Quick Answer
Whether a worker is an employee or independent contractor depends on control, not on the 1099. If you direct how, when and where the work is done, supply the tools and the work is part of your core business, the worker is likely an employee. In New York, most workers count as employees for workers comp, and uninsured contractors are often charged back to you at audit.
Ready to check your coverage?
“He was hit with a random audit by his own insurance company claiming he owed over $90k.” That’s how one business owner put it, and we hear versions of that story every year. He paid installers on a 1099, collected signed waivers and assumed the employee or independent contractor question was settled. Then the audit counted every dollar paid to them as payroll. “At first we thought this might be a scam,” the family said. It wasn’t.
The Coyle Group is a commercial insurance agency that handles the complex, high-value risks other agencies don’t know how to structure, where the details in the policy are the difference between a paid claim and a denied one.
We have written about the topic of properly classifying employees in the past, but there is a continued crackdown by regulatory authorities and insurers about classifying workers properly with regard to NY workers compensation. So, is each of your workers an employee or independent contractor?
If you pay people on a 1099 and aren’t sure they’d hold up as independent contractors at audit, you’re not alone, and the bill lands with only 20 days to pay it. We manage the market for you: we review how your workers are set up, what your carrier will count and which insurers fit before anything goes out. In my experience, almost all insurance programs we review contain at least one fatal mistake. The next step is a short, confidential call.
What does getting employee or independent contractor status wrong cost?
Getting employee or independent contractor status wrong can cost far more than the premium you saved. In New York, the Workers’ Compensation Board can charge up to $2,000 for every 10 days a business goes without required coverage, and the penalty can pass $12,000 before the first notice arrives. Audit bills come on top of that.
How the costs stack up:
Workers comp penalties.
The Workers’ Compensation Board penalty schedule allows up to $2,000 per 10-day period without coverage, and it lists misclassifying employees as “independent contractors” as misrepresentation.
Fines.
Criminal fines run up to $50,000, and Fair Play Act fines up to $5,000 per misclassified worker (full table below).
Federal employment taxes.
The IRS says that if you treat an employee as an independent contractor with no reasonable basis, you can be held liable for employment taxes for that worker.
The audit bill itself.
The insurer adds what you paid uninsured workers to your payroll and bills the premium.
That last one is the one most owners never see coming. It hits cash flow at the worst time, and it repeats every year until the employee or independent contractor setup is fixed.
What is the difference between an employee or independent contractor?
An employee works under your direction and control; an independent contractor runs their own business and controls how the job gets done. The paycheck label doesn’t decide it. What decides employee or independent contractor status is the real relationship: who sets the schedule, who supplies the tools and whether the work is part of what you sell.
Here is the plain-language comparison:
Feature |
Employee (W-2) |
Independent contractor (1099) |
|---|---|---|
|
Control |
You set hours, methods and supervision |
They set their own schedule and methods |
|
Tools |
You supply them |
They bring their own |
|
Pay |
Hourly, daily, weekly or salary |
Per job or by invoice |
|
Taxes |
You withhold and match payroll taxes |
They pay self-employment tax |
|
Workers comp |
You must cover them |
Their own policy, or you may pay at audit |
|
Tax form |
W-2 |
1099-NEC |
|
Relationship |
Ongoing and part of your core business |
Project-based; they work for others too |
Frankly, most owners assume a 1099 and a signed contract settle the employee or independent contractor question. They don’t.
How do the IRS, Labor Department and New York tests decide?
Three tests can give three different answers on employee or independent contractor status. The IRS looks at control for taxes, the U.S. Department of Labor looks at economic dependence for wage law and New York’s workers comp rules use their own factors. The tricky part is that a worker can pass one test and fail another.
The IRS common law test
The IRS guidance on independent contractors sorts the facts into three groups:
Behavioral control.
Do you control what the worker does and how.
Financial control.
Do you control pay, expenses and tools.
Type of relationship.
Are there benefits, an ongoing relationship and core-business work.
The IRS says no set number of factors makes someone an employee or independent contractor. If it’s still unclear, Form SS-8 asks the IRS to decide, but a determination may take at least six months. The IRS also notes that working remotely doesn’t make someone a contractor; if you control what is done and how, a remote worker is still your employee.
The Department of Labor’s economic reality test
For minimum wage and overtime, the Labor Department’s rulemaking page shows the 2024 rule took effect March 11, 2024. On February 26, 2026, the department announced a proposed new rule, and comments closed April 28, 2026. As of October 2026, check the current federal employee or independent contractor rule before relying on it.
The ABC test some states use
Some states, including California, presume a worker is an employee unless the business proves all three parts of an ABC test: (A) the worker is free from your control, (B) the work is outside your usual course of business and (C) the worker runs an independently established business. New York uses a similar three-part test for construction and commercial trucking.
The workers comp factors most owners miss
There are several factors which will determine whether a worker is an employee or an independent contractor for workers comp purposes, and many are similar to IRS guidelines:
Now, it is not always easy to determine for workers compensation purposes whether a worker is an employee or independent contractor, but understanding these factors should help guide you.
