Taxes and insurance are more than likely two of your least favorite necessities as a business owner. Then again, some taxes seem unnecessary, but that is an entirely different kind of article! The funny thing about these two things is that they go hand in hand.
As an insurance agent I deal with a large variety of business, in numbers sectors, of varying sizes and tenor. A common theme I noticed was that the businesses which were using full time accountants were spending significantly less money on their commercial insurance lines, like workers comp and general liability.
Now, before I go further, don’t cut and run thinking “A full time accountant…nope not in the budget!” You would be surprised how cheap having an accountant handle your payroll, taxes, and books can be. In fact, I know that many of my clients are paying less than $75 per month and their accountant handles everything I mentioned above. In addition to dealing with me for their business insurance servicing.
1099 VS W2
This is one of the biggest hurdles to affordable coverage that I come across with my clients. It is very common for new or small businesses to pay their employees on a 1099 basis, and even more so with builders and artisan contractors. It is just the way business has been done for, well, since the beginning of payroll taxes I would imagine!
A lot of people don’t understand how, or why, this affects their ability to obtain affordable workers comp coverage. The reason, as I have been told by many underwriters, is that 1099 employees are considered “uninsured subcontractors.” Even if you just have one person working for you, and they work exclusively for you full time, they are considered an uninsured subcontractor.
So what is the problem?
The insurance carriers have a very small window into the operations of the companies they are insuring. In reality, they only have a small amount of information which has been provided to them on the application, and the rest is just a giant question mark. There is no way for them to know if that one 1099 employee is an individual who works exclusively for you full time, or if that one 1099 employee is really a full blown framing crew for which they are extending coverage to the entire team.
In addition, it is more common for workers comp claims to arise from these types of employees, because more often than not they are not working exclusively for you. If they get on another job working for someone who doesn’t carry workers compensation, or on their own job, guess who’s policy they are going to be making a claim against!
This is not to say that you can’t get affordable workers comp coverage with only 1099 employees on the books, but is is extremely more difficult than if you were running W2. In terms of carriers who are willing to write businesses with only 1099 employees, you are looking at best case 1 in 20. In fact, most carriers set the hard limit for 1099 payroll at 25% of the overall total annual payroll.
…and then there’s the IRS
On a side note, if you have a 1099 employee and they are working exclusively for you on a full time basis…they are not really a 1099 employee as far as the IRS is concerned and you are exposing yourself to the possibility of being audited and oweing potentially years of back taxes. This of course is none of our business, and you can choose to run your business how you want! If you are not sure what I’m talking about , or you have never looked at the definition of 1099 vs W2 employees you should, here is a 20 point checklist to help clear things up from the IRS:
The additional tax liability of having a w2 vs 1099 employee is not as significant as some people assume it is. In fact, a lot of employers of 1099 employees are paying more per hour or per job than they would be if they just had the employee on the books. As mentioned above, in many cases you would have more control over the employees on the job performance, which is going to correlate to more money at the bottom line.
Not to mention you get the peace of mind of knowing the IRS is not going to come knocking some day trying to collect on past outstanding social security, medicare, and matching income tax.
Enter your accountant
Payroll processing these days is an ultra simple affair. Between software, direct deposit, etc, accountants are able to process small business payrolls in minutes. This allows for some extremely reasonable accounting fees if you choose to make the switch. Like I said above, I know a lot of companies who are paying $75 per month and it includes everything they need to never have to worry about anything payroll or tax related.
If you are running 1099, and want to know exactly how much it would effect your workers comp premiums if you switched over to W2 give us a call and we will get to work on some quotes for you.
Pay as you go workers comp programs
Many standard and surplus carriers are offering what are called “Pay-as-you-go” workers comp programs these days. Just as it sounds, you pay for what you are actually using, as you use it. This is a great way to keep down payments exceptionally low, keep your money in your pocket, and never end up owing at the end of the year.
Does this cycle sound familiar?
Pay as much as 25% or more as a down payment on your workers comp policy, pay monthly payments, complete your annual audit, find out if you owe more money for last years policy.
This is the cycle that so many businesses are in, and pay as you go programs eliminate it entirely.
Here are some of the advantages of these programs:
- Down payment requirements at or below 10%.
- Report payroll monthly, pay your fixed rate on actual payroll numbers.
- If you run less payroll this month, you pay less premium this month, and vice versa if you are growing. This really works out well for seasonal operations.
- Because you are reporting monthly most carriers waive the annual audit.
Easy for your accountant
If you are running payroll with your accountant it is nothing for them to login to the online reporting platform and report your payroll for you. They have access to your payroll numbers at the click of a button, and simply copy and paste the information to your account. Taking another thing off your plate, and once again saving you time and money.
Policies are cancelled more often than any of us would like, and often for completely avoidable reasons. Insurance carriers require you to pay on time, complete your workers comp audit on time, and to have all of the information they want when they want it. It is one of the more frustrating things for me as an agent, because it is something that is out of my control and often the carriers are way less flexible than they should be in my opinion. This is one area where your account becomes invaluable.
We all have them, we all hate them. Number one, who has time to be dealing with insurance auditors and their requests for “Additional information?” Number two, does everyone else feel like these people are always looking for one little thing they can “Get you” on?
Your accountant is your buffer between the guy with a pocket protector and the additional bill he is trying to pin on you. By the way, while we are on the topic, are you accounting for your materials and labor separately on every transaction which is audible for premium? The answer is likely no, and it is costing you money. Period.
How many bills do you have to pay every month? If you are anything like me, it’s somewhere beyond “Lots” and “Way too many!” Have you forgotten to pay for your workers comp policy and had it be cancelled for non-payment. Taking that one step further, have you ever had your policy cancelled and taken a huge hit on the replacement coverage because of it? I will say this, if I got paid a dollar for every call I’ve made to an insured to let them know their payment is past due…I’d have lots of dollars!
Your accountant can handle that! Not only can they handle it, but they will probably handle it for next to nothing. The reality is that they know the more dependent you are on them for day to day operations the less likely you are to leave them as a client. It’s really a win-win for everyone involved. You get to focus on building your business instead of the ancillary tasks, and they get a solid long term client.
What is your time worth
There are many ways that having an accountant handle your finances will affect your business in a positive way. Starting with the amount of time you are spending on handling these things rather than working on growing your bottom line, and ending with setting you up to be a favorable risk for insurance carriers to want to insure.
Do yourself a favor if you don’t have a remarkable accountant already, and give one of our accounting partners below a shout to find out what they can do for you. We work with all of these companies on a regular basis, they do great work at great rates, and know exactly how to help you take it to the next level.