Workers' Comp for Independent Contractors and 1099 Workers

Paying someone on a 1099 does not, by itself, get you out of workers’ comp. Each state applies its own test to decide who is an employee for workers’ compensation, and if a worker you treat as a contractor fails it, your business can be treated as their employer. Your insurer can also charge premium for subcontractors who cannot prove their own coverage. If you are the contractor, you can usually buy a policy that covers yourself.

The short version:

A 1099 is a tax reporting choice. It does not settle whether someone is an employee for workers’ comp.
States use their own tests. California uses the ABC test for most workers; Wisconsin uses a nine-part test.
At audit, your insurer can charge premium on money paid to subcontractors who cannot show their own coverage. A certificate of insurance is the usual proof.
In some states, such as Florida, a contractor is liable for the employees of an uninsured subcontractor.
Sole proprietors with no employees are usually left out by default, but in states such as Wisconsin and New York they can choose to cover themselves.

This is general information, not legal or insurance advice. Classification rules differ by state and by industry, so confirm yours with your state workers’ compensation agency or a licensed agent.

For what workers’ comp pays and how premium is calculated, see our guide to workers’ compensation insurance for small business.

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The 1099 label does not decide it

The IRS has its own test for tax purposes. It weighs behavioral control, financial control, and the type of relationship, and says no one factor decides the answer (IRS). Workers’ comp is a state system, and a state can reach a different answer.

California says so directly. Being labeled an independent contractor, signing an agreement that says so, or being paid on a Form 1099 instead of a W-2 “does not determine employment status.” The same guidance notes that a worker can be an employee under California law without being one under federal law, because the tests differ (California Labor and Workforce Development Agency).

Wisconsin’s workers’ compensation division puts it more bluntly: a person is not an independent contractor for workers’ comp “just because the person says they are,” or because the contractor over them says so, or even because the federal government or other state agencies say so (Wisconsin DWD).

Two state tests, side by side

These are two examples, not a national rule. Other states use other tests, so check your own state’s agency before relying on either.

	California	Wisconsin
Name	ABC test (Labor Code sections 2775 to 2787)	Nine-part test (s. 102.07(8))
Starting point	The worker is an employee unless the hiring business proves all three parts	The worker is an employee unless they meet all nine parts (or are an employer themselves)
What must be shown	(A) free from the hiring business’s control and direction; (B) the work is outside the usual course of its business; (C) the worker is customarily engaged in an independently established business of the same kind	A separate business; a federal EIN or prior business tax returns; specific contracts; responsibility for expenses and performance; pay per job, contract, commission, or bid; profit or loss; recurring business liabilities; a real chance to succeed or fail
Exceptions	Some occupations use the older Borello multifactor test; construction subcontracts also fall under Labor Code section 2750.5	None listed for the test itself
Source	California LWDA	Wisconsin DWD

California has applied the ABC test to workers’ comp for injuries on or after July 1, 2020 (LWDA). Part B turns on what your business does. The state’s examples: a retail store that hires an outside plumber to fix a leak passes it, but a bakery that regularly hires cake decorators for its custom cakes does not (LWDA).

What misclassification can cost

In California, an employer found to have misclassified workers may face liability for, among other things, not providing workers’ compensation insurance. Willful misclassification carries separate civil penalties of $5,000 to $25,000 per violation (LWDA).

In Wisconsin, an injured “contractor” may file a workers’ comp claim against the business, decided on the facts at the time of injury. If they are found to be an employee, the insurer must pay benefits and charges premium on what they were paid (Wisconsin DWD).

The premium audit: where subcontractors show up

Your premium starts as an estimate; after the policy year, the insurer audits your books. Oregon’s state fund lists “certificates of insurance for subcontractors” among the records it reviews, and notes that Oregon rules require insurers to look at payments to uninsured contract workers (SAIF).

Wisconsin explains what happens next. When the auditor finds money paid to a sole proprietor or independent contractor, the insurer asks for proof that the person meets the nine-part test or has their own policy, “usually a Certificate of Insurance.” Without it, the insurer charges audit premium on what you paid them (Wisconsin DWD).

