employees and independent contractors working at an insurance agency

When hiring insurance agents for your agency, you will have to decide whether to set them up as employees or independent contractors. Whatever setup you choose will affect how you pay them, the tax forms to fill out, and the benefits and other resources you must offer.

Tax Forms and Payroll Tax

One of the biggest distinctions between employees and independent contractors is the tax form they will receive.

Employees receive the W-2 tax form. In this arrangement, your insurance agency is to withhold payroll taxes on their paycheck.

By contrast, independent contractors receive the 1099-NEC form. In this setup, you don’t have to do any withholding for them.

Understanding Independent Contractors

Independent contractors are separate business entities. They provide their services to your agency and perform their tasks on behalf of it.

Importantly, labor and employment laws don’t apply to independent contractors. They also supply their materials and office space. So, your agency is not required to provide independent contractors with office space, tools, or other resources for the job.

Understanding Types of Employees

You may not realize it, but there are several types of people who may work for your agency, specifically four worker classifications. Two are types of employees, and two are types of independent contractors. We have already discussed independent contractors as one classification. The other three are as follows:

Common Law Employees

Common law employee classification says that the worker is an employee if your agency controls:

  • What work is done
  • How the work is done

Common law rules apply equally to managers, regular employees, support staff, supervisors, and more. As an exception, partners don’t classify as employees.

Statutory Employees

Statutory employees are independent contractors who fit into a specific situation that would qualify them as employees. Overall, there are four categories under this classification, but not all are relevant to your insurance agency.

  • A full-time life insurance agent who primarily sells for a single life insurance company
  • Anyone working at home using an organization’s materials, where the organization supplies the materials, expects them to be returned, and provides specifications for the work
  • A full-time salesperson working for an organization with contractors, etc., as their main business activity
  • A driver who distributes food or beverages or delivers dry cleaning as an agent or with a commission-based payment. As mentioned, this is not relevant to your insurance agency.

Statutory Non-employees

There are also statutory non-employees who are either licensed insurance agents, direct sellers, or companion sitters. This is a type of independent contractor.

How to Tell If You Are in Control – Employees Vs. Independent Contractors

As mentioned, one of the biggest distinctions between employees and independent contractors is whether you are in control of what they do and how they do it. The IRS looks at the following:

  • Behavioral control: How your team performs specific actions (If you control the process, they are employees. If they do, they are independent contractors.)
  • Financial control: If the agent made a significant investment (If yes, they are independent contractors.)
  • Relationship of parties: Written agreements, businesses, and whether the workers’ services are crucial to the agency’s regular work

Know the Amount of Control You Can Impose on Independent Contractors

Given the importance of control over the means and manner of performing tasks is a crucial difference between employees and independent contractors, make sure you know the limits you can place on independent contractors.

Based on past court cases, imposing the following limits will NOT automatically turn an independent contractor into an employee.

  • Requiring authorization before they can discharge an insurance contract
  • Complying with your guidelines and instructions (as long as you don’t control the manner of the sale, the sales technique, or how agents solicit customers)
  • Confidentiality provisions
  • Noncompete and non-solicitation clauses

This Can Change

Keep in mind that challenges over classifications are incredibly common. This is especially true for insurance agents who work as independent contractors and feel they should be classified as employees.

So, if you decide to hire agents as independent contractors, make sure that you can legally defend your position in doing so. In other words, make sure you don’t have any requirements or supply materials that would classify your agents as employees.

What’s Right for Your Agency?

Now that you have a better idea of the difference between an independent contractor and an employee, how do you choose which category to use for your agency?

Think About Your Preferred Amount of Control

Start by considering how much control you want over what the employee does and how they do it. Do you want them to follow a specific process, or will you give them the liberty to work however they want as long as they achieve the desired results?

If you want full control, you should hire employees. If the control isn’t as important to your agency, you can hire independent contractors.

Consider the Materials and Tools

Think about the basic materials and supplies you will provide for your insurance agents. Agents working as independent contractors are usually responsible for getting their own office space and materials.

By contrast, if you provide office space, physical materials, and insurance agency tools like Jenesis, you are likely working with employees.

Consider the Benefits You Provide

Employee benefits will be a significant consideration in the work setup. Employees usually get benefits like health insurance and paid sick or vacation days. By contrast, independent contractors usually don’t get these benefits. This difference can make it more cost-effective for your agency to hire independent contractors.

Consider Taxes

In addition to benefits, the other big financial difference between hiring contractors and employees is the taxes involved. If you hire employees, you must pay the payroll tax. If you hire independent contractors, they will have to pay self-employment taxes, which reduces your burden in terms of tax paperwork and possibly even your financial responsibilities.


The insurance agents you hire for your agency can be either employees or independent contractors. Your decision will determine how taxes work, including whether or not you have to withhold payroll tax. It will also determine your level of control over how and when your agents work.

When deciding which setup makes more sense for your agency, think about your ideal processes and desired level of control. Also, consider benefits and your capacity to supply basic materials, such as office space and software. If you want to hire agents as independent contractors, it’s smart to make sure they won’t be classified as employees.