New Business Liability Insurance

      Issues including insurance, worker's comp, and taxes. April 18, 2004

Question
I have been working as a helper, but am going to start on my own. I registered my business name a few months ago, got my cards printed, and got a quote from my insurance company. Even though NJ insurance is quite high, the quote they gave me seems like a lot. Is anyone here from NJ and if so, what should I do or ask the agents?

Also, I know a few subs in the field and at least one doesn't have a business license. Is this required for cabinet installations in NJ? I used to work around this guy at my old job, and he likes my work. I am working for him now and he is going to help me move in as a subcontractor. I just want a few more opinions and some good advice. I had this planned for some time now. I had a partner and was just waiting for some downtime at my job. He got a better offer in the state he came from, so I told him to take it. I didn't want him to pass up the chance waiting around for me. I had a lot of work at the time, and I couldn't leave it. I now have his brother to work with (called him the other day), so I want to get things rolling. Any advice would be greatly appreciated.

Forum Responses
(Business Forum)
From contributor S:
As somebody who has started from the bottom, I understand how you feel right now. It's exciting and scary all at the same time.

If you need to have a partner, then do, just make sure you don't share profits with him if he isn't putting the same amount of money and time into the venture. You could start off by bringing him aboard as a sub, and them pay him according to a rate that is fair to you first, then him, as you are the one taking the risks and putting yourself out there.

As for insurance, the highest coverage you can get is best, but at first you might get by with less coverage and later, when the phone rings more often and you can afford better, do so.

Don’t expand too fast. Many small businesses fail because the owner’s overheads expand at the same rate and can become overwhelming very quickly. Keep your overhead and spending down, as having money in the bank is your net to fall on during slow periods.

A good example of this is here in Florida. It can rain for 90 days at a time. During this time, many businesses that work outdoors close down, as they don’t have a net to catch them during this period.

A low overhead will afford you lower rates, and that is what is going to get you going during the first few years.

Go after many small projects rather than one or two big ones. Making a mistake on a small project will hurt you, but not much. And so you can learn the ins and outs of dealing with clients and other contractor’s relatively easily.

When hiring, do it w-9, get a subcontractor agreement and ensure that the sub has his own liability insurance. Put everything on paper. When pay time rolls around, put on the checks "for sub work” and name the project. Never, ever pay cash.

When it comes to working with others, look after you first. In business, nobody has your back on the job site.

When I started out, I had 100K coverage only and I made sure that everybody I did business with knew it. Today I have 1 million coverage. My tools and myself are insured, too.

Take things slow. Don’t share profits with people if they don’t share responsibility.
Put it on paper. Crawl, walk, then run.



From contributor P:
When doing a job for a builder, it's required to have a set amount of insurance for you. Or have someone as a sub. The IRS has some rules on this that you may want to check, and also you must carry workman's comp.

Some states allow you to exclude yourself as a business owner from the policy, but if you get hurt on the job, your private insurance will not cover you. Your sub also needs this insurance for himself and his workers. A lot of businesses start off as not having some of these items and that is a bad way to start. Make sure your pricing will pay for this overhead. Having low overhead when first getting into business is good but make sure that it is smart low overhead.

When I started, I had a shop that was small and grew very fast, but I stayed at this shop too long and lost money because of its size. The rent was low but I was fooling myself. We are now in a shop that is 4-5 times bigger than the old one and we can see the difference in production. 1 mil is the average liability coverage.



from the original questioner:
Yes, 1 mil is what I got my quote on. Thank you both for the advice. When I have someone working for me, I plan to pay them cash, but not so much that it will put me in a hole. I won't have an office outside my home, and I will be working just as a sub. When I say partner, I just mean someone who is working with me. The name is registered with me, and unless I need someone to help on a job, I will be working alone. The guy I am working with now is a sub and he pays cash by the hour. He used to pay by the day, but we both figured that was the wrong way to do it. He now pays cash by the hour, and that's what I will be doing, just in case I run into a problem 4 hours into a job and can't do any more that day. I don't want to pay 8 hrs for 4 hrs of work. When you say overhead, do you mean the amount of money spent compared to the money made? I don't have a big spending habit and I have all my tools, so I don't see that being a problem. Sure, I will always need to buy new things and pay out of my pocket for help, but I'm not looking to make a lot of money right away. For two good installers, an install usually comes out to about $100 hour. An $1,800 job would take us two days and a $2,400 job would take us about three days, so it would usually come out to about $50 hour or more per person. We have decided that we are going to help with each other's jobs when needed. If I need help lifting a heavy cabinet or a hood, he will have no problem coming by my job and giving me a hand and the same with me. I am used to installing $100,000 kitchens and sometimes we do need some help, but a lot of these other companies won't have kitchens and bathrooms as big. From what I hear, their average job lasts about two days with two guys. We were on jobs for two weeks sometimes, with two guys. I'm really glad that I started off with the bigger installs. I have seen a lot in 1 1/2 years.


