The rise in recent years of for-hire business models, like those used for driving services Uber and Lyft, and delivery services like Instacart and Postmate, have put the term “independent contractor” under the microscope.
High profile liability issues (like the class action lawsuit that former drivers are filing against Uber) are only one aspect of the confusion; not only do employers need to understand their obligations towards the different types of workers they hire, but aspiring entrepreneurs should have a handle on what kind of risks and rewards are associated with self-employment.
The IRS has suggestions for defining characteristics that determine whether or not a worker is an employee or independent contractor…
- - Who controls details of how the work is done?
- - Who is responsible for negotiating the business aspects of the worker’s job?
- - Who provides the worker’s benefits? (Vacation, insurance, pension, etc.)
The most basic distinction, tax-wise, between an employee and an independent contractor is that an employer is generally held responsible for withholding income taxes from an employee’s wages, but not for those of an independent contractor. Workers who are hired as independent contractors are often called “1099s”, a reference to the year end tax form they receive. (As opposed to “W2 employees”, who fill out a W2 for their employers and have taxes withheld by them).
But there are distinctions between the two types of workers that have ramifications in the insurance world, as well.
While the IRS may accept your choice to classify a worker as a subcontractor who receives a 1099 from you at the end of the year, if that same worker is injured on the job, or the subject of a lawsuit, it’s the Department of Labor who will determine if the individual is an employee or a subcontractor, regardless of which tax form they’ve been receiving from you.
And if the decision is that they are truly an employee, instead of an independent contractor, you will be held responsible for all medical costs, lost wages, future lost wages, etc, regardless of who has been paying their employment taxes.
The “bottom line” is always a factor in business decisions, and while the short term benefit of not having to pay employment taxes may sway business owners towards a preference for classifying workers as independent contractors, the potential for liability and associated costs should motivate the final decision about how to categorize the people they hire.
In fact, insurance costs for standard employees may actually be lower than those for subcontractors in some cases, although rates will vary from business to business and state to state.
For the individual who is trying to determine what the best status for them would be, the same elements of cost and risk should be weighed.
While the freedom to regulate the amount and type of work taken is a great benefit, independent contractors should also remember that they will shoulder the responsibility for damages or personal injury, and weigh out those costs against the perks of self-employment.
Getting specifics about insurance coverage from anyone hiring you as a subcontractor is highly advised, and keeping a policy in place for yourself that covers you in case of injury or damages could help forestall future financial disasters.
Call one of our specialists today (1-877-907-5267) or use the orange quote box above to find quotes for both worker’s compensation and general liability policies for small business owners and self-employed entrepreneurs.