Is Your 1099 Subcontractor Truly a Subcontractor?
1099 Subcontractor or Employee?
Paying Someone by 1099 Does Not Automatically Make Them a Subcontractor
Many business o
wners assume that issuing a 1099-NEC automatically makes someone a subcontractor. Unfortunately, that is not how the IRS or insurance companies view worker classification.
A 1099 form is simply a tax reporting tool. It reports how someone was paid, not how they should be classified. What matters is how the working relationship actually functions — including who controls the work, who supplies tools, and whether the worker operates an independent business.
From an insurance standpoint, paying someone by 1099 does not prevent them from being treated as an employee if the facts support that classification. This distinction becomes especially important during insurance audits or after a claim.
The term “subcontractor” gets thrown around a lot in your industry, but it is important to understand that not all workers paid on a 1099 are subcontractors. While Form 1099-NEC is used to report payments made to non-employees, the IRS and insurance companies make a determination based on the actual working relationship, not just the tax form. An individual paid on a 1099 could still be considered an employee if the business retains significant control over how the work is performed.
Important note about 1099 reporting:
Paying someone via a 1099-NEC and issuing a 1099 tax form does not automatically make that person a subcontractor or independent contractor. The IRS requires businesses to issue a Form 1099-NEC to report payments made to non-employees when certain conditions are met, but the tax form itself does not determine whether someone is truly a subcontractor. What matters is how the working relationship is structured — who controls the work, how much independence the worker has, and whether they meet the IRS definition of an independent trade or business.
This means that simply paying a worker as a 1099 contractor doesn’t automatically make them a subcontractor in the eyes of insurers, tax authorities, or labor law regulators.
If you use uninsured 1099 subcontractors, you are facing the probability of the following occurring:
- There may not be any coverage under your business liability insurance policy for the negligence or liability of the subcontractor
- You maybe held responsible for the injuries to the subcontractor and/or their employees if they are injured while working for you at a job site
- Possibly that the subcontractors will be picked up on your audit as employees causing you a large additional premium.
Anytime that you use a 1099 subcontractor the following should be required;
- Subcontractor Agreement signed by parties, stating the scope of the operation, what exactly is to be done and the requirements of the subcontractor.
- Certificates of insurance should be maintained on all subcontractors and should be updated annually at a minimum, but preferably at the beginning of each new job
- Subcontractors should be required to provide their independent contractors business license and it should be kept on file
- Even when you have subcontractors that you are subcontracting to and have certificates many times there will still be a charge on your liability insurance for the subcontractor. The reason is because if the subcontractor is negligent you will still be sued and if their coverage is not sufficient you would then potentially have excess coverage under your policy.
If you answer yes to any of the following questions, the individual contract laborer in question, is most likely an employee.***
- Is the person paid by piece, hour, day or week?
- Does the person perform work that regular employees of your business perform?
- Is all or a majority of the work that is the general nature of your business, performed by contract labor?
- Do you provide the material for the jobs?
- What does the subcontract specify?
- Do you tell them when to work?
In all cases, if the individual/contractors (without worker’s compensation insurance coverage) in question, hires labor to help perform work, the individual would be consider as an uninsured contractor and the amounts they were paid would rightfully be included with payroll/wagers on your audit, and you maybe held responsible by the workers compensation commission to provide them workers compensation coverage if there would be a claim.
*** This is not an all inclusive list; please consult your accountant and/or attorney in determining if a subcontractor is really an employee or not according to IRS and the workers compensation commission
If you use independent contractors you need to beware of the new laws for Maryland was effective October 1, 2009!
SB 909 amended the Labor and Employment Article. This bill creates a presumption in the workers compensation law that an individual in the service of an employer is an employee and not an independent contractor. As a result, the burden will now be on the employer to prove that a worker is, in fact, an independent contractor (free of the employer’s control, paid other than hourly, not provided tools or materials, etc).
If your subcontractors do the following:
- Are doing work that would normally be done by employees
- You provide them with their equipment
- You have the right to hire/fire them
- You tell them HOW the work needs to be done
- You provide them with the jobs to do each day
Then they are not subcontractors they are employees and you do need to provide workers compensation coverage for them.
You need to hold your subcontractors to the same standard that you are being held to by your contracts. If you are using subcontractors then please call us to discuss. We can tell you the charge on your liability insurance and workers compensation insurance coverage. Call Huff Insurance 410-647-1111.
Does the IRS Classification Matter for Insurance?
Issuing a 1099-NEC correctly reports income to the IRS but does not alone determine whether a worker is an independent contractor for insurance or employment law purposes. Insurance companies, the IRS, and state regulators will look at the actual facts — such as control, independence, and financial responsibility — when evaluating whether someone is truly a subcontractor.
Insurance Audits and Uninsured Subcontractors
Insurance audits are one of the most common ways subcontractor issues turn into unexpected costs.
At the end of a policy period, insurance carriers review payroll records, 1099s, and payments made to subcontractors. They also request Certificates of Insurance to confirm that subcontractors carried their own coverage.
If a subcontractor cannot provide proof of insurance, the carrier may treat that worker as your employee for audit purposes — even if they were paid as a 1099. When this happens, the subcontractor’s payments may be added to your payroll, increasing your premium after the policy ends.
From an insurance standpoint, uninsured subcontractors often become your responsibility.
Huff Insurance is a full service Independent Insurance Agent We have been dedicated to Protecting Lifestyles™ since 1960. We offer a full array of Personal Insurance, Commercial Insurance and Life Insurance & Health Insurance products. Call us at 410-647-111