Do I Still Need Workers Comp if I Only Have 1099 Contractors?

Nov 2, 2022 | Business Insurance

Workers’ Compensation Defined

Workers’ Compensation is a type of insurance that protects employees from work-related injury or illness. It provides medical benefits, lost wage replacement, rehabilitation expenses, and funeral expenses. Almost all U.S. states need to purchase from the state itself, a state-run agency, or private insurance companies. Workers comp sure is important for all U.S. employees.

All employees can receive workers’ comp provided that they work at that company, has a position in the company, and use the tools and equipment of the company for their work. Other types of workers not included to receive workers’ comp seasonal workers, agricultural workers, freelancers, commission-based salesmen, and other independent contractors.

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1099 Contractors Defined

Workers who provide goods or services that don’t work for a company are “1099 contractors”. They are freelancers, independent contractors, or self-employed individuals. They don’t work directly for a business and do not receive the same benefits as regular employees. 

You are a 1099 contractor if:

  1. First, you are receiving pay per project.
  2. Second, you work at your own hours. 
  3. Third, you use your own tools and equipment.
  4. Fourth, you can work on projects simultaneously with different businesses.
  5. Fifth, you can subcontract some of the work needed.
  6. Sixth, you are free to choose which projects to accept.

Some of the professions that are independent contractors:

  1. Carpenters
  2. Plumbers
  3. Mechanics
  4. Painters
  5. Lawyers
  6. Dentists
  7. Public stenographers
  8. Auctioneers
  9. Photographers
  10. Woodworkers

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Why Hire 1099 Workers?

Hiring 1099 workers can be beneficial for your company or organization especially if you are just starting. It has also a lot of advantages as opposed to hiring full-time employees immediately. Here are some advantages for you to consider hiring an independent contractor:

Financial savings

Hiring an independent contractor will cost less because you don’t need to give them benefits like workers’ compensation. You will not need equipment and office space as well.


You will only need to hire if there is a job that needs to do. Skilled professionals are for only a short period of time and hiring a full-time employee will not be beneficial to the company


Independent contractors are efficient. You need not train an employee for the skills needed. Contractors already have the knowledge and expertise for the job.

Low Maintenance

There is less paperwork if you hire a contractor. It requires no withholding taxes so fewer forms to fill. 

Reduce Exposure to Lawsuits

A regular employee will have rights. They can easily sue you for a variety of rights under state and federal laws. Contractors, on the other hand, are independent workers and are not protected by these wide arrays of rights. 

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Workers Comp and 1099 Contractors

Independent contractors are generally not covered under workers’ compensation. Businesses are not required to purchase this type of insurance for 1099 contractors. Since they are not considered employees, they will not be entitled to the benefits of workers’ comp. 

If your business requires independent contractors, it is recommended that you require them to have their own insurance to avoid future problems and lawsuits. Make sure that your contractor carries his own workers’ comp and general liability insurance.

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Worker Classification

It is important that you classify your workers accordingly. There are severe penalties if an employer is caught misclassifying employees to save on insurance and avoid liability. It is important to differentiate them because, under the law, they are treated differently. 

According to the Internal Revenue Service (IRS), there are three tests that you can use to determine the classification of your worker. They call this the Common Law Test. It consists of examining the following:

Behavioral Control

If you control the task given to workers like giving specifics, how the work is to be completed, how long it should be done, and how many working hours are needed, then the IRS will classify them as employees.

If you have a task for workers and they are the ones to decide how they will finish it without your intervention, they are classified as independent contractors. 

Financial Control

If workers get fixed salaries and appropriate taxes are withheld, then they are employees. They also get mandatory benefits like health insurance.

Contractors get their pay per project and don’t have benefits at all. They pay their own taxes and are responsible for their own liability insurance. 

Type of Relationship

If you’ll hire workers indefinitely, they already are employees. If hired for a specific period of time, they are contractors. 

On the other hand, the U.S. Department of Labor and most U.S. states use the ABC Test to determine workers’ status. If workers satisfy these 3 criteria, they are classified as independent contractors.

Absence of Control

Workers are free from the control and direction of the hiring entity. They do not conform to the work time and schedules of the employer. 

Business of the Worker

The worker performs work that is the usual course outside the usual of the hiring entity. They do jobs for a short period of time. 

Customarily Engaged

The worker is customarily in an independent trade or business of the same nature as the work.

Insurance that 1099 Contractor Needs

Being a responsible employer, you need to make sure that your 1099 contractors have their own insurance to protect their own businesses. There are several insurance policies that they can avail of. Some common coverage needed is:

General Liability Insurance 

General liability insurance covers injuries and property damage on the job site. It also helps cover legal fees if you file a lawsuit against the contractor.  

Errors and Omissions Insurance

This type of coverage pays for legal fees if the contractors are sued for negligence, mistakes, and failure to deliver goods and services. This type of insurance is best for lawyers, financial advisors, consultants, insurance agents, and real estate agents. 

Commercial Auto Coverage

Contractors are often on the road. If they use their cars for work, they will need commercial auto insurance. Regular auto insurance will not cover any vehicle used for work purposes. 

Workers Comp

If your independent contractor has employees, they need to purchase workers comp. This will protect them from out-of-pocket costs in case their workers injure themselves at work.

Disability Insurance

This is a kind of insurance that pays a pre-stated weekly benefit in the event an independent contractor is not able to work due to an injury or other disability. It would require a certain waiting period after the injury before the policy begins to pay. The premium cost will depend on the pre-selected waiting period, occupational risk and salary percentage to be paid each week. 

Performance Bond

A performance bond is a guarantee that the work needs to do satisfactorily. If not, the bond needs to repair or complete a job. This will protect the employer or hiring entity from poor workmanship or service. 

Depending on the type of job your independent contractor does, the above-mentioned coverages can be part of your contractual agreement with the 1099 contractor to protect you both from financial losses. 

Employee or Independent Contractor?

The decision to hire an employee or independent contractor will depend on the work that needs to do. There are some tasks that require regular updates and maintenance which would require a full-time employee. There are some tasks that need to do for a short period of time and require a certain skill or expertise which a 1099 contractor can do. 

For example, you own a restaurant and you need a graphic layout for your Thanksgiving special promo. Instead of hiring a full-time employee to do layouts that require a special skill, you can hire an independent contractor instead to do it for you. An employee will have nothing to do since your special promos are seasonal. Hiring a contractor will be a wiser option. 

But if you need a bartender in your restaurant, you will need a full-time employee to come to work daily. You can train the worker for the job because employers will be long-term. Contractors will not be able to satisfy your need since they can have other jobs as well that are in conflict with the time you need them. 

Deciding which one you need will always be dependent on the job that needs to be done. You need to weigh the pros and cons because whichever you choose, there will be some responsibilities that you will need to assume. Once you hire an employee, you are responsible for his well-being in the workplace. When you hire a contractor, you are responsible for making sure that your agreement includes liability insurance on their part. 

Our Last Say

If you need workers’ compensation or general liability insurance, you can always trust Advantage Insurance Solutions here in Denver, CO to guide you in choosing the best coverage for your employees. Expert agents are here to help you with all your insurance needs. So, call or text us now!

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