Is your subcontractor really an employee?

Do you have a subcontractor or employee?

Companies in the construction industry will often hire “subcontractors” and classify them as independent contractors. This is usually for tax purposes. For the purpose of workers’ compensation insurance whether a person is a subcontractor or employee makes no difference.

Very often these subcontractors are, in fact, employees of the contractor even if neither party thinks so. If your subcontractor gets injured on the job your business could be liable for the loss.

Even if you have an affidavit of exemption for workers compensation, you could still be liable if the true nature is an employee/employer relationship.

The Oklahoma exempt status fact sheet is attached here.

Labor costs are usually the biggest expense of any business. There is the expense of the salary but the employer must also pay half of the Medicare and social security tax of an employee.  There is unemployment tax and multiple other costs to having an employee as well.

A subcontractor is responsible for paying their own federal, social security, Medicare, and state income taxes. They may be paid by the “job” and not by the hour. They are not eligible for any company benefits that the contractor may offer regular employees.

But they may, in fact, still be considered employees by definition of the IRS and certainly by your workers compensation insurance. The Guide for Employers put out by the Workers’ Compensation Commission of Oklahoma is a resource every employer in Oklahoma should be familiar with.

I am no accountant, so I will steer clear of the tax issues. But insurance is what I do know.

Here are a few ways to determine if you have an employee or a subcontractor working for you. This is not an exhaustive list, but these questions quickly reveal what the true nature of the employment is.

  1. Do you have a written contract for each project your subcontractor is working on for you? If not, they are an employee.
  2. Is your subcontractor one person with no employees of their own? If so, they are an employee.
  3. Does your subcontractor work only, or primarily for your company? If so, they are an employee.
So what is the risk to your business of not carrying workers compensation?

If you have a subcontractor that gets hurt on the job or while in service to your company, you and your business are responsible. By law an employer must carry workers compensation insurance for all employees.

It doesn’t matter how you pay your subcontractor. The employment relationship determines who is an employee and who is a subcontractor.

As a small business owner, I understand the costs of running a business. If you don’t have proper insurance coverage, you can be putting your business and future on the line.

If you are buying insurance from an agent, they should be educating you on the risks you face and the most efficient way to protect your business.  If you are buying your insurance online or by phone, you have to be your own insurance expert.

You have enough on your plate as a business owner.  Do what you do best and hire a good insurance agent and a good CPA. These two professionals should be a part of every business owner’s team.

You know the IRS will have no mercy if your taxes are messed up. But one insurance claim could bankrupt you if you are not properly insured.

We would love to have a conversation about your business insurance plan. Call us at 405-340-0606.

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Are you ready to save time, aggravation, and money? The team at Allen Drew Insurance Agency is here and ready to make the process as painless as possible. We look forward to meeting you!

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