In Alaska, whose rating rules come from NCCI, this falls under NCCI Basic Manual Rule 2-H. In a 2022 decision, the state’s Division of Insurance upheld an audit that charged a general contractor premium on the full subcontract price because the subcontractor had no proof of coverage. Under the rule, avoiding the charge takes evidence of the subcontractor’s workers’ comp insurance or a certificate of exemption (Alaska Division of Insurance).

To keep that charge off your bill:

Get a certificate before work starts from every subcontractor, and check that its dates cover the period they work for you.
Keep exemption paperwork where your state issues it. A general liability certificate is not a substitute.
Keep contracts and invoices for each subcontractor, separate from employee payroll.
Make it routine, the same way contractors already check their subcontractors’ liability cover.

When a contractor is liable for a subcontractor’s workers

Some states go beyond premium and make the hiring contractor responsible for benefits. Florida’s statute says that when a contractor sublets part of its work, the contractor “shall be liable for, and shall secure, the payment of compensation” to the subcontractor’s employees, “except to employees of a subcontractor who has secured such payment.” It also requires a contractor to get evidence of workers’ comp insurance from each subcontractor, or a copy of a corporate officer’s certificate of exemption (Florida Statutes s. 440.10). Our guide to the Florida workers’ comp exemption covers how those exemptions work.

Alaska’s law also makes a contractor liable for workers’ comp payments to the employees of an uninsured subcontractor (Alaska Division of Insurance).

If you are the independent contractor

Many states do not require a sole proprietor with no employees to carry workers’ comp, but let them choose to. In Wisconsin, a sole proprietor may “voluntarily purchase” coverage for their own injuries, and the policy must be endorsed to name them, because policies exclude sole proprietors otherwise (Wisconsin DWD). New York’s law treats a self-employed person with no employees as excluded “unless he elects to be covered,” which can be done by buying a policy (New York DFS).

Three reasons to consider it:

Clients ask for it. Contracts often require subcontractors to carry workers’ comp and show a certificate. Wisconsin says the main reason is to avoid an audit premium dispute with the contractor’s own insurer (Wisconsin DWD).
Your health plan may not pay for a work injury. Delaware’s insurance department has warned that “many health insurance policies reduce or exclude benefits for work-related injuries,” and that complaints often come from the self-employed (Delaware Department of Insurance). How the exclusion applies depends on your state and policy wording, so read yours.
Disability insurance is not a substitute. Wisconsin notes it does not satisfy a contract that requires workers’ comp (Wisconsin DWD).

Be careful with policies that only produce a certificate. Wisconsin describes a minimum policy that covers any employees you may have “but it does not cover the sole proprietor” (Wisconsin DWD). Policies like this are what people usually mean by a ghost policy, and they will not pay if you are the one hurt.

Frequently asked questions

Do I need workers’ comp for 1099 contractors?

Not if they are genuinely independent contractors under your state’s test. The 1099 does not prove that, and a worker who fails the test can be treated as your employee.

Can I buy workers’ comp for myself if I am self-employed?

In many states, yes. Wisconsin and New York, for example, let sole proprietors elect coverage. Make sure the policy names you.

Why did my audit add premium for my subcontractors?

The auditor found payments to subcontractors without proof of their own coverage. If you have certificates covering the policy period, send them and ask the insurer to review the audit.

Does a subcontractor’s general liability certificate count?

No. Auditors look for evidence of workers’ comp insurance or a valid exemption. General liability is a different policy.

Where to go from here

If you hire contractors, find your state’s test and collect certificates before work starts. If you are a contractor, ask for a quote on a policy that names you, and see whether your state has an owner exemption, such as Tennessee’s registry or New York’s CE-200 certificate. For cost and coverage basics, read our guide to workers’ compensation insurance for small business. LLC owners can compare it with other policies in small business LLC insurance cost, and consultants whose clients mainly ask for liability cover can read about professional liability insurance for consultants. Arhox is an independent publication, not an insurer, broker, or law firm; our editorial policy and disclaimer explain how these guides are prepared.