From contributor T:
I think you missed the point where contributor S said:

"Never ever pay cash."

He gave you very good advice, but you wrote that you will pay cash.



From the original questioner:
In my experience, it is better to pay cash than to have to deal with workmen's comp. I didn't want to get into it, because I think you may misunderstand how this business will be run, but why would paying cash be so bad?


From contributor A:
What are you going to do when the insurance company wants to know your sales and your payroll costs, and you say you subbed it out and then they ask for the sub certificates of insurance?

What are you going to do when the guy you are paying cash to gets injured and goes to the hospital and says it happened at work? What are you going to tell his family if he can't ever work again and there is no insurance? What will you tell your family when you have to sell everything to give to this guy?

What are you going to do when you have paid this guy cash for three years and had no problems and then you disagree and don't pay him, and he goes to the labor board and they come knocking?

What are you going to do when the local competition finds out and points out to the homeowner that no one has comp and if they get hurt, it may end up on the homeowner?

What are you going to do when the sales tax board comes around for an audit and you have no sub records and no proof of where this cash went? They will figure it out and you will pay sales tax on the sales.

What are you going to tell the bank when you want to borrow money? Bond a project? Get a mortgage?

If the only way you can afford to be in business is do disobey the law, maybe you should reconsider. Otherwise, step up to the plate and pay the expenses of being in business and charge accordingly.



From the original questioner:
"What are you going to do when the insurance company wants to know your sales and your payroll costs, and you say you subbed it out and then they ask for the sub certificates of insurance?"

I won't be subbing anything out. He will be a helper, whose money I will be paying the tax on.

"What are you going to do when the guy you are paying cash to gets injured and goes to the hospital and says it happened at work? What are you going to tell his family if he can't ever work again and there is no insurance? What will you tell your family when you have to sell everything to give to this guy?"

My work doesn't involve anything that is that dangerous, and I will discuss this issue with them, before they are able to work with me, for cash.

"What are you going to do when you have paid this guy cash for three years and had no problems and then you disagree and don't pay him, and he goes to the labor board and they come knocking?"

If he is working with me for three years full time, I will surely have him with insurance on my payroll.

"What are you going to do when the local competition finds out and points out to the homeowner that no one has comp and if they get hurt, it may end up on the homeowner?"

If I am doing a job for a homeowner through a middleman (another company), I will need workman's comp. If I am doing a job for a homeowner directly and I don't have insurance, then they will know before I start the job and decide for themselves. I don't have insurance now, so if I get a cash paying job, I don't think insurance will be a problem for the homeowner, since my price will be so low, but when I start my company fulltime, I will have insurance. Cash paying jobs will still be welcome, though.

"What are you going to do when the sales tax board comes around for an audit and you have no sub records and no proof of where this cash went? They will figure it out and you will pay sales tax on the sales."

What sub records and what sales and what cash going where? I will not be hiring subs. I spend money on miscellaneous things all the time. Who's to say I didn't spend that money on dinner, movies, things for the home, clothes, or anything else? Are you saying I have to show where all my money goes?

"What are you going to tell the bank when you want to borrow money? Bond a project? Get a mortgage?"

I don't understand the problem with this. If I want a mortgage, then I ask them for a mortgage. I don't understand why that would have anything to do with these things.

"If the only way you can afford to be in business is do disobey the law, maybe you should reconsider. Otherwise, step up to the plate and pay the expenses of being in business and charge accordingly."

Although you made some good points, I think you may not fully understand some things about my business. I have no problem getting workmen's comp for me and, if I am paying someone for three years, he will surely be on it. But what do I do when I have a helper for one day and not the other, for three days and not the next 10? Do I have to keep calling insurance so they can keep adjusting the premium? I have been around many subcontractors, and they all pay cash for their help. I will be working alone, most of the time. If I need help, I will have another sub help me. We have already agreed on this. If I bring someone else in, like a friend, and paying him cash is going to be a problem, then I won't do that, but I don't think it will be, in my situation.



