Independent Contractor vs Employee: Does It Matter?

Small Business

Independent Contractor vs Employee: Does It Matter?

Published on February 02, 2018


A small business health insurance group plan is a great way to cover you and your employees with quality health insurance, oftentimes at a lower price per individual than if you purchased an individual or family plan.
So how do you know if you qualify as a small business? Well, one important part of knowing whether or not you qualify for a small business health insurance group plan is by how many employees you have—or if you technically have any at all. It’s important to understand what types of workers you have. Let’s take a closer look at the definition of what is considered an independent contractor vs an employee, and what each one means in terms of getting a small business health insurance group plan.

Defining independent contractor vs employee

Defining what kinds of employees you have might help you figure out if a small business insurance plan is right for you. Whether or not you have independent contractors or employees working for your small business is an important distinction to make.
According to the IRS, if you hire or contract individuals for your business, you have to determine whether each individual is an independent contractor, sometimes referred to as a 1099 contractor, or an employee. This is a necessary distinction to make for both tax purposes and for health insurance purposes. See the definitions of these types of workers:
Independent contractor- An independent contractor is usually a self-employed individual whose earnings are subject to the self-employment tax. The IRS states that the rule of thumb for identifying an independent contractor is that “the payer [employer] has the right to control or direct only the result of the work and not what will be done and how it will be done”. You may hear contractors called “1099 employees”, which really just means that they receive a 1099 form at the end of the tax year. These “1099 employees” are responsible for calculating their own payroll taxes, rather than having payroll taxes automatically deducted like a W-2 employee.
Employee- When shopping for health insurance, you might hear this type of worker referred to as a “common law employee”. According to the IRS, this means that you (the employer) control the work they perform for you and how it will be done. An employee will have an ongoing relationship with the employer, continuing to provide a service as a key aspect of the business.
Even after getting these straightforward definitions, “independent contractor vs employee” is not always a black and white distinction to make. There are many factors that go into the complete analysis of whether a worker is an independent contractor or an employee.  It is a good idea to talk to your accountant or legal representation to define which type of workers you employ.

Independent contractor vs employee: what does it mean for health insurance?

You may be considered a small business by yourself or by state or federal government tax boards, but for health insurance purposes, you may not be eligible for a small business plan.
After exploring independent contractor vs employee definitions, you might realize that the people you are paying to work for your small business are not actually employees from a small business group health insurance standpoint. Or, maybe you didn’t know what a “common-law employee” meant, and you were counting yourself or your spouse as the sole employees.
For example, a business comprised of two spouses where both of you work full-time seems like it would meet the definition of being a small business; there are two employees and they are both working full-time. However, most health insurance plans require your business to have at least one “common law” employee (besides yourself or a spouse) whom you employ and is electing to be covered under the small business health insurance plan you choose. You may want to explore options for Individual Family Plans that fit your needs on

Can 1099 independent contractors count towards the total employee tally for my small business?

Now that we’ve defined which workers count as employees when dealing with health insurance (generally, one full-time, common law employee besides yourself or a spouse), you may have realized that you don’t technically (from a health insurance point of view) have as many employees as you thought you did.
If you’re a business who only has “1099 employees” (contracted workers to whom you send a 1099 tax form to report their earnings), there are a limited number of health insurance plans on that may count these types of workers as employees. Understand, though, that the IRS requires you to give a worker all the benefits of being an employee if he or she meets the common-law criteria described above. You can find this outlined in more detail on the IRS website. Essentially, you should look at the behavioral, financial, and relational aspects of how your small business interacts with each worker.

What to do if I don’t have enough employees to be considered for a small business group plan?

If it is just you as a full-time employee, or if it’s just you and your spouse, you will likely not qualify for a small business health insurance plan. The same could apply for a small business that has only independent contractors working at the business.
Don’t go uninsured if this is the case, though. Consider checking out an individual or family plan on that will meet the health-care needs of you and your spouse or family. You can also educate your employees about health insurance options besides a small business group plan.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.

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