As a small business owner in the insurance industry, you are most likely aware of the continuing litigations over the working classification of insurance agents. You need to understand the classification of your workers because if you intentionally or unintentionally misclassify your agents it can cost you and your small business. So is your insurance agent an independent contractor and if so, what’s the easiest way to file their recipient copy W-2 or 1099 Form?
Is Your Insurance Agent an Independent Contractor?
What is an Employee?
An employee will typically receive training for their positions at your agency, and you or a supervisor manage them. Employees are hired by the company to perform a specific type of work. They are also paid salaried or hourly and are subject to overtime laws.
What is an Independent Contractor?
An independent contractor usually works for multiple companies and has complete control over where and when their work is completed. Their pay is also a flat fee that is given once they finish the task.
Why is Knowing the Distinction Important?
First, you must understand that the law dictates whether your agent is an independent contractor or employee, not you. Did your agent sign a contract/employee agreement, or do they come work on their own. Despite your arrangement, your team’s classification is based on the nature of their work and how they do it.
As an employer, you have very different responsibilities depending on the type of worker your business employs. Everything from health benefits to labor laws will depend on this classification. Most importantly, you will need to withhold and pay taxes for your employees but not for independent contractors.
If you are paying an employee you are responsible for withholding federal, state, and local income tax based on your business location. Additionally, you are required to withhold the employee portion of Medicare and Social Security.
Your Insurance Agent Are Independent Contractors if…
The Agent must meet all of the following requirements:
- Their income is based solely on sales and not hours
- They are not receiving a training allowance subsidy
- There is a written agreement outlining the services they are to perform
- They work the hours they choose
- They pay for their own expense including transportation and travel
If your agents are correctly classified as independent contractors, you will need to file Form 1099-MISC. This form is used to report payments for services performed for your business by the agent. You, the employers must file Form 1099-MISC for all non-employee compensation $600 or more. For 1099-MISC must be provided to the recipient by January 31st and a copy submitted to the IRS by March 31st.
If your agents are classified as employees, you must file a W-2 Form with the Social Security Administration (SSA) by January 31st. In addition to filing with the SSA, you must send recipient copies of Form W-2 to your agent to report salary and other compensations offered during the previous calendar year.
What if I Misclassified My Insurance Agent?
Unfortunately, this is a worst-case scenario. If you have misclassified your insurance agent as a contractor, you will need to pay the IRS back taxes and various other expenses.
E-File Your Employee W-2’s Today
Be sure to research what classifies as a contractor to avoid contract labor abuse violations. Remember this is not a choice your small insurance business can make but a legal classification.
Once you fully understand your agents classification you can e-file all of your required forms with our sister product, TaxBandits. This all-in-one software solution provides a comprehensive step-by-step guide for generating and e-filing in the simplest way possible. Skip the complicated IRS terminology!