Our accountant decided to give 1099s to three of our employees, two of them because they received a loan from the company and the other one did some consultancy from his home.
Every year we have an audit for our worker’s compensation policy. The auditor included these employees that receive 1099 as an additional cost to our policy. But they are our employees, they are already included in our workers compensation insurance.
Is it correct that because they receive a 1099 our workers compensation policy has to increase?
No, you do not have to cover these employees twice because of this accounting situation. However, you may want to rethink the whole 1099 idea. It sounds like this bit of creative accounting is causing more problems than it is solving.
Independent contractors receive a 1099. Employees do not. The individual is an employee, not an independent contractor, when you control when, where or how he or she works (even if that work is being done from home.) So the consultant may have genuinely been an employee.
Also, when you treat someone as an employee, then usually they are considered an employee legally, even if their work could be considered consulting (as an independent contractor.) So it is probably not a good idea to issue 1099s to these employees. It may also be seen by the U.S. Department of Labor as an attempt to avoid overtime payments and other labor laws.
The two employees were received a loan from the company were issued 1099s because otherwise, you have to pay tax on the money you paid them. But that does not make this a good idea. Frankly, this is just one of many problems that you get into when you loan money to employees. The solution here is to stop, or to draw up formal, legal loan papers, bite the bullet and pay taxes on the loaned amount.
Normally 1099 employees are not entitled to workers comp coverage, anyway. It appears the auditor believed that these workers are genuinely employees and not independent contractors. Which means you are probably breaking the law, by treating them as independent contractors. Even so, you should not have to pay workers comp on these employees twice. If they were included in your original total, they should not also be added again.
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