Worker's Comp insurance deducted from independent contractor income

[manyhappyreturns]

I just saw a lady who received a 1099-Misc for independent contractor income, and the total reported included amounts that were deducted for Worker's Comp insurance. So she essentially paid for her own Worker's Comp. That seems a bit weird to me, like she probably should have been considered an employee, but of course that would have cost her employer the employment taxes which he didn't want to pay. My client says the Worker's Comp was to protect her employer in the case that she got hurt on the job, but isn't the employer supposed to pay that?

[JohnH]

The employer pays workers comp insurance on all employess, and a company is supposed to pay it on all independent contractors unless they provide proof of coverage. This issue is usually covered in most independent contractor agreements.

So, assuming she's a legitimate independent contractor and doesn't have her own coverage, the company is probably handling the workers comp correctly. It isn't so much a matter of who is "supposed to" pay it - rather it's a matter of what the contract says.

[manyhappyreturns]

Thanks, John. Yes, she is a legitimate independent contractor. Because the Worker's Comp is coming out of her pocket, can she deduct it on her Sch C?

[JohnH]

She can deduct it on Schedule C but ONLY IF it has not already been deducted in arriving at the amount she shows as gross income on the Schedule C. If it is not included in the gross income on Schedule C, then she cannot deduct it.

[taxea]

She can deduct it on Schedule C but ONLY IF it has not already been deducted in arriving at the amount she shows as gross income on the Schedule C. If it is not included in the gross income on Schedule C, then she cannot deduct it.

John...if the employer deducted it from the gross amount owed to the IC wouldn't that then be an expense for the IC? Why would the company even show it on a 1099 if it wasn't charged to the IC? If it is in the contract that they will pay it shouldn't the contract also say whether they are paying it at the expense of the IC rather than just being nice and covering her at their expense while she is working on their property?

[manyhappyreturns]

This employer subtracted the WC Ins he paid from the total reported on the 1099 before paying the IC, so it is clear to me that she can deduct it. Thank you for clarifying this.
Linda

[Burke]

The employer pays workers comp insurance on all employess, and a company is supposed to pay it on all independent contractors unless they provide proof of coverage. This issue is usually covered in most independent contractor agreements.

So, assuming she's a legitimate independent contractor and doesn't have her own coverage, the company is probably handling the workers comp correctly. It isn't so much a matter of who is "supposed to" pay it - rather it's a matter of what the contract says.

Why is an independent contractor supposed to have workmen's comp insurance on himself? I work with many of these persons and this is the first I have heard of it.

[MRPLOW]

In Ohio an independent contractor(self-employed) is not required to pay for workers comp insurance by law. So it's rare to see it.

But it is available for them to purchase for themselves, and may be required for bidding on certain jobs.

http://www.ohiobwcattorney.com/Articles/A-Smart-Business-Decision-Workers-Compensation-Insurance-for-the-Self-Employed.shtml

[JohnH]

Why is an independent contractor supposed to have workmen's comp insurance on himself? I work with many of these persons and this is the first I have heard of it.

This workers comp issue must be quite different from state-to-state. In NC, when we handle a Workers Comp audit, the auditor will ask for all payments to indpendent contractors. Unless we can provide proof that the I/C has their own W/C insurance, the payments to I/Cs will be added to the base in calculating the W/C insurance premiium. So either the I/C must have their own W/C insurance or the company must pay for it.

Some companies might factor the cost of the W/C into deciding what they pay their I/C's , whereas others might set the payment to the I/C at a higher level and then reserve the right to deduct the W/C from their payments. That second scenario was what I assumed is happening with the original post. If I understand correctly, the company is deducting the W/C premiums from the gross due to the I/C, but still reporting the gross on the 1099. They may have a bookkeping problem if they aren't closing the loop on this by netting out the W/C withholding on their financials and tax returns, but that's another discussion. ( a double-entry system will catch that, but I can see how a hand-prepared financial summary might miss it.)

Personally,, I wouldn't knowingly allow any I/C to perform services on my home or business premises without seeing proof of W/C insurance, because if they don't have W/C insurance and they get injured on my premises, they might be able to sue me.

[JohnH]

I think some of what we are saying is a matter of semantics. If everybody accounts for cash in and cash out, then the W/C never appears in gross income or on the 1099, so there's no deduction available on the Schedule C. But if the employer is showing gross payment due to the I/C on the 1099 without adjusting out the W/C withheld, and if the I/C is reporting that higher figure as gross income on their Schedule C, then the I/C has a legitimate deduction on their Schedule C.

When all else fails, sometimes it's a good idea to add up the checks to determine what really happened. (or pull out a leal pad and set up "T" accounts if it gets really confusing.)

[manyhappyreturns]

This TP from the original question just brought me her last year's tax return and a print-out of her paycheck amounts for the year. Her employer deducted the WC from the gross that he reported on the 1099, but the smount she received did not include it, so in this case it is clearly deductible because she in essence paid it. Her preparer deducted the WC on the misc grid on p. 2, but I would have a tendency to deduct it in the insurance box, not that it matters a whole lot because it all gets added up together anyway.

[taxea]

Or ask the issuer in an effort to negate the time it would take to figure it out yourself.

[Lion]

Her employer deducted the WC from the gross that he reported on the 1099

No. And last year may have double-dipped, too. She did not have W/C reported on her 1099, does not report it as income, does not pay tax on it. So, she can NOT deduct it.

You tell us that she earned, for instance, $10,000. She had $1,000 deducted from her checks as W/C. She received a 1099 for $9,000. She pays taxes on only $9,000. She already got a tax benefit by not paying taxes on the $1,000 W/C. She can't get a second benefit by deducting it again.

[manyhappyreturns]

The reality here is that her 1099 shows she made $6061, but she only received $4829. The employer deducted W/C as well as mileage reimbursement, so she should be able to deduct the W/C and the mileage amount because it was like she got paid $6061, but spent $1232 on insurance and gasoline, etc., in order to do her job. What I just thought of though while preparing this person's return is that her employer gets to deduct the whole amount as contract labor, so that means that $1232 is being deducted twice on 2 different people's tax returns. Does that make sense? I thought it was all crystal clear a few minutes ago, and now I'm confused.

[JohnH]

If there's very much at stake, independent verification is always desirable. Sometimes the issuer can't answer intelligently either. Adding up the checks is the most reliable way to know for sure.

As a matter of fact, for some 1099 clients I recommend that they send a printout listing all the checks to the vendor along with the 1099-misc simply to avoid questions like this. Otherwise you get these calls saying "there's no way you paid me this much"