Watch: Does my business need workers compensation insurance in NY?
Who counts as an employee under New York workers comp?
Under New York Workers Compensation Board rules, most workers are classified as employees for rating and coverage purposes unless they are specifically exempted. That default is broader than most owners expect. In construction and commercial trucking, the law presumes the worker is your employee, so the burden of proving the employee or independent contractor call falls on you.
“Employee” includes day laborers, leased employees, borrowed employees, part-timers and some sub-contractors, unless that sub-contractor has their own insurance or is exempt. Leased and borrowed workers bring in the alternate employer endorsement. Still unsure whether you need workers comp in NY? Start there, then see our workers compensation insurance guide.
The Board’s page on identifying an independent contractor sets out the key aspects by industry:
Industry |
Starting point |
What the worker must show |
|---|---|---|
|
Construction |
Presumed your employee (Fair Play Act, October 26, 2010) |
All 3 parts of an ABC-style test; a business entity must meet all 12 separate-business criteria |
|
Commercial goods transportation |
Driver presumed your employee |
A 1099 where required, all 3 test parts and 11 separate-business criteria |
|
All other industries |
Weighed case by case |
Their own FEIN, liability and workers comp policy, advertising, equipment and business location |
One line on that page matters most. The Board notes carriers often charge general contractors premium for all “subcontractors” unless they show proof of their own workers comp. Of the 5 things you should know about workers comp in NY, this is near the top.
Watch: Why is NY Contractors Insurance So Expensive?
Not sure how your crew would hold up? Book a call and we’ll walk through each employee or independent contractor decision with you in 15 minutes.
How does the workers comp audit charge you for 1099 contractors?
At audit, the insurer adds what you paid uninsured contractors to your payroll and bills premium on it. Workers comp is priced on estimated payroll, then trued up after the year ends. If a 1099 worker can’t show their own coverage, the auditor settles the employee or independent contractor question for you.
Here’s the rub on the whole deal. If you exclude wages or fees paid to uninsured independent contractors in your business, you should be prepared to possibly pay the workers compensation charge for them on audit. Especially if you do not have a solid methodology to demonstrate that they are truly independent contractors. Ultimately, your insurer will attempt to collect a charge on that “payroll” on audit.
You can dispute that charge, but the final arbiter on the decision will be the Comp Board or a Workers’ Compensation Law Judge. Our definitive workers comp audit guide walks through what auditors ask for.
Watch: The Definitive Workers Compensation Audit Guide
Why the timing hurts
In our opinion, it is better to clear up this potential confusion before you start your policy or get to its audit, so that you budget accordingly for it. Having to pay a large additional premium at audit, within 20 days of its billing, isn’t always easy, so knowing beforehand is probably a good idea. Premium audits exist because the starting payroll is only an estimate.
Real-world example: the $90,000 flooring audit.
A small flooring business paid licensed carpet installers on a 1099. They worked for other companies and had signed waivers. The carrier’s audit still billed over $90,000 for not having workers comp in place for those subcontractors. The family said it “just doesn’t make ANY sense.” The step that usually prevents this is a current workers comp certificate from each installer, collected before the first job.
Which businesses get caught most often?
Any business that pays people on a 1099 to do the same work its own staff does is at risk. The pattern we see most is a fast-growing company adding help without adding paperwork, treating employee or independent contractor as a payroll setting rather than a legal test. Some industries feel it far more.
Construction trades.
New York presumes construction workers are employees, one reason New York contractors insurance is so expensive.
Flooring and installers.
Crews move between companies, and few carry their own comp.
Cleaning firms.
Workers compensation for janitorial contractors in NY gets audited closely.
Fitness studios.
Instructors teach the studio’s core service.
Trucking.
New York presumes drivers are employees.
What does it cost to cover contractors, and what moves the number?
The cost of covering a misclassified contractor is the payroll you paid them, multiplied by your class rate and experience mod. There’s no flat price. An office code and a roofing code differ many times over, so the same $100,000 can mean a small charge or a very large one once the employee or independent contractor finding goes against you.
The penalty figures below come from the New York Workers’ Compensation Board, as of October 2026:
Cost item |
Range |
What moves it |
|---|---|---|
|
Audit premium on uninsured contractors |
Payroll paid x class rate x mod |
The class code of the work and your mod |
|
WCB civil penalty (uninsured) |
Up to $2,000 per 10 days |
How long you went without coverage |
|
Criminal fine (uninsured) |
$1,000 to $5,000; $5,000 to $50,000 over 5 employees |
Number of employees affected |
|
Fair Play Act fine |
Up to $2,500 per worker; $5,000 on a second violation |
Construction or transportation |
Here’s the math with a made-up rate, for illustration only: $200,000 paid to uninsured installers at $8.00 per $100 of payroll. That’s a $16,000 audit bill before your mod. See how workers compensation premiums are calculated and how much workers comp costs in NY.
