A 1099 does not make someone an independent contractor at audit. If you paid a subcontractor who had no workers’ comp coverage, the auditor adds that sub to your policy. You pay premium for the exposure, because your insurance company would have paid the claim.
This is the most common reason for a large audit bill, and it is almost always preventable.
The rule
In most states, a contractor is responsible for the injuries of an uninsured subcontractor’s employees. Since your insurance company is on the hook for the claim, it charges premium for the risk.
The auditor asks one question about every sub you paid: can you prove they had coverage on the dates they worked for you?
What counts as proof
A certificate of insurance showing workers’ comp coverage for the dates the work was done. That means:
- The policy dates on the certificate cover the whole job, not just the day it started
- The certificate is for workers’ comp, not only general liability
- You have a certificate for each policy term if the job crossed a renewal
A certificate that expired halfway through the job covers half the payments.
How the auditor figures the charge
If you cannot show coverage, the auditor needs a payroll number for the sub. If you have the sub’s actual payroll records, that is what gets used. If you do not, the auditor uses a share of the contract price. The share depends on the state and on whether the sub supplied materials or only labor.
Suppose you paid an uninsured framing crew $80,000 for labor only. The whole $80,000 can be treated as payroll at the framing rate.
Independent contractor or employee?
Some 1099 workers are employees no matter what the paperwork says. Auditors look at who controls the work, who supplies the tools, whether the person works for anyone else and whether they can make a profit or take a loss. Each state has its own test.
If the person works only for you, on your schedule, with your tools, expect them to be counted as an employee.
Sole proprietor subs with no employees
A sub who works alone may be legally exempt from carrying coverage. Rules differ by state. Some states issue an exemption certificate. Others still let the insurance company charge for the sub. Know your state before you rely on an exemption. See how it plays out in Michigan, Georgia, Alabama and Virginia.
Build the habit
No certificate, no check. Collect the certificate before the sub steps on the job, track the expiration date, and keep every one in a file the auditor can see in five minutes.
For everything else the auditor reviews, read how a workers’ comp audit works.