Discussion on the laws and rule of determining status and the IRS forms.
Workers Compensation Board
Only the Workers Compensation Board of Indiana (Board) and the Indiana courts can determine whether or not a worker is an independent contractor or employee. The decision can only occur after a workplace accident. The state will examine the characteristics of the relationship at the time of injury.
The Indiana WC statute defines an employee as follows:
“Employee means every person, including a minor, in the service of another, under any contract of hire or apprenticeship, written or implied, except one whose employment is both casual and not in the usual course of the trade, business, occupation, or profession of the employer.” Reference IC 22-3-6-1 (b)
The statute defines an independent contractor:”A person is an independent contractor and not an employee under IC 22-3-2 through IC 22-3-6 if the person is an independent contractor under the guidelines of the United States Internal Revenue Service.” Reference IC 22-3-6-1 (b) (7) and IC 22-3-7-9 (b) (5)
The Indiana Code is available on the State of Indiana website at this address: http://www.state.in.us/legislative/ic/code/.
Laws and Rules
The laws and rules that apply to coverage and premium issues are explained below.
a. Independent Contractors
The law defines a worker as an independent contractor if he/she meets the guidelines of the IRS (See statute quote above in section 2). Senate Enrolled Act 576, (Public Law 168), provides that all independent contractors, not just those in the construction trades, may now obtain a “clearance certificate.”
The Indiana Department of Revenue accepts and processes Clearance Certificate Applications. The WC Board understands that the IDOR does check the applicant’s tax status in the state of the contractor’s residence.
The WC Board of Indiana maintains a webpage for Independent Contractors. You can also make an inquiry if a contractor has a certificated filed with the WC Board on the Contractor Search page.
In its Form SS-8, the Internal Revenue Service has identified 46 factors under the categories of Behavioral Control, Financial Control, Relationship of the Worker and Firm, and a section for Service Providers or Salespersons. The factors are used as guidelines to determine whether sufficient control is present to establish an employer-employee relationship. [Please see the link to the IRS form at the bottom of this document.]
Indiana law requires that a sole proprietor or partner:
- who is an independent contractor in the construction trades, or is any other independent contractor, and
- who does not elect to include himself as an employee,
- must file the WORKER’S COMPENSATION CLEARANCE CERTIFICATE APPLICATION with the Indiana Dept. of Revenue.
Reference IC 22-3-2-14.5
IC 22-3-2-14.5Sec. 14.5. (a) As used in this section, “independent contractor” refers to a person described in IC 22-3-6-1(b)(7).(b) As used in this section, “person” means an individual, a proprietorship, a partnership, a joint venture, a firm, an association, a corporation, or other legal entity.(c) An independent contractor who does not make an election under IC 22-3-6-1(b)(4) or IC 22-3-6-1(b)(5) is not subject to the compensation provisions of IC 22-3-2 through IC 22-3-6 and must file a statement with the department of state revenue in accordance with IC 6-3-7-5 and obtain a certificate of exemption.(d) Together with the statement required in subsection (c), an independent contractor shall file annually with the department documentation in support of independent contractor status before being granted a certificate of exemption. The independent contractor must obtain clearance from the department of state revenue before issuance of the certificate.(e) An independent contractor shall pay a filing fee in the amount of fifteen dollars ($15) with the certificate filed under subsection (g). The fees collected under this subsection shall be deposited in the worker’s compensation supplemental administrative fund and shall be used for all expenses the board incurs.(f) The worker’s compensation board shall maintain a data base consisting of certificates received under this section and on request may verify that a certificate was filed.(g) A certificate of exemption must be filed with the worker’s compensation board. The board shall indicate that the certificate has been filed by stamping the certificate with the date of receipt and returning a stamped copy to the person filing the certificate. A certificate becomes effective as of midnight seven (7) business days after the date file stamped by the worker’s compensation board. The board shall maintain a data base containing the information required in subsections (d) and (f).(h) A person who contracts for services of another person not covered by IC 22-3-2 through IC 22-3-6 to perform work must secure a copy of a stamped certificate of exemption filed under this section from the person hired. A person may not require a person who has provided a stamped certificate to have worker’s compensation coverage. The worker’s compensation insurance carrier of a person who contracts with an independent contractor shall accept a stamped certificate in the same manner as a certificate of insurance.(i) A stamped certificate filed under this section is binding on and holds harmless from all claims:(1) a person who contracts with an independent contractor after receiving a copy of the stamped certificate; and(2) the worker’s compensation insurance carrier of the person who contracts with the independent contractor.The independent contractor may not collect compensation under IC 22-3-2 through IC 22-3-6 for an injury from a person or the person’s worker’s compensation carrier to whom the independent contractor has furnished a stamped certificate.As added by P.L.75-1993, SEC.2. Amended by P.L.202-2001, SEC.3.
To document its approval of the clearance certificate, the state issues Form WC-999.
The benefit, or purpose of the certificate of exemption establishes that no premium will be charged to the general contractor because the independent contractor has affirmed that:
- he carries workers compensation coverage if he has employees, or
- he is a sole proprietor or partner (not employee) and exempted from WC coverage.
The Indiana Department of Revenue is actually the entity that accepts and processes these applications. They will process Clearance Certificate applications from a non-Indiana subcontractor performing work in Indiana.
The Workers Compensation Board has advised the ICRB they will accept applications for persons under 18 when a parent also signs the form.
The Board cautions that an employer who procures independent contractor certificates from workers who are, in fact, employees may not be held harmless in a worker’s compensation action.