Watch: Workers Comp Class Codes, What Are They For? 2025
What auditors check before they exclude a contractor
These underwriting factors decide employee or independent contractor treatment at audit:
Factor |
Why underwriters care |
What to have ready |
|---|---|---|
|
Proof of workers comp |
No policy puts the risk on you |
A current certificate per sub |
|
Separate business |
Shows independence |
FEIN and their own liability policy |
|
Type of work |
Same work as staff points to employee |
What each sub does |
|
Written agreement |
Defined result, not supervision |
Signed contract with insurance terms |
|
Payment records |
Ties payments to covered vendors |
1099s matched to certificates |
Want a second set of eyes on your next audit? Contact us and we’ll review your employee or independent contractor list before the auditor does.
What paperwork protects you when you hire contractors?
The single best protection is a current certificate of workers comp insurance from every contractor, collected before they start. Without it, even a true independent contractor can land on your audit. With it, the auditor has a clean reason to leave those payments off your bill.
The key benefits of getting the employee or independent contractor paperwork right, framed as risk avoided:
No surprise audit bill.
Contractor payments stay off your payroll.
No uninsured claim.
If a contractor’s worker is hurt, their policy responds first.
Cleaner contracts.
A waiver of subrogation for subcontractors only works if the sub’s policy is real.
Stronger disputes.
Documents are what a Law Judge looks at.
A certificate of insurance only proves a policy exists. Check the dates, the named insured and that workers comp is listed.
What should you watch out for?
The biggest gaps sit outside the workers comp policy. A wrong employee or independent contractor call can trigger lawsuits your other policies don’t cover, and an injured worker can sue you directly if you were uninsured. Here’s what I’d want every owner to know.
Employers liability doesn’t help the uninsured.
Employers liability sits inside the workers comp policy, so an uncovered worker gets none.
Action-over lawsuits.
An injured worker can sue an owner or general contractor, who then turns to the employer. See action over liability.
EPLI usually won’t pay wage claims.
Overtime claims from misclassified workers are wage-and-hour claims, which most standard EPLI policies exclude.
Personal liability.
The Board holds sole proprietors, partners and a corporation’s president, secretary and treasurer personally liable for failing to secure coverage.
Red flags your contractor setup needs a review
How do you evaluate your own workforce?
List everyone you paid in the last 12 months who wasn’t on payroll, then test each one. The first pass takes an afternoon, not a lawyer. You need a spreadsheet, the factors above and an honest employee or independent contractor answer for every name.
Step 1: Build the list
Pull your 1099 vendors and anyone paid by invoice.
Step 2: Ask the control questions
Who sets the hours, who supplies the tools and does the work match your employees’ work?
Step 3: Collect certificates and budget
Get a workers comp certificate from every contractor you keep. Put the rest on payroll or budget the premium; the IRS also offers a Voluntary Classification Settlement Program.
Step 4: Review before the audit
Revisit the list 60 to 90 days before your audit, not the week of it.
Watch: Why are Insurance Premium Audits Necessary on Liability and Workers Comp Policies
Want help working through your list? Book a call and bring your 1099 vendor report.
Why work with The Coyle Group on worker classification?
Because the employee or independent contractor question is really an insurance design question, and that’s our work. I hold the PWCA, the Professional Workers’ Compensation Advisor designation, and I’ve been auditing business insurance programs since 1984. Donna Richard, our Senior Account Manager, has spent 20 years on workers comp alone.
The Coyle Process
95% of our clients stay with us, and we return calls and emails within one business day. We start with a confidential review, then go to market only where it makes sense:
Diagnose the risk.
Payroll, 1099 list, class codes and last audit.
Identify the right insurers.
Ones whose appetite fits your operation.
Explain where we’re going and why.
Before we approach anyone.
Bring viable options back for comparison.
Coverage and price side by side.
The benefit is fewer applications, fewer duplicate requests and one point of contact.
About shopping your coverage
Comparing options is smart. Indiscriminate shopping isn’t. Several brokers mean duplicate applications, the same insurers approached twice and a generalist who may misclassify your work. You don’t need five brokers shopping your insurance. You need one capable broker making sure the right insurers compete for your business.
Who this isn’t right for
We only handle business insurance. If you want someone to rubber-stamp what you have at a lower price, there are brokers who will do that, and we’re not one of them. We also won’t copy a program that leaves your contractors uncovered and call it fine. And if you’re a very small business with a simple risk, a basic packaged policy may serve you well, and I’ll tell you so.
Your next step: a 15-minute call, not an application
If you have coverage today.
A confidential review of your forms, exclusions, conditions and last audit.
If you need new coverage.
We build the underwriting picture first, then identify which insurers fit.
Don’t sign a policy you don’t fully understand. Get it right the first time. If you’re unsure, it’s best to speak to an agent or broker for advice; they should be able to guide you appropriately and keep you “out of trouble.” If that fails, book a call and let’s have a conversation.
Frequently Asked Questions
Author’s Expertise
This article was written by the CEO of The Coyle Group, Gordon B. Coyle, CPCU, ARM, AMIM, PWCA, who has over 40 years of experience working with business owners of all sizes and industries across the US, solving their insurance challenges.
