Insurance producers: independent contractor vs. employee
An insurance producer is hired to find new prospects for an insurance agency and turn those prospects into clients by convincing them to purchase an insurance policy. He or she may be designated as an employee or as an independent contractor. There have been legal rulings both ways as to the proper classification of insurance agents/producers. Does it matter which classification you choose? It does matter. Here is why.
There are possible legal ramifications and potential fines if you have an employee classified incorrectly. Misclassification of employees can also have costly tax consequences. An agency owner should consider the IRS criteria for independent contractors versus employees when determining how to classify employees.
The IRS definition of an independent contractor looks at these aspects: behavioral, financial and the type of relationship. Some of the questions to ask include: do you set the producer’s work hours? Do you pay travel expenses for the producer? Do you control what the producer does and how he or she does their job? Are there any written contracts or employee benefits given?
There do seem to be some advantages to hiring insurance producers as independent contractors, including decreased costs in taxes, heath insurance, benefits, etc. If a producer is hired as an independent contractor, they pay their own business expenses, taxes, worker’s compensation insurance, etc., however, they will also likely be receiving a greater commission rate than a salaried producer whose business expenses are paid by the hiring insurance agency.
The legal classification of an independent contractor varies from state to state and is subject to change. If you have questions regarding the classification of any of your producers as independent contractors, please contact a legal advisor to make sure you adhere to the laws of your state. You may also complete IRS Form SS-8 and have the IRS determine the worker status for the purposes of employment taxes and tax withholding.