Are Insurance Agents Employees or Independent Contractors?

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Are Insurance Agents Employees or Independent Contractors?

Post by 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) ... 13,00.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.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by 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.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by 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 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.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by 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.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by 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.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by JAM »

They just tightened the rules here in CA as well.
Western commercial hub.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by 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.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by 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.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by mangroveman »

I'm no CPA, but my thought would be that this should vary based on state employment regulation.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by 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.
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Re: Are Insurance Agents Employees or Independent Contractor

Post by Brock Andersen »

I'm a partner in a CPA firm that works exclusively with independent contractors, many of which are insurance agents. I wanted to chime in and hopefully provide some insight.

The laws that determine whether or not you're an independent contractor are federal. There are law firms that specialize in litigating this area. I am not an attorney, so I make no claims to legal advice. However, I am an expert in the taxation (and tax strategy) of ICs.

Here is the reality: if you're structured properly and you've got a good CPA, you should pay less taxes as an independent contractor than as a statutory employee. Most people mistakenly believe that independent contractors pay more in taxes because they are responsible for both halves of self-employment taxes (social security, medicare taxes). If you're operating as a sole proprietor or as a single-member LLC without an S corp election, this is true. However, a good advisor will have you form an LLC, and elect S corp status which will allow you to avoid the double-taxation of self-employment taxes. There is, however, an income threshold under which it is better to be a sole prop or LLC with no S corp election. The rule of thumb is about $30,000. If you make $30K or more, you need an LLC taxed as an S corp. Period.

Ok, so now that we've gotten rid of the self-employment tax issue, you're on equal footing with your statutory employee counterparts. But it gets even better for independent contractors because, unlike an employee, an independent contractor can deduct all kinds of things that an employee cannot; e.g., auto mileage, phone, home office, computer & equipment, supplies, etc. Done properly, this almost always allows independent contractors to pay much less in taxes than an employee. Many employees actually understand this and ask their employers if they can be treated as a 1099 contractor instead.

That said, you have to be careful. Operating an S corp has some quirks that must be followed (payroll, distributions, reimbursements) that warrant professional help. My point is this--don't do this on your own. In this area of taxation, a good advisor will actually save you money and doing it yourself will almost always result in problems. I love talking about this stuff, so if you have any questions, please feel free reach out to me by phone (888-959-2829) or email (
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Re: Are Insurance Agents Employees or Independent Contractor

Post by ssweatlaw »

Although this varies from state to state, the legal standard usually centers around whether the employer has control over the work duties of the alleged "independent contractor". Other tests that courts have used include the following:
1. Whether the person performing services is engaged in an occupation or business distinct from that of the principal;
2. Whether or not the work is a part of the regular business of the principal or alleged employer;
3. Whether the principal or the worker supplies the instrumentalities, tools, and the place for the person doing the work;
4. The alleged employee’s investment in the equipment or materials required by his or her task or his or her employment of helpers;
5. Whether the service rendered requires a special skill;
6. The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
7. The alleged employee’s opportunity for profit or loss depending on his or her managerial skill;
8. The length of time for which the services are to be performed;
9. The degree of permanence of the working relationship;
10. The method of payment, whether by time or by the job; and
11. Whether or not the parties believe they are creating an employer-employee relationship may have some bearing on the question, but is not determinative since this is a question of law based on objective tests.

Hope this helps!
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Re: Are Insurance Agents Employees or Independent Contractor

Post by agent14 »

ssweatlaw, I have a question for you: If an independent contractor insurance agent(captive or independent agent) is given a monthly quota, and is terminated due to not making said production quota, does this infer an employer / employee relationship?

There are some companies now, such as Travelers, that is telling their independent agents(1099 independent contractors) that they must produce 4 policies per month or they will be terminated.
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Re: Are Insurance Agents Employees or Independent Contractors?

Post by morganphillips »

I have general experience working with insurance agencies in the web design / management space (built this website: and I can say for sure the smaller ones are going to have 1099 contractor agents. As a general rule it seems most smaller companies will 1099 their workers until they have the profits to hire full time employees.
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