure to collect Certificates of Insurance (COIs) for workers' compensation coverage purchased by the subcontractor. If you don't collect a COI from the subcontractor, your insurance company will likely charge you for workers' compensation insurance for the workers employed by the subcontractor.

It’s common for businesses to want to classify workers as 1099 independent contractors since they can avoid having to pay payroll taxes on amounts paid to those workers. But government entities, including federal agencies like the Internal Revenue Service (IRS) and the Department of Labor (DOL), look closely at the classifications companies apply to their workers and aggressively pursue those that make intentional misrepresentations, which is a violation of tax law.

These government entities can administer significant fines and other penalties if they determine that a worker is incorrectly classified as a 1099 independent contractor.

1099 and Workers’ Comp: Do You Need Coverage for Independent Contractors?

According the the IRS, a worker is more likely a 1099 independent contractor if:

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    You have a contract with them indicating you are separate entities.
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    They perform work for other companies in addition to yours.
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    You have little control over the person’s work and don’t directly supervise them.
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    Their occupation requires certifications, licenses, etc., that they obtain independently.
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    They use their own tools and equipment.
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    The work they do for you differs from your general business (e.g., you sell products, and the contractor is tasked with remodeling your breakroom).
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    There is a specified duration for the engagement.
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    The person considers themself an independent contractor.
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    They can’t terminate the relationship without liability.

If you have questions about workers’ comp for independent contractors or are wondering if you need workers’ comp insurance for contractors, our licensed insurance experts are happy to assist you. 

It’s important to make sure you’ve got the right level of coverage if you’re an employer and to confirm you’re covered if you’re an employee. You should also check on your coverage if you’re an independent subcontractor or an independent contractor. Getting the correct level of insurance is essential to avoid any problems should an injury occur.

1099 and Workers' Comp: Insurance From a Trusted Source

Meeting your workers’ comp insurance obligation is essential. So is getting your policy from an insurer you can rely on if an employee has to file a claim.

biBerk is a Berkshire Hathaway Insurance Group company and leading provider of business insurance online. As an organization, we have over 75 years of insurance experience and millions of satisfied customers. What’s more, we paid $38 billion in claims in 2020. And because we sell insurance directly to you, we can do so at savings of up to 20% over other providers. For small business owners, that can make a big difference in their budgets.

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Bottom line: You can trust biBerk for affordable workers’ comp insurance, attentive customer service, and prompt claims payment. And if you need to know more about workers’ comp for independent contractors, we’re here to help.