Small Business

Should You Offer Health Insurance to a 1099 “Employee”?

Updated on February 12, 2020


The term 1099 “employee” typically refers to self-employed workers or independent contractors – they are generally not truly employees as defined by the Internal Revenue Service (IRS) or some state laws. Some common examples of these kinds of self-employed workers may include doctors in hospitals, building subcontractors, and all kinds of freelancers.

People commonly think that having yearly income reported upon a W-2 versus a 1099 is the main difference between a regular employee and a 1099 employee. The reality is more complicated. Those documents do indicate employment classification, but they don’t fully explain the distinction between the two kinds of workers and sometimes a worker may be misclassified and receiving the wrong type of form.

Distinctions between 1099 and regular employees

The IRS and many individual states each have complicated rules for determining whether a worker should be considered an employee (who receives a W-2 tax form) or an independent contractor (who receives a 1099 tax form).

These clarifications will help explain the line between employees and self-employed workers under the IRS guidelines:

  • The IRS says that the main distinction between employees and independent contractors is the amount of control that employers legally have over how the contractor can perform tasks. Employers can assign tasks and communicate expectations to self-employed people; however, they have a limited legal right to tell a self-employed contract worker how to complete the assigned task.
  • Distinctions between levels of instructions, provided training, and job requirements might vary for different kinds of jobs or professions. Sometimes the differences are subtle. In many cases, the relationship between the worker and employer is agreed upon hiring, so as the employer, you should make it clear to your new hire whether he or she is a contractor or employee. However, this agreement is generally only one factor when determining if a worker is an employee or not.
  • Business regulations typically do not compel a business to offer the contracted 1099 employee benefits that they might have to offer regular employers. On the other hand, according to the U.S. Department of Labor, a company can legally choose to offer a 1099 employee benefits. In these cases, the self-employed individual may need to declare employer contributions for 1099 benefits as taxable income.

If you decide to offer employee benefits to workers who get a Form 1099, for example by giving them access to your group medical plan, then you don’t necessarily have to pay some or all of the premiums. Some self-employed people may just hope to have the chance to join a group health plan and be willing to pay the entire premium. IRS rules may also allow the independent contractor to deduct the premiums that they pay for “1099 employee benefits” from their income at tax time.

Should your business offer workers who get a Form 1099 employee benefits?

Your company might not have to offer a worker who gets a Form 1099 employee benefits. On the other hand, you may decide that you or your business could benefit if you do. Regulations generally do not prevent you from including your 1099 “employee” in your health benefits, and some health insurance companies will accept your 1099 “employee” in your group medical insurance.

Offering a worker who gets a Form 1099 employee benefits could benefit your company in a few ways:

  • These 1099 “employee” benefits may help you retain good workers and keep them healthier.
  • A larger group or a younger population of 1099 workers may reduce premiums for you and everybody else on the plan.
  • If you only have 1099 employees (besides you and a spouse), you might need the extra headcount to qualify for group medical insurance.

How to decide if offering 1099 “employee” benefits is best for your business

Some health insurance companies won’t accept a 1099 contractor on a group business plan. Before you decide if you’ll offer your 1099 “employees” group medical benefits, you can compare health insurance for your business on the eHealth Group Health Insurance Page. You may find that one of these fits your situation:

  • Your company can enjoy better medical benefits and/or lower premiums by offering 1099 “employee” benefits.
  • You may be better off only including W-2 employees in your group health insurance plan.
  • You and your family may just want to make do with a family health insurance plan.

No matter which scenario fits your business, we can help you compare multiple options online to give you the information you need to make a good choice.

This article is not intended as legal or accounting advice, so check with your legal or accounting advisor instead of relying on the general information in this article.

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