Workers' compensation insurance is straightforward when it comes to covering your employees in the event of a workplace-related accident. But it can become fraught with nuance when you're issued an annual audit and asked not only to report what kind of work your staff does and their annual wages, but also to provide a list of workers that you have paid as Form 1099 contractors.
As a business owner, hopefully you're aware that you have two types of workers: W2 employees paid via payroll and 1099 outside contractors. The latter you generally hire as their own business, and they provide specialty services that are outside the course of the usual work of your staff.
If these small businesses you engage as 1099 contractors are more than sole proprietors, they should be carrying their own workers' compensation insurance. You are within your right to request a copy of their certificate of insurance (COI) when engaging their services. This is a best practice and helps reduce your workers' compensation insurance liability during audits.
When you are able to provide copies of the COIs for your contractors, it shows that they are already covered for workers' compensation and don't have to be covered by you. It's a quick way to eliminate the risk of having last-minute additions to your premium.
For contractors you didn't collect a certificate for or who are sole proprietors, the workers compensation insurance auditor will ask you to provide their names and how much you paid them. This is the tricky part — the auditor may then ask probing questions about the nature of their work, hoping to include their 1099 payments with the payroll amount to increase your premium. If they didn't have their own workers' compensation coverage, they will likely be added to yours, and you will have to cover them.
So be judicious in 1) collecting COIs and 2) correctly classifying contractors when hiring them. If in doubt, reach out to an HR professional.
Have questions? Contact the Armanino HR Solutions team. We can help you determine if a worker will be correctly classified as a contractor, or, if not, how to move them onto your payroll.