From contributor P:
What you pay to workman's comp is a min. a year. You figure that the guy will be working for you maybe 25 hours a month and that is what you pay on. If it is more at the end of the year, you pay more; if less, you get it back. Just keep track of your payroll. I know that it is hard.

You will use these guys only when you need them, and when you think nothing will happen, trust me - it will. In August our shop was destroyed by a fire that started from someone else's storage trailer behind our shop and made it into our shop. I never thought that would happen, but I did have insurance and we were covered. Paying cash is done a lot in this business, but if you want to grow your business, it can be a bad way to start off. What you can do is have the guy that works with you carry his own insurance and then pay him like a sub.



From the original questioner:
There are just two things wrong with doing it that way. First, it will be more money out of his pocket, so he will want more from my pocket. Second, if he is going to have insurance and work as a sub, he might as well start on his own, like I am... I don't know what the going rate is for general liability, but I got a quote, for $1,600 a year. No one is going to want to work as a sub for a sub, unless they are making out pretty good for themselves. I don't know of any subcontractors who work for subcontractors. The only reason I am doing it now is because I don't have insurance, and I want to see the business from a sub's point of view, and I get paid cash. As soon as I get insurance, there is no way in hell I am going to work for a sub.

I don't want you to think that I think I have it all figured out, because I don't. I am taking note of all everyone is saying here. When I said I was going to pay cash, I meant that that looks like the best way to do it in my situation. I am not in a rush to figure this all out. I want to work with this guy and see how he runs his business. He is always on top of things, so I'm sure I will learn a lot from him.



From contributor B:
You have a lot to learn about running a business and insurance. Don't pay cash! You can pay your help as you would a sub, but they better have W/C exclusion. The insurance company will catch what you are doing and 1. charge you for all the money you paid out or 2. charge you with insurance fraud. And a homeowner will treat you like the plague if you tell them you don't have liability insurance.

You also need to look at the tax advantages. If you pay in cash, you have no write-offs. And just because a customer pays you in cash doesn't mean they won't 1099 you at the end of the year. They don't need to write you a check to 1099 you. You better rethink what you want to do. Better yet, don't even waste your time thinking about it, and just do it legit.



From the original questioner:
I heard about a 1099, but wasn't sure what it was. If someone pays me cash, they can claim that on their taxes at the end of the year and screw me? How can they prove that, if they have no paperwork? The reason I ask is that I got paid cash a few times, while working as a helper. My father would get mad when the guy would pay me with a check, but he never worried about me getting cash. When I worked with another guy, he used to give me a bonus in cash every week. I remember that he used to get that amount that he gave me, in a separate check that he had 1099. I told him that I don't want the IRS sending me a letter saying I owe them money because of the cash I had been getting from him, and he said that wouldn't happen. Why would he get that amount each week in a separate check that was 1099? He obviously had plans on claiming it as spendings, right? I am no longer with him, and I would hate to have to pay him a visit.


From contributor B:
He can take a withdrawal from his bank and in the journal write your name on it. Just because it is cash doesn't mean the payment is nonexistent. And yes, he will send you a 1099. He may not send it to you, but you can be sure he's sending it to the IRS so he can get his deduction.

If the cash amounts are small, you probably have nothing to worry about, but if they are for a few hundred or thousand, he'll 1099 you.



From the original questioner:
$200/week for a few months, so yes, in the thousands. Would I get in trouble for not claiming it as income, or does the 1099 cover it? Why would he tell me I won't have to worry about it? This is an old friend of my father's, so if it comes down to me having trouble with the IRS, he will know about it.


From contributor B:
Would you pay taxes on a few thousand dollars for a friend of your Dad's? Or would you write it off? The 1099 means that he paid it to you and didn't pay any taxes on it. 1099 means you have to pay the taxes on it yourself. I have never heard of the IRS getting anybody for back taxes on a 1099, though. But then, would you tell everybody that you got caught?


From the original questioner:
I don't want anyone to think that I am trying to get over on the laws, but this money was agreed upon for me helping him out so much. He agreed to pay tax on it and give cash to me, for a bonus. I'm a little upset right now, but thanks a lot for all the info.


