does a subcontractor need workers compensation insurance

clock May 26, 2021

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Does a Subcontractor Need Workers Compensation Insurance?

In 2019, there were almost three million accidents in workplaces across the country. That same year, there were over 5,300 fatal work-related injuries. 

As a business owner, you know it’s your job to follow state laws. That means you need to have workers’ compensation insurance for your employees. But does a subcontractor need workers’ compensation insurance?

If you use subcontractors, it’s important to understand your obligations. In this blog, we’ll look at how you can ensure you follow the law. Let’s start by defining what a subcontractor is. 

What Is a Subcontractor?  

Depending on your business, you may classify workers as employees, contractors, or subcontractors. When it comes to workers’ compensation, you need to understand the differences.

The Internal Revenue Service (IRS) says subcontractors are responsible for keeping track of their earnings. They also have to report and pay their income and self-employment taxes. You may need to supply documentation come tax time.

Subcontractors are companies or individuals that help you complete a project. They report to you, not the client. There are more insurance implications. This means hiring a subcontractor could be risky.

Are Subcontractors Employees?

The simple answer on whether subcontractors are employees is “no.” But, that’s not necessarily a satisfactory explanation. To determine if a worker is a subcontractor, the IRS looks at the following three categories:

  • Behavior control. Subcontractors are not provided with the same level of training and instruction regarding how their work gets done. 
  • Financial control. Subcontractors typically control the economic aspects of their work, including investments, expenses, profits, and losses. 
  • Relationship of the parties. Subcontractors typically do not have benefits, and their contracts are different than an employee’s. 

The IRS guidelines, along with individual state laws, determine a workers’ employment status. Some states require employee status based on the number of employees. Therefore, subcontractors could be independent workers and employees at the same time. It all depends on state laws.

Once you know what category your workers fall into, you can focus on ensuring you meet your legal obligations. This includes workers’ compensation insurance. If you have questions about your duties, National Workman’s Comp Solutions can help.

Does a Subcontractor Need Workers’ Compensation Insurance?

On-the-job injuries can affect the worker as well as the company. To curb the effects, workers’ compensation insurance can manage certain expenses. However, if a subcontractor gets injured, the situation can seem complex. 

Many factors go into figuring out if a subcontractor has workers’ compensation insurance. This includes state requirements, the nature of their work, and more. Business owners need to understand their obligations to avoid penalties and lawsuits. 

In most instances, self-employed workers are not covered by an employer’s workers’ compensation insurance. This is because subcontractors are independent of the businesses they’re working for. 

Depending on the contractual obligations, the subcontractor could have to carry their own workers’ comp policy to reduce possible liability issues in the event of an accident. Every state has different laws that govern workers’ compensation. Therefore, it’s important to review the guidelines for your state.

If you need your subcontractors to have workers’ comp insurance, verify their coverage. You can do that by requesting policy numbers, coverage amounts, and coverage periods. Keep all documents as up-to-date as possible.

The Cost of Workers’ Compensation Insurance for Subcontractors

The cost of subcontractors’ workers’ comp insurance varies. Factors include payroll, location, number of employees, industry, risk factors, coverage limits, and claims history.

On average, workers’ comp costs $47 per month per person. If a worker gets hurt, coverage can kick in. This is the case for public and private policies. The policy can take care of expenses. This includes medical bills and lost wages for the period of time they are incapacitated.

If you know you have to have insurance for your subcontractors, speak with an independent insurance agent. They can offer you their unbiased opinion on the most comprehensive policies. This way, you’ll know you’re complying with the law and making the best financial decisions. 

The Penalties for Failing to Have Workers’ Compensation Insurance

You might think you’re in the clear if you don’t have to have workers’ comp for independent contractors. However, this isn’t always the case. Therefore, it’s important to know about the potential risks of hiring uninsured subcontractors.

If you hire a subcontractor who doesn’t have insurance, you could face legal issues if they’re injured. Any accidents could fall back on you if the injured person files a lawsuit.

There could also be issues if your policy is audited. This is especially true if there’s a lack of coverage. As a result, you could face charges for their payroll.

Uninsured subcontractors can also affect your bottom line. Your loss history and premium rates could go up in the future. If a subcontractor gets hurt and the state says you’re responsible, your costs will likely go up significantly.

States have unique penalties in place when insurance laws aren’t followed. For example, failure to have workers’ comp in California is considered a misdemeanor. It’s punishable by up to one year in jail or fines of at least $10,000.

Any subcontractors you hire need the proper insurance coverages in place to avoid penalties and other potential issues. This needs to happen before they begin working on the job. Collect all the necessary documentation to prove coverage. That way, you will have that information if you need it at some point.

Contact National Workman’s Comp Solutions

Now you know the answer to “does a subcontractor need workers’ compensation insurance?”! If you need to pursue policies for your workers, National Workman’s Comp Solutions can help. Contact us to learn more. 

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