Do independent contractors need workers’ comp?

A true independent contractorIndependent contractorAn 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.Read the definition runs their own business and usually isn’t covered by your workers’ compensation policy, so in general you don’t buy coverage for them. The catch is that you don’t get to decide who’s a true contractor, because the IRS, the federal Department of Labor (DOL) and your state each look at how the work actually happens, and the DOL says plainly that a worker who gets a 1099 isn’t necessarily an independent contractor.

There’s a second catch for anyone who hires subcontractors, and this one arrives as a bill. If a sub doesn’t carry workers’ comp of their own, your insurer may count what you paid them as your payroll at audit and bill you for it, months after the job is done.

Three agencies, three tests

Three agencies can ask this question, and each one looks past the label to how the work actually happens.

The IRS uses common law rules and says all information that shows the degree of control and independence has to be considered. It sorts the evidence into three groups: behavioral control (whether you control, or have the right to control, what the worker does and how they do it), financial control (whether you control the business side of the job, like how they’re paid, whether expenses are reimbursed and who provides the tools) and the type of relationship (written contracts, employee-type benefits, whether the work is ongoing and whether it’s a key part of your business). When it’s still unclear, either side can file Form SS-8 and ask the IRS to decide, though the IRS says that can take at least six months.

The DOL, under the Fair Labor Standards Act, asks whether the worker is economically dependent on you for work or in business for themselves. Its fact sheet lists six factors: the worker’s chance for profit or loss through their own managerial skill, investments by the worker and by you, how permanent the relationship is, the nature and degree of your control, whether the work is integral to your business, and the worker’s skill and initiative. The DOL says what a worker is called doesn’t matter, and that agreeing to be a contractor, even in a signed contract, doesn’t make someone one. The rule behind that fact sheet keeps moving, too: the fact sheet reflects a 2024 rule that’s being challenged in court, and the DOL proposed a new rule in February 2026, so check the current fact sheet before you rely on any summary of it.

Your state decides who counts as an employee for workers’ comp, and that’s the test that settles this question, though it’s also the one owners skip, and it may not match either federal one. Some states use a stricter test than either federal agency, so a worker who looks like a contractor to the IRS can still be an employee for workers’ comp. Find your state’s agency on the DOL’s list of state workers’ compensation officials and read what it says about independent contractors before you rely on a 1099.

So how can you tell?

No single sign settles it, and the agencies weigh the whole picture. Still, these point toward employee status under most tests:

• You set the schedule and tell them how to do the work.
• They work only for you, on an ongoing basis, with no end date.
• You supply the tools, equipment, space and materials.
• You pay by the hour or the week, and reimburse their expenses.
• Their work is the core of what your business sells.
• They don’t advertise, carry their own insurance or have other clients.

And these point the other way:

• They bid or quote by the job and can make or lose money on it.
• They bring their own tools, crew and vehicle.
• They have other clients and market their own business.
• They carry their own liability insurance and workers’ comp.

Be honest about which list fits. If most of what you see is on the first list, treat the person as an employee and put them on the policy. That’s our position. It costs more up front, but it’s usually the cheaper mistake to make.

What misclassification can cost

A worker you treated as a contractor who turns out to be an employee can cost you in four separate ways, and they tend to arrive together. None of them is cheap.

• Taxes. Employers generally withhold income tax and pay Social Security and Medicare taxes on employees’ wages, which they don’t do for contractors.
• Wages. The DOL notes that misclassified employees may not receive the minimum wage and overtime pay they’re owed under federal law, and it says employers are responsible for getting the classification right.
• Workers’ comp. If the worker is hurt and your state treats them as your employee, you may be responsible for the injury, on a policy that was never priced for them. With no policy at all, the consequences are whatever your state’s law says.
• Audit charges. Your workers’ comp insurer may add their pay to your payroll at audit. See what is a premium audit.

