I’m a sole proprietor contractor that does handyman / repair / remodeling type work. I only work directly for homeowners. Been doing it for quite some time now… I’ve done well and business is great. I would now like to have a couple of assistants working with me.
As I remember from my GC class a few years back, I’m not required to carry workers comp till I have more than 2 employees. Still, I would like to have anyone working with me covered in case of an on the job injury.
I talked to my insurance agent the other day and was informed that workers comp premiums will be 25% of the payroll. My agent told me that since this is obviously cost prohibitive for most small contractors, most small construction business only hire helpers as independent contractors using 1099’s instead of W2’s. That way I could require the independent contractor working for me to carry his own workers comp, and I would carry what is called a “ghost” policy for “only” $1000 per year.
So I researched a little online. Looks like a ghost policy is basically just worthless piece of paper to tell someone that “yes, I do have a certificate of workers comp insurance”. There is no possible situation that a ghost policy will ever pay out money. As well, I’m guessing when I require my sub contractor to have workers comp, he will have a “ghost policy” also.
I basically just want to know what type of insurance should a sole proprietor “one man operation” contractor carry in case of a work related injury to himself that will actually be of use if needed? From what I have read thus far, workers comp only covers W2 employees of a proprietor, not the proprietor himself.
I do have general liability in case I damage a clients property. I’ve got my own basic health, life, and dental insurance.
I’m in Cary NC.
Replies
Workers comp is regulated by the state. Your rules would be different than mine. There is a lot of abuse of the rules and agencies are always on the lookout for those who don't comply or try to skirt the regs. You better check things out with the state so you don't get fined. Your agent may be correct but it wouldn't fly in my state. We are required to carry WC for a single employee but not the sole proprietor. Costs are a legitimate business expense and are deductable on your Fed return. In my state, WC is based per $100 of payroll and what classification of work you do. The rates are competitive between different insurers and rates can also be effected by things like safety programs number of claims, etc. A carpenter rate can vary from, $17.41 - $11.73/$100 where an attorney would only pay $0.51 - $0.31/$100. Guess it's safer to be a lawyer. It's also a good idea to consult one on such matters as well as other business issues.
A carpenter rate can vary from, $17.41 - $11.73/$100 where an attorney would only pay $0.51 - $0.31/$100. Guess it's safer to be a lawyer
Of course, the lawyer makes about 10 times per hour what the carp makes, so on a per-hour basis the difference isn't so great. Paper cuts can be hell.
Treating employees as if they are independent contractors could cost you a WHOLE lot more than just money.....like say your freedom along with your money.
The IRS frowns highly on people who treat employees as indp contractors.
If you plan on telling these guys when to arrive when to stop for lunch when to leave....then you are controling them and they aren't ind cont.
If you plan on telling them what to do and how to do it... then they aren't ind cont they are employees.
If you plan on supplying them tools to use then they aren't ind cont.
If you plan on these people only working for you and they don't offer their services to anyone else...then they aren't ind cont
If you plan to pay them by the hour for the hours they work instead of paying them $500 to put in the stairs....then they aren't ind cont
Get caught and you will pay both sides of the FICA insurance instead of just 1/2 plus fines and interest plus you run the risk of jail for filing a fraudulent tax return. You will spend a massive amount of time and attorney fees getting yorself out of the mess and just for good measure, the IRS will then report you to your state for not carrying work comp and not paying unemployment insurance
IRS Tests are below:
Behavioral control
Facts that show whether the business has a right to direct and control how the worker does the task for which the worker is hired include the type and degree of—
Instructions the business gives the worker. An employee is generally subject to the business' instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work:
When and where to do the work
What tools or equipment to use
What workers to hire or to assist with the work
Where to purchase supplies and services
What work must be performed by a specified individual
What order or sequence to follow
The amount of instruction needed varies among different jobs. Even if no instructions are given, sufficient behavioral control may exist if the employer has the right to control how the work results are achieved. A business may lack the knowledge to instruct some highly specialized professionals; in other cases, the task may require little or no instruction. The key consideration is whether the business has retained the right to control the details of a worker's performance or instead has given up that right.
