Many employers who hire 1099 employees (contractors and subcontractors) assume that only W2 employees are their responsibility. However, that is far from the truth. If you have hired someone to do a job for you, they are employees. W2 and 1099 tags are tax labels that define how you pay them. Therefore, there is also a difference between how you insure them. 

Read on to determine the difference between insuring W2 employees vs. 1099 employees.

Difference Between Insuring W2 Employees vs. 1099 Employees

One of the most expensive overhead costs for a business owner is the insurance premiums, benefits, and payroll taxes that they have to pay. These benefits, payroll taxes, and wages are determined by how you have classified your employees. There are two types of employees here:

• 1099 employees 
• W2 employees

It's extremely important to classify your employees correctly so you are not held liable in an audit.

Generally, contractors or subcontractors have their insurance when you them. Before you hire them, you have to ask for proof of insurance to ensure that you will not be held responsible if they make a mistake or cause damage. However, you can also include them in your workers' compensation and general liability insurance by extending your insurance policies.

Keep reading for a more detailed breakdown of these employee categories. 

1099 Employees

Independent contractors are 1099 employees as per IRS. These employees can include doctors, veterinarians, lawyers, dentists, contractors, subcontractors, accountants, auctioneers, and stenographers who are involved in an independent profession, business, and trade. 

In general, an employee is considered an independent contractor if the employer only controls the result of a project and not how or what is done to achieve those results.

1099 employees are not considered real employees of the company and therefore are not covered by the protection of labor regulations, such as workers compensation insurance, unemployment compensation, Americans with Disabilities Act (ADA), and Occupational Safety and Health Act (OSHA). These independent contractors pay their own taxes, and their social security, Medicare, and other deductions are not dedicated by the business.

Moreover, 1099 employees or independent contractors are also not eligible for benefits and overtime pay and are not affected by the Fair Labor Standards Act (FLSA) regulations related to youth employment and record-keeping.

By hiring 1099 employees, businesses can save extensive labor costs such as healthcare, insurance, and overtime. They can pay them on demand for their specific skills as their business requires.

However, there is a huge drawback to this type of employee classification. Businesses that hire 1099 employees undergo serious scrutiny by the IRS if they are being reviewed for their employee classifications. They may also have to pay high hourly rates. Moreover, if an emergency occurs due to which the contractor cannot deliver the required amount of hours, there will be a delay in work.

W2 Employees

According to the IRS, W2 employees are defined as anyone who performs services for you and you can control what services will be performed and how they will be performed. You can give freedom of action to the employee, but you still have the right to control the details of how they perform the services. 

All W2 employees fall under the protection and regulation of various FLSA and protection of labor regulations, such as workers' compensation insurance, unemployment compensation, Americans with Disabilities Act (ADA), and Occupational Safety and Health Act (OSHA). They are also eligible to receive benefits, healthcare, and overtime, and their employers will have to meet the minimum wage requirements. On the other hand, 1099 employees are not eligible for any of these things. 

The benefits of having W2 employees for a business include having a company culture and teamwork that everyone can benefit from. Teamwork is hard to achieve with independent and remote contractors. There is also the ease of hiring as you can easily find interested candidates for permanent positions with benefits. Moreover, you can alternate tasks between your permanent employees in case of any emergency.

However, there are also some drawbacks. For instance, you will be paying more in general labor costs, such as insurance, taxes, and payrolls. Moreover, it is more complicated to hire a W2 employee as compared to a contractor, as you have to go through the whole process of protecting yourself from a possible lawsuit in case of unfair termination.

This is where your Employment Practices Liability insurance policy (EPL) comes in. It is your main line of defense against wrongful termination lawsuits filed by W2 employees. It’s an essential tool that every employer needs. It protects the employers against any wrongful claims such as discrimination, sexual harassment, and wrongful termination. 

Workers’ Compensation Policy for 1099 and W2 Employees

Now that you know how 1099 and W2 employees are classified let's see how these classifications apply to Worker's Compensation Insurance. Workers Compensation Insurance is an essential policy for employers that offers coverage to employees for any work-related injury or death. It offers coverage for disability payments, rehabilitation, and hospital and medical bills.

However, 1099 employees are not covered by the employer's workers' compensation insurance. Only W2 employees who are permanent are required to be covered by this insurance policy. This is why you will need to correctly classify your employees so you don't have to pay premiums for your independent contractors too. 

Employers can still choose to offer benefits to their 1099 contractors. For instance, you can extend your health insurance policy for 1099 workers. You can also include them in other insurance policies, such as general liability and commercial auto liability.

Final Thoughts

There is a big difference between insuring W2 employees vs. 1099 employees. Now that you know what that is, make sure to ask your 1099 employees for proof of insurance before you hire them as a contractor. If they don't have insurance, you can extend your existing policies to include coverage for them. Get in touch with a reliable insurance provider like Elemental Risk Management today to find out more.