Not Properly Deducting From Uninsured Subs

Other than the proper collection of Certificates, the proper deducting from uninsured subcontractors is the second most important element when it comes to saving money on your premiums.

If a subcontractor does not carry his own Workers’ Compensation and/or General Liability, you will be charged on your audit as if such subcontractor and his employees were your own employees. The amount that you will be charged depends on the amount paid to the subcontractor for labor and the type of work that he performs.

Since you will be charged on audit for the use of uninsured subcontractors, you must recoup your cost by deducting this expense from what you would have otherwise paid the subcontractor.

When you deduct from an uninsured subcontractor who has no Workers’ Compensation, you are actually extending Workers’ Compensation coverage to the employees of such uninsured subcontractor. On the other hand, when you deduct from an uninsured subcontractor who has no General Liability, you are not extending your General Liability coverage to such subcontractor. Instead, you are merely recouping your cost of doing business.

In order to properly deduct for the use of uninsured subcontractors, you should receive a “withholding sheet” from your insurance agent that tells you exactly how much to deduct for each type of uninsured subcontractor for both Workers’ Compensation and General Liability. Remember, the rates vary depending on the type of work that the sub is performing.

You should only deduct for the amount that is paid to an uninsured subcontractor for labor only. If the subcontractor provides material along with his labor, he should provide an invoice that separates labor from material.

If the invoice does not provide a detailed breakout, and if the subcontractor provides 100% of the materials that are used in his work, it is assumed that 50% of the total cost is allocated to labor.

If the subcontractor provides heavy equipment in the performance of his work (ex: tractors, backhoes, bulldozers) it is assumed that 33 1/3% is allocated to labor.