Are Insurance Agents Employees or Independent Contractors?

[threed]

Our agency has always treated its sales agents as 1099 Independent Contractors. The owner, however, has always said that if the IRS were to audit they might disallow this practice based on the agent contract that states the agent will only write business with our agency.

A CPA recently brought to our attention the IRS Voluntary Classification Settlement Program (VCSP) http://www.irs.gov/businesses/small/article/0,,id=246013,00.html

He recommends that we participate in the VCSP as a good opportunity to "change our ways" and classify the sales agents as employees now. This would be very hard for the agents because we would have to change their contract paying a lower commission % to compensate for the increased tax burden.

Have any other agencies considered this program? How does your agency handle the matter of commission only agents? What steps does your agency take to solidify that relationship? All other applicable thoughts welcomed.

[OldIndyAgent]

Get a good accountant!

If you treat each licensed producer as a separate business entity, transferring a % of commission into their account each month, you would not need to treat them as employees. They would need to purchase their own laptops, equipment, would get mileage, and other perks like writing off a home office. Each one would file a DBA as John Doe Insurance Agent, with a business bank account, etc.

[LadyBroker]

If they are independent contractors, each sales agent would also need to provide the agency with an E & O policy. If they are independent, they are not covered by the agency's policy, right?

Also, I would be a bit suspicious of a CPA who just happens upon you with the settlement information....is he your CPA, or how did you find you?

Finally, if the agents are only allowed to sell for your firm, then I don't believe they are independents, they are your employees, as you are directing their work.

Please post again and let us know what happens.

[AgencyEquity]

The risks of going on and doing nothing can come back later to haunt your firm. Remember, it's not up to your firm to determine who is an 1099 and who is a w-4, it's the the IRS guidelines that determine this. I would beleive if you did not do this, they may end up at coming later time coming back and forcing you to pay the additional tax burden, perhaps including the employees share of the 15% SS tax, let alone you are building in this tax as a part of the higher compensation, only to have it come back and bite you.

[robmejia]

You would only be allowed to sell your firms' products and nothing else. You are after all a representative of the company as their agent.

[JAM]

They just tightened the rules here in CA as well.

[William Graham]

It is fairly easy to research IRS publications & info on this subject on the internet!

the only thing I keep in mind though is that even the government publications have a dog in this fight -
the legal wording you find and the actual enforcement are far different creatures.

Most captive agents probably are employees based on the criteria put out by the IRS but I think all of the major carriers 1099 their agents and classify them as Independent Contractors but treat them as employees in their daily activity.

Many new IA come from a captive insurance background -- so it natural for them to think that employees are contractors &
they should 1099 them.

[jackwehoca]

Try for the best situation. Try to find an employer who will classify you as a Statutory Employee. Deductions go on schedule C and no doubling of the FICA tax. Just "layman" talk-check with a CPA for complete perspective.

[mangroveman]

I'm no CPA, but my thought would be that this should vary based on state employment regulation.

[johnsharp]

I get mad about this a lot. Most companies issue you a 1099 and that would say you were a Independent Contractor for IRS guidelines. When in reality the companies have rules and superiors that would seem like an employee relationship.

But, in a Captive Agent role the company sometimes helps with expenses. In a Independent Agent role all the expenses are on the agency owners responsibility.