How uninsured subcontractors show up at audit

Say a general contractor hires a drywall crew for a two-month job and pays them by check, and the crew’s owner says they’re fully insured, so nobody asks for paperwork. Nine months later the workers’ comp audit comes around, and the auditor asks for the drywall crew’s certificate of insurance, which nobody has. Now it’s a bill.

That’s the risk most contractors actually run into, and it works like this. Workers’ comp is priced on estimated payroll, and at the end of the policy periodPolicy periodThe policy period is the span of time between a policy’s start and end dates, usually 12 months, during which its coverage is in force.Read the definition the insurer checks the real numbers in a premium auditPremium auditA premium audit is the insurer’s review of your actual payroll, sales or other figures after a policy ends, used to replace estimates and set your final premium.Read the definition, and part of that check is a look at what you paid subcontractors. Many insurers ask for proof that each sub had their own workers’ comp for the whole time they worked for you, and if you can’t show it, the insurer may treat what you paid that sub as your payroll, assign it a class codeClass codeA class code is a number insurers use to classify what your business does, so your rates reflect the typical risks of businesses doing similar work.Read the definition and charge you premium on it.

It stings, but the reasoning is fair: it’s about the insurer’s exposure. Depending on your state, if an uninsured subcontractor’s worker is hurt on your job, the claim can fall to the contractor above them, which means your policy may end up responding to an injury it was never priced for. The audit charge is the insurer collecting for that risk after the fact.

The money is only part of it. By the time the bill arrives, the job is finished and paid for, the sub may be long gone, and you can’t go back and add the cost to the client’s invoice. So the fix happens before the sub’s first day, or it doesn’t happen.

Collecting certificates from every subcontractor

A certificate of insuranceCertificate of insuranceA certificate of insurance (COI) is a one-page summary that proves your business has insurance, listing your policies, limits, insurers and policy dates.Read the definition (COI) is the standard proof that a subcontractor has coverage. Before any sub starts work:

1. Ask for a COI showing workers’ comp and general liability, sent from their insurer or agent if possible. A copy the sub forwards is still worth having, but call the agent listed on it to confirm the policy is active.
2. Check the dates. The policy should be in force for the whole time they work for you.
3. Match the name. The business on the certificate should be the business you’re paying.
4. Check the state. Their workers’ comp should apply in the state where the work is done.
5. Look for owner exclusions. A one-person sub may show a workers’ comp policy that excludes the owner and lists no employees. It looks fine on a certificate and may cover nobody, so if that sub turns up with a crew, ask your insurer how the auditor will treat it.
6. Track renewals. Ask for a new certificate when a policy expires mid-job.
7. Keep copies by subcontractor and policy year, ready for the auditor.

Your subcontracts can also require subs to carry coverage and send certificates before work starts; how to collect and check certificates from your subcontractors goes further on tracking, and what insurance contractors need to win jobs covers what your own clients ask of you.

Same job title, different answer

Here’s how the same tests play out in each kind of business.

• Contractors. Subcontractors are routine, so collect certificates every time, from every sub, before they start.
• Salons. A booth renter who rents a chair, sets their own hours and books their own clients may be in business for themselves, while a stylist working your schedule for a commission may not be. See booth renters vs. employees.
• Offices. A freelance designer with several clients who works from their own studio is a different case from a “freelancer” at your desk, on your hours.
• Restaurants and cafés. A catering helper who works your busy weekends on your schedule usually looks more like an employee.
• Auto shops. A mobile detailer who serves many shops with their own van and equipment differs from a technician in your bay full time.
• Retail. A visual merchandiser who sets displays for several stores on a project basis is a different case from staff who work your floor.

One rough check works in all of these. If you stopped calling tomorrow, would this person still have a business? A booth renter with their own client list would, and a “freelancer” at your desk on your hours wouldn’t. It’s only a rule of thumb, and no agency uses it as its test, but a no is a good reason to run the formal tests before you write the next 1099.