If you work as a contractor in the construction trade, you have probably realized by now that every general contractor that you try to work for wants you to have workers compensation coverage. The problem is, you are a one man band with no employees. This seems crazy to have to buy workers compensation insurance on yourself.... right?
Well, there are some reasons why this is required of you. Remember that guy (cousin, brother, homeless guy you picked up on the street etc.) that you only used every once in a while to help you out on a job? The law says, unless he has his own business, AND his/her own workers compensation policy, your policy has to cover them. This causes everything to roll down hill. But we will come back to your employees that you did not know you had!
The general contractor must prove that you have your own WC insurance in order to prevent being charged premium under their workers compensation policy at the end of the year when it is audited ( and yes, unlike the IRS.....Insurance companies audit every year, and are quite good at it!) The general contractor will most likely show on their taxes that they paid you, and send you a 1099. This means the insurance company will see this and ask for a certificate of insurance from you. If they cannot produce it, they will get charged premium under their policy for you as if you are an actual employee of theirs. This will end up costing them thousands of dollars at the end of their policy period, which they obviously do not like!
This is why they require you to have your own coverage. guess what....the same audit rules apply to you! Welcome to the wonderful world of workers compensation coverage. You may think that just because you know the person, or they are a family member, or they are your best friend that they will never need coverage from your insurance. And...you only use them on the weekends when you are really behind anyway! But what happens when that person is seriously injured and has no health insurance, or the health insurance will not cover them because it was a work related injury?
In comes the lawsuit. Somebody is going to pay for this persons injuries. If you have workers compensation coverage, that person/company is your insurance company. this is why their payroll is factored in to your premiums. At audit, they are going to look for any payroll that you have written off of your taxes as sub-contracted labor. If they do not have their own insurance, you will be charged for their payroll as if they are an employee.
So now back to the one man operation. I am going to tell you the secret to solving the problem, and it is to do the same thing the general contractors do.
Below are the steps:
1. You must file for an exemption on the state of TN Website to exclude yourself from coverage. This puts it in writing that you have formally decided to opt out of coverage for yourself. You of course do not have to do this, but if you do not, you will be charged for your own payroll and depending on what you do, it could be very expensive. Most owners tend not to sue themselves for work related injuries, so this is not necessarily a bad decision. In order to file for the exemption, you must have a business license in the city/county that you are based in. You must also pay a fee to the state. The cost of the exemption is $50 if you have a contractors license, and $100 if you do not. You can do this online by clicking here. When you get done, a PDF document with your exemption form will be generated. SAVE THIS!!! you will need it for step 2.
2. Now for the crazy part. You have now professed your intention not to file a claim if you are hurt while operating your own business to the state. this should be enough right? Nope... and here is why. Remember that guy you pick up every once in a while, but other than that you don't really have any employees? Well what if that guy gets hurt? These employees even though very part time, have successfully filed claims against the general contractors insurance policy that you were working for and the insurance company ends up having to pay for it even though they never collected the premium for them. Obviously They do not like for that to happen. For this reason they often will not accept an exemption unless you are also willing to send in a copy of your tax return to the general contractors insurance company to prove you really do not have any employees. Most people are not willing to do this, and many insurance companies still will not take it. So here goes the crazy part. NOW YOU have to buy a workers comp policy to satisfy the GC's work comp carrier.... to cover....well NOBODY!! However in the off chance that your temp employee was hurt, your wokers comp would have to cover it instead of the General contractors. So now you need a workers compensation policy in addition to your exemption. The exemption allows you to exclude yourself from your own policy so that it can be rated with no employees. Otherwise they would charge you premium for your own wages. This is referred to as a "Ghost Policy" and can Generally only be written through the state assigned risk pool. The cost of the polciy (assuming you actually have no payroll) is $800 per year and must be paid in full for the year.
3. At the end of the policy period, you will have an audit. This audit is designed to detect any employees. If they find any, they will go back and charge the premium for every $100 in payroll you paid to them. If you end up actually having no employees, you will not see a charge, and may even receive a partial refund on your $800 that you paid at the beginning.
There really is no way around this sequence of events if you want to run a legitimate business.
Total cost= $100 for exemption =$800 for the Ghost policy: Total $900
If you are ready to get started, and have already filled for your exemption, click here to complete an application and we will get you set up in no time!