Independent contractor
Also called 1099 contractor, freelancer or subcontractor
Definition
An independent contractor is a self-employed person or business you hire for a job who controls how the work gets done, rather than working as your employee.
How the IRS decides
For federal tax purposes, the IRS looks at how much control and independence the relationship has. Its common-law rules group the evidence into three categories:
- Behavioral control: whether your business controls, or has the right to control, what the worker does and how.
- Financial control: who controls the business side of the job, such as how the worker is paid, whether expenses are reimbursed and who provides tools and materials.
- Type of relationship: whether there’s a written contract, employee-type benefits, an expected ongoing relationship and work that’s a key part of your business.
No single factor decides it, and the IRS says to look at the entire relationship, so calling someone a contractor in an agreement doesn’t settle it on its own. If it’s unclear, either the business or the worker can file Form SS-8 to ask the IRS for a determination.
Why it matters for insurance
Other laws use their own tests. The U.S. Department of Labor applies its own analysis to minimum wage and overtime, and each state’s workers’ comp law decides who counts as an employee for comp. Check with your state’s workers’ compensation agency.
Workers’ comp generally doesn’t cover true independent contractors, so a misclassified worker can leave a gap. At a premium audit, insurers often ask for certificates of insurance from the contractors and subcontractors you paid. Payments to those who can’t show their own coverage may be counted as payroll on your policy. Collecting certificates before work starts helps.