Workers' Comp Insurance for Employers
Everything employers need to know about workers' comp, and more
Written by
Christine Lacagnina has written thousands of insurance-based articles for TrustedChoice.com by authoring consumable, understandable content.
Reviewed by
Paul Martin is the Director of Education and Development for Myron Steves, one of the largest, most respected insurance wholesalers in the southern U.S.
As a responsible employer, you want to make sure your employees' safety is taken into account before they ever punch their first time card. Fortunately having the right workers' compensation insurance can help you achieve this.
It's important to know your responsibilities as an employer, as far as offering workers' comp for your crew. An independent insurance agent can help you get set up with enough coverage to protect your business and its employees alike. Until then, here's a look at what you need to know about workers' comp as an employer.
What Is Workers' Compensation Insurance?
Workers' compensation, or workers' comp, is a policy obtained by an employer to pay for medical expenses for employees that get injured or ill while working, or otherwise due to job-related activities. Most states make coverage mandatory if a business has a certain number of employees.
Workers' comp not only provides protection for employees on the job, but also for you as the employer. If a business covers their workers with a workers' comp policy, their employees automatically forfeit the right to sue the business for a work-related incident in exchange for these benefits.
Workers' Comp and Owners, Officers, CEOs, etc.
For business owners, members, officers, or CEOs, there's an option to exclude themselves from a workers' comp policy. In return for excluding themselves from coverage, they're not required to include their annual payroll, which can save the business a good bit of money on the policy.
But any employer who is an owner, CEO, etc. that chooses to exclude themselves from coverage of course won't be protected by the workers' comp policy if they get injured or ill due to work-related activities. Though optional, many business owners exclude themselves from coverage to avoid paying the additional premium. Each state has its own rules for workers' compensation exclusions, and it’s important for business owners to be familiar with them.
Workers' Comp and W-2 Employees
The IRS takes both the W-2 and 1099 employee classifications very seriously. An employee should be classified as a W-2 worker if:
- They're required to work certain hours and days set by the employer.
- They're paid on an ongoing continuous basis for a job with no end in sight.
- They're required to be at meetings, events, or other work functions.
All W-2 employees have a portion of their taxes paid by the employer, which is why some employers mistakenly try to classify a W-2 employee as a 1099 subcontractor. Doing this can cost you a lot more in the long run. Be sure to classify all your employees properly.
Workers' Comp and 1099 Subcontractors
A 1099 subcontractor is self-employed, pays their own taxes, and generally doesn't need to be included on an employer's workers' comp policy if they provide a proper certificate of their own insurance. As the employer, it's your responsibility to ensure that each subcontractor has coverage that's equal to or greater than your own policy's limits. Each state sets its own workers' compensation guidelines for independent contractors.
Not collecting proper certificates from 1099 employees could result in the cancellation of your workers' comp coverage. If your policy gets canceled, it could be harder for your business to obtain new coverage from a different insurance company.
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What You Need to Know about Workers' Compensation Audits
Preparing yourself for a workers' compensation audit is as easy as being prepared ahead of time. Study the following checklist so your business can take appropriate proactive measures.
Workers' comp audits often require:
- Certificates of insurance from any 1099 subcontractors you've hired throughout the policy term
- All W-2 employee tax filings
- Classifications of each worker with job duty descriptions for each
- Payroll for each W-2 employee and 1099 subcontractor for the policy term
- Documentation of all safety procedures implemented and mandatory meetings attended
- All subcontractor agreements signed and dated
- All hold harmless agreements signed and dated by all subcontractors hired*
*A hold harmless agreement states that a subcontractor will hold your business harmless if they get injured while doing a job for you or as a result of doing business with you. An independent insurance agent can help you determine which documents you need as the employer to prepare for a workers' comp audit.
Consequences of Misclassifying Employees under Workers' Comp
As an employer, it's crucial to make sure that you classify your employees correctly to avoid penalties from the IRS. Failure to do so can cost your company a ton of money unnecessarily down the road.
One of the most potentially confusing employee classifications is a 1099 worker vs. a W-2 employee. Fortunately there's a checklist used by the IRS to determine whether someone is a W-2 employee or a 1099 worker.
The IRS's W-2 vs. 1099 employee checklist:
If you instruct a worker on when, where, and how to perform their job, the IRS would classify them as a W-2 employee, not a 1099 subcontractor.
If you have to train a worker, they would be classed as an employee by the IRS.
If you have similar workers doing similar job duties, this is an indication of employer control over the job and should be classified as a W-2 employee.
If the relationship between the employer and the worker is consistent and ongoing, the worker should be classified as a W-2 employee.
If there are set hours required of the worker, they should be classified as a W-2 employee.
Full-time work indicates control by the employer because it does not allow the worker to obtain other employment, which means they should be classified as a W-2 employee.
If the worker must do their job on your premises, employer control is implied and the worker should be classed as a W-2 employee.
Payment method by the hour, weekly, or monthly implies an employee-employer relationship and should be classified as such. If the worker gets paid from commissions or contracts, they can be classified as a 1099 worker.
The potential for profit or loss by the worker indicates 1099 worker status.
Working for a number of different people at the same time indicates 1099 worker status, not employee status.
Workers' Compensation Terms
When reviewing workers' comp coverage options for your business, it's important to be familiar with some common terms used by insurance companies, like:
- Certificate of insurance: Proof of coverage provided by the insurance company or agent for a policyholder like a 1099 subcontractor.
- Experience modification rate: A number used by insurance companies to gauge the past cost of injuries and future chances of risk by an employer. The lower your business's experience modification rate is, the lower your workers' comp premiums will be.
- Classification code: The codes assigned to each job type or duty per employee or business operation on a workers' comp policy. These codes determine 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 up to code and implementing proper safety regulations, you could save quite a bit on your workers' comp coverage. An independent insurance agent can further explain how following safety protocols can reduce your premiums.
Why Are Independent Insurance Agents Awesome?
It’s simple. Independent insurance agents simplify the process by shopping and comparing workers' compensation insurance quotes for you. Not only that, but they’ll also cut the jargon and clarify the fine print, so you know exactly what you’re getting.
Independent insurance agents also have access to multiple insurance companies, ultimately finding you the best workers' comp coverage, accessibility, and competitive pricing while working for you.
https://www.irs.gov/businesses/small-businesses-self-employed/independent-contractor-self-employed-or-employee