Do subcontractors need workers' compensation insurance?

An independent contractor works directly with a client. This could be for the duration of a project, on an as-needed basis, or for a specific period of time.

Contractors are directly responsible to the customer, and make sure a project is done according to the contract and to the satisfaction of the customer.

Subcontractors are hired by contractors to work on certain aspects of a project. Subcontractors report directly to the contractor, who oversees the subcontractor and makes sure their work is completed satisfactorily.

For example, a general contractor might be hired for a building project, and then hire electricians, plumbers, and carpenters as subcontractors to handle different parts of the job.

It’s important to make sure you correctly identify the status of those who work for you, whether they’re your own employees or contractors. Misidentifying their roles can lead to legal and tax complications.

Employees receive an IRS W-2 tax form from their employer, who is responsible for withholding payroll taxes. An employer might also have to provide health insurance, depending on the size of the company. The employer is responsible for overseeing their work, setting their hours, and providing the equipment they need as well.

Contractors receive a 1099 form and are responsible for paying their own taxes. They typically work under a contract for the duration of a project or for a set period of time. 1099 contractors report to a client, but they are typically responsible for providing their own tools and have more flexibility in terms of when they work.

Subcontractors are hired by and report to a contractor. When contractors are using subcontractors, it’s the contractor who is responsible for overseeing their work.

The workers’ compensation laws in most states require business owners with one or more employees to provide workers’ comp insurance. Sole proprietors often qualify for an exemption. However, they may be required to buy their own workers comp’ coverage if they work in riskier professions, such as roofing or other types of construction and contracting.

Independent contractors, subcontractors, and other self-employed individuals aren’t typically required to carry workers’ compensation insurance although they may need it to qualify for contracts. An uninsured subcontractor could have trouble obtaining work if it’s usually required for jobs in their field.

Many contractors and subcontractors buy their own workers’ compensation insurance even when it’s not required. That's because they want coverage for medical bills after a job injury, which likely wouldn't be covered by regular health insurance.

Workers' compensation benefits also supply part of the income lost by an injured worker during their recovery, or if they are disabled by a work injury.

Contractors and subcontractors are more likely to buy workers’ comp if they work in a risky profession, where they could face an expensive injury or become unable to work due to a work-related injury.

Subcontractors who should consider a workers’ comp policy include:

• Construction contractors (including carpenters, commercial builders, excavators, and electricians)
• Installation contractors (including appliance installation, drywall installation, HVAC, etc.)
• Landscaping (including landscape design, lawn care, irrigation, and tree service)

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