From the original questioner:
Okay, so there were no taxes paid on that money? I see now. This is no longer a friend of my dad's, which is why it would be a big problem for him, if there was a problem for me. What do you mean when you say "would I tell everyone I got caught"? You never heard of the IRS getting anyone for back taxes on a 1099? Does that mean when I start my business, i can have some of my check 1099, pocket it, and say I paid it out to someone? I don't need the IRS knocking on my door in a few years telling me I owe them money. If I get a 1099, I will take care of it.


From the original questioner:
Here is what I want to know about this 1099. If I do a job for a homeowner, they pay me cash, and then they send the IRS a 1099, would the IRS wait for me to claim that money? Would I get in trouble for not claiming it? Is that up to the person paying out the money to decide whether they want to bring it to the IRS?


From the original questioner:
I can still pay cash as long as I have that 1099 and show where it is going? The sub I work for now pays cash to all his help. Do you think that he 1099s all that money? Doesn't the IRS want to know where it is all going? I really doubt that the people he is paying will ever see a 1099 from him or the IRS... Okay, so I think it would be better if I paid by check and had all insurance to cover my help and myself.


From contributor B:
A homeowner won't 1099 you. A contractor will. A homeowner may write off the work on his taxes, though.


From contributor L:
I think a little visit or phone call to the IRS would be in line. Let them tell you what is reportable and what is not and what they will do if you don't report income. Real simple. Ask the ones who will want you to pay.


From contributor P:
This is not that hard. A 1099 is a form that you as employer can pay your workers in two ways.

1) The worker is a sub to your business. You get a tax ID # from him that is a S/S # or a number given to him by the government to identify his business with them. Mostly corporations use these numbers. In January of every year, you add up what you have paid this person no matter if it is cash or check and fill out the form that shows this amount and one is sent to the sub, the other is sent in with your taxes to show that this money was paid out and to whom.

2) Pay on a payroll check, take out the taxes and give him a W-2 form at the end of the year. For workman's comp insurance, it works like this. You have to pay on workman's comp so much per every $100 paid out for labor done by a sub or an employee. If the sub has his own workman's comp insurance and can give you proof of that, then you do not have to pay W/C on what you pay him.

The two things that we as business owners should have is a accountant and an insurance man. And sometimes a lawyer. Let these folks help you set up what is best for you. And yes, shop around - prices can vary. Here in the Chicago area, we pay $1500.00 for liability and $9.50 per hundred for workman's comp for manufacturing.



From the original questioner:
Yes, it does help a lot. Some of these subs don't write out contracts when doing some jobs, but I want to always have a contract.I think it's fair for both me and the person paying for my services. I have learned more from this thread than I have in all the months I've been planning this out.


From the original questioner:
Someone pays cash for work done and sends the 1099 out, but the employee denies getting paid that much and fights it? I plan on paying by check, but I was just wondering what happens in that situation. The person who paid cash doesn't have proof of it, so can he get in trouble for filing a 1099?


From contributor G:
I'm not sure I follow the line of thought here, but I will tell you that not having liability insurance can cost you big time.

I sent out an installer that put some cabinets in and ran a screw though the electrical line into the low voltage computer line that connected the dumb monitor to the mainframe computer at the headquarters of a chain store. The 110 volts fried the main frame. Because of some complex circumstances, the main frame had to be replaced at a cost of 50k. We still do work for the chain to this day, and they were very, very relieved that we could pay for the damage. The alternative…?

We did a high-end commercial job were the architect stated that we were the best millwork company they had ever dealt with; the gc and the owner said similar things. But the construction manager (owner's rep) decided that the job was sub par and not only didn’t pay, but decided to sue every sub on the job for purposes of saving money at the expense of everyone. To accomplish this, he hired the largest law firm in Los Angeles. My liability insurance company is picking up the tab for this.

My neighbor is a successful landscape contractor for almost 30 years and did not have liability insurance. He is currently being sued by the Segrestroms sp (the people who own South Coast Plaza, one of the most successful malls in the U.S.). He was forced into bankruptcy and just to twist the knife, the Segrestroms are now trying to take his house to boot. His wife and kids are not having fun. His competition is quick to bring up the story and has forced him out of the prime markets because of this. This is a good guy and extremely competent at what he does, but…

What contributor A said is extremely real and you should consider it.

P.S. Not having workman’s comp makes not having liability insurance look small.