Also note that the WORKER’S COMPENSATION CLEARANCE CERTIFICATE includes the following clarification:
An independent contractor generally:
- directs his own work and performs the work in the manner he chooses, without direction from a boss or general contractor;
- sets his own hours;
- may hire assistants;
- provides his own tools and materials;
- is paid by the job rather than by the hour;
- may make a profit or suffer a loss on a job; and
- is free to work for more than one person or firm and to offer his services to the general public.
An employee generally:
- is under the control of his employer;
- has income taxes withheld from his pay;
- must work the hours specified by the employer;
- receives pay on an hourly basis;
- must perform the work in the manner indicated by the employer;
- receives training, tools and equipment provided by the employer;
- is not free to offer his services to any person or firms or to the general public;
- and can be fired at any time.
Clearance Certificate Processing Time
The statute calls for a seven day waiting period. IC 22-3-2-14.5(g) provides “A certificate becomes effective as of midnight seven (7) business days after the date file stamped by the worker’s compensation board.”
|House Enrolled Act 1553|
|The Indiana General Assembly passed House Enrolled Act 1553 which impacts independent contractors in several ways:|
Homeowners are exempt from getting a certificate of insurance from a contractor [IC 22-3-2-14(a)].Indiana Department of Revenue must clear status of an independent contractor ($5 fee). The Indiana Department of Revenue website contains Information Bulletin #86and the WORKER’S COMPENSATION CLEARANCE CERTIFICATE APPLICATION(WCE-1, State Form #45899).Independent contractor certificate (formerly called affidavit) with WC Board is effective 7 days after stamped (now a $15 fee).Contractor who assists employees in filing a false statement for independent contractor status commits a Class D felony. IC 6-3-7-5(m)
The statute says a contractor is liable for coverage for an uninsured subcontractor. So, the insurer will charge premium for this coverage. Reference IC 22-3-2-14:
(c) Any contractor who shall sublet any contract for the performance of any work, to a subcontractor subject to the compensation provisions of IC 22-3-2 through IC 22-3-6, without obtaining a certificate from the worker’s compensation board showing that such subcontractor has complied with section 5 of this chapter, IC 22-3-5-1, and IC 22-3-5-2, shall be liable to the same extent as such subcontractor for the payment of compensation, physician’s fees, hospital fees, nurse’s charges, and burial expenses on account of the injury or death of any employee of such subcontractor due to an accident arising out of and in the course of the performance of the work covered by such subcontract. The general contractor (GC) is ultimately liable for workers compensation benefits due to any worker on the jobsite who is not covered by workers compensation coverage. When a Clearance Certificate is in force for a subcontractor, that Certificate does not apply to other subs or employees they might hire, i.e. that responsibility flows upwards to the GC. The GC can obtain a policy even though the owners/executive officers exempt themselves, and they have no direct employees. The servicing carrier for an assigned risk policy will carefully underwrite the exposure in an attempt to charge a premium commensurate with the exposure to uninsured subs. During the first 90 days of the policy, it will conduct a preliminary audit to verify the payroll assumptions, and increase the estimates to match the results projected to annual.
c. Sole Proprietor
A sole proprietor is excluded, however he/she may elect coverage as an employee under the Act if the owner is actually engaged in the proprietorship business. If the owner makes this election, the owner must serve written notice of the election. Ind. Code §22-3-6-1(b)(4). If the owner of a sole proprietorship is an independent contractor and does not elect coverage, the owner must obtain a Certificate of Exemption under Ind. Code §22-3-2-14.5.
The workers compensation policy permits the insurer to charge premium for “all other persons…that could make us liable” for workers compensation benefits unless “…you give us proof that the employers of these persons lawfully secured their workers compensation obligations.” This may include workers whom the employer may think are independent contractors. Also, an insurer may audit an insured’s records within three years after the policy period ends and make premium adjustments. So, an employer could be obligated to pay premium to an insurer up to four years after the fact if it discovers workers that could make it liable. Reference the NCCI Policy Forms Manual, Workers Compensation and Employers Liability Insurance Policy, Part Five, C. Remuneration, 2.
However, if an apparent “independent contractor” worker fails to file the certificate of exemption, the carrier, if questioned, should still perform the IRS tests to determine if the person is truly an independent contractor and not an employee. If the tests support the position that the person is an independent contractor and not an employee, then there would be reasonable proof that there is no employer/employee relationship that would create a workers comp liability. However, the issue of liability for an uninsured subcontractor would apparently still exist even though there may not be an employer/employee relationship.
The rule for premium charge for subcontractors is in the Basic Manual, Rule 2.H., page R18 (old Rule IX.C). It requires the insured to provide “satisfactory evidence that the subcontractor has workers compensation insurance in force covering the work performed for the contractor. The following documents may be used to provided satisfactory evidence:
- Certificate of insurance for the subcontractor’s workers compensation policy
- Certificate of exemption
- Copy of the subcontractor’s workers compensation policy”
The workers compensation policy requires the insured to “keep records of information needed to compute premium.” Merely completing an IRS 1099 form versus a W2 form is most likely not enough to convince the insurance company auditor that a worker is an independent contractor. The following records are helpful in determining if an insured should be charged premium for a worker:
- payroll amounts of a contractor
- contract price
- sole proprietor or partner election for coverage
- certificate of insurance
- certificate of exemption (if in construction trades)
For more information on employer-employee relationships, refer to Chapter 2 of Publication 15, Circular E, Employer’s Tax Guide and Chapter 2 of Publication 15-A (PDF), Employer’s Supplemental Tax Guide. If you would like the IRS to issue a determination, you may submit Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
- Form SS-8 (PDF), Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding.
- Independent Contractor or Employee brochure