Training the business gives the worker. An employee may be trained to perform services in a particular manner. Independent contractors ordinarily use their own methods.
Financial control
Facts that show whether the business has a right to control the business aspects of the worker's job include:
The extent to which the worker has unreimbursed business expenses. Independent contractors are more likely to have unreimbursed expenses than are employees. Fixed ongoing costs that are incurred regardless of whether work is currently being performed are especially important. However, employees may also incur unreimbursed expenses in connection with the services they perform for their business.
The extent of the worker's investment. An employee usually has no investment in the work other than his or her own time. An independent contractor often has a significant investment in the facilities he or she uses in performing services for someone else. However, a significant investment is not necessary for independent contractor status.
The extent to which the worker makes services available to the relevant market. An independent contractor is generally free to seek out business opportunities. Independent contractors often advertise, maintain a visible business location, and are available to work in the relevant market.
How the business pays the worker. An employee is generally guaranteed a regular wage amount for an hourly, weekly, or other period of time. This usually indicates that a worker is an employee, even when the wage or salary is supplemented by a commission. An independent contractor is usually paid by a flat fee for the job. However, it is common in some professions, such as law, to pay independent contractors hourly.
The extent to which the worker can realize a profit or loss. Since an employer usually provides employees a workplace, tools, materials, equipment, and supplies needed for the work, and generally pays the costs of doing business, employees do not have an opportunity to make a profit or loss. An independent contractor can make a profit or loss.
Type of relationship
Facts that show the parties' type of relationship include:
Written contracts describing the relationship the parties intended to create. This is probably the least important of the criteria, since what really matters is the nature of the underlying work relationship, not what the parties choose to call it. However, in close cases, the written contract can make a difference.
Whether the business provides the worker with employee-type benefits, such as insurance, a pension plan, vacation pay, or sick pay. The power to grant benefits carries with it the power to take them away, which is a power generally exercised by employers over employees. A true independent contractor will finance his or her own benefits out of the overall profits of the enterprise.
The permanency of the relationship. If the company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship.
The extent to which services performed by the worker are a key aspect of the regular business of the company. If a worker provides services that are a key aspect of the company's regular business activity, it is more likely that the company will have the right to direct and control his or her activities. For example, if a law firm hires an attorney, it is likely that it will present the attorney's work as its own and would have the right to control or direct that work. This would indicate an employer-employee relationship
BTW, when your "independent
BTW, when your "independent contractors" take their 1099 to their tax preparer, they are going to suddenly find out that they owe self employment tax which is going to cost them both sides of the FICA or 15.3% which none of them ever plan for. Thats when their tax preparer starts to tell how you are misclassifying them as ind contractors and how they can turn you in. Some of them even find out they can get a whistle blower reward for narking you out.
So if you do follow your insurance mans "advice", you better make sure you pay them above market rates, tell them how to save for the self employment tax and generally kiss their backsides to make sure they are NEVER unhappy with you. In effect, they kind of become your boss once they can hold this over your head.
I can't provide
any input on the woker issues, as I have none. But I do own my own business and it is a Corporation.
I would suggest that you run your business as a Corporation or as an LLC. My company is the manager in a series of LLCs that actually own the properties/assets in the business. The corporation owns very little beyond office equipment, tools and work vehicles. The LLC's separate the real assets from one another and from my personal property.
As a sole proprietor, you have zero asset protection. All of your personal property and assets are exposed to any judgement against your "company", which is simply your person. If your company will own no signicant assets, then shielding segments of the business internally is not necessary, but you still need to shield your personal property and assets from your business assets and property. There are obvious tax benefits as well. Look into it.
LLCs provide a lot of the benefits of a corp (limiting liability) without incurring corporate income tax. Profits are passed through the LLC to the owners who pay at personal rates.