In this post, we are going to dive into Workers-Comp, disclaimer, ensure you talk to your financial adviser and/or tax pro before making any financial decisions in regards to taxable solutions. I am offering you insight to get you growing in the right direction. As a business owner, it's your responsibility to maintain the proper coverage for your employees and to keep employees safe at work, but sometimes employees get injured or become ill. For these reasons, and others are why you need to have workers compensation insurance, or how I like to call it work comp.
When starting a small business, you may need all the breaks you can get. Hiring a family member may be exactly the break you need to jump-start your small business growth. Let's say you have a niece that helps in your business for a few hours a day, but you don't have her captured as an employee. – Under labor law, she is considered an employee. An "employee" is defined as someone you engage in or permit to work. Even though your niece is part of your family, she is considered by definition, an employee, and must be covered by workers' comp insurance in case she is injured on the job. If your niece got injured at your business, she (or her parents) could file a personal injury lawsuit against you if you don't have her covered on your policy.
A question I often get from small business owners is; do I have to have workers comp coverage for any of my family members that will work for me? The most straightforward answer is "yes," in most cases, you do, and it's a good idea to have workers comp; don't worry; in most cases, it's a tax write off. Workers' comp is only deductible when the state government requires them, be sure to check your state rules because they can vary from state to state. You are allowed to deduct costs for workers' comp from your federal taxes; the deductions are to be documented on Internal Revenue Service Schedule C, filed with the small business owner's Form 1040.
Depending on the type of small business and location, determines the type of insurance, wages requirements, and compensation you will have to provide. For example, your business is in Colorado, all public and private employers must provide coverage for their employees, even if one or more full or part-time persons are employed. If you have three or less employees in Alabama, your business is not required to carry it. Let's say your business is in Illinois, the law is even more strictly worded: Workers Compensation Insurance is required in “every work situation. Additionally in some states, such as NY, failure to provide workers compensation results in strict and heavy fines applied by the state.
Work comp covers medical costs and lost wages; it can also cover things like rehabilitation or physical therapy. In many states, it's mandatory and highly recommended for all employers, even family members. In this article, we define family members as children, spouses, nieces, nephews, uncles, aunts, grandparents, and cousins. Hiring a family member as an employee doesn't always exempt you from your state and federal tax reporting and establishing insurance as most would think. I highly recommend visiting your state's website for family employment labor laws and the IRS website for more detailed information on tax reporting requirements. In most cases, every employer in the state that uses employee labor must secure workers' comp coverage, which would include family members. Work comp coverage is essential because if you fail to include a working family members on your workers' comp policy, you could risk a fine, and so make sure you check the regulations of your state.
If you are a married sole proprietor, in some states, some insurance companies may consider your spouse a co-owner, which will exclude them from workers' comp insurance. But different insurance companies will handle this situation differently, so it's essential to know how yours handles it.
If the state finds out that you don't have the necessary workers' comp insurance, you could face severe consequences, including fines of $1,000+ per employee or possibly twice the amount you would have paid in insurance premiums and even misdemeanor charges.
Okay, still unclear of when you need to purchase work comp for a family member, here is an example; You run a lawn care service and your son works 30 hours a week cutting grass. Your son would be considered an employee subject to workers' comp laws, and he would not be able to be excluded from your workers' comp (unless, of course, he was an owner/officer, member, or partner).
Contact your state officials on work comp on the State Officials page.
Read more on the Insurance types that are deductions for small business owners at IRS.gov