Regarding the 1099 thing, this is an area that the IRS loves to scrutinize and I wouldn’t even consider without talking at length with a lawyer who specializes in this.



From contributor P:
Yes, you would have to prove it, but how did you get his ID #? He must have given it to you. Just pay a sub with a check and get the insurance proof from him or make him your employee and pay him and take out taxes. Even if you use him part time, he is still an employee.


From the original questioner:
Sounds good to me, and contributor G, that kind of stuff is really sad. I know of some builders who never want to pay subs or companies even when the work is outstanding. It's hard to believe that a guy in business for 30 years wouldn't have insurance. I guess it really is better for me to cover my butt even if it means a little more out of my pocket. I think I'll sit down with an insurance agent, just start off with as much insurance as I need for smaller jobs, and talk with a good lawyer and accountant.


From contributor G:
Well, he must have thought "it will never happen to me." It was the first time he had real trouble. Who would think you could cook a main frame on a different floor of the building by putting a screw into the wall?

I would say the odds are much higher that you are going to run into this sort of thing if you are just starting out. You might consider writing a business plan, as the stuff you are talking about is just one area of many to look at.



From contributor S:
It is very simple. If you pay somebody cash, you will have to pay the income tax for that person and yourself. Why, for the love of money, would you want to do that?

Say you earn 60K and your helper makes 30K. You are going to show 90K as income and pay tax on that. Simply make the responsibility of paying tax the subcontractor's by making him fill out a w-9. Your next responsibility is to send him reminder of the amount earned. Let him pay the tax on that 30K out of what he earned.

Trust me - you are going to have plenty of other things to worry about and pay for.

Further, make him take out a 100K liability. Here in Florida, it's 200 down and 38 a month for 9 months to have 100K liability. (Better than nothing.)

Always remember that he works because you produced the opportunity for him to work. Don’t let people lead you around by the nose making you believe that you are to be grateful for their participation in your project.

When it comes to subs, expect them to have experience, insurance, their own tools and transportation. Anything else is an employee and should be treated respectfully as such. An employee has rights that should be handled with care. An abused employee will be your downfall.

Not too long ago, one person threatened to take matters further should I not address a situation in the workplace. The situation? Religious harassment. The other guy in the shop was handing out religious material on a daily basis and inviting others to prayer meetings without me knowing about it. That was a close one, and I was able to stomp out the fires before it got out of hand.

So, should your friend be paid cash, he can be seen as an employee and have rights that you could easily violate without knowing and this can cost you everything at the drop of a gavel.

You pays your money, you takes your chances, or you go with the sure thing and cover your 6.



From contributor C:
Very good advice by everyone here. I am still learning the business ropes myself and fortunately, I have been able to do so by reading these posts (versus The Hard Way). I do not have any employees myself, but these messages have been educational because someday I will.

That said, I do know from my day job (my woodworking is a side business) that the world of liability and business laws is a rough one. While negligent work should be penalized and also honest but expensive mistakes happen, on the other hand, there are people out there that just resent your success and proud accomplishments and feel the world owes them something for whatever reason... and suing you because you left an opening is not beneath them. Please CYA; I would hate to see you running a business one day and living in a box under the freeway the next.



From the original questioner:
It's my business and I understand that. When I mentioned paying cash, it was for a lot lower than half of what I would be making. I wouldn't have minded paying the taxes on it. I know how crazy this country is with people suing everyone, so I will watch how I treat my workers, but they better work. I'm only going to hire help if I really need it, and it will be a friend. It would be cool if in the future if I can get one friend to work with me as my partner. He has a lot of experience in all fields of construction.


From contributor B:
As you start your business and people say all kinds of things, I always think of this quote:

"Do just once what others say you can’t do, and you will never pay attention to their limitations again."



From the original questioner:
My insurance agent is going to send me some info on workmen's comp. I'm glad they charge by what I make and not an outrageous premium off the start. The sub I work for says that if he had it all to do over again, he would work for someone else, but he's not the most experienced at what he does, at all.


The comments below were added after this Forum discussion was archived as a Knowledge Base article (add your comment).

Comment from contributor D:
When it comes to the amount of liability coverage to carry, the best advice I have ever received is: carry enough to protect your assets (that's assets, not net worth). As you are just starting out and certainly not incorporated, this includes your home, car, tools, bank accounts, investments and anything else you own. For all practical purposes, if you lose a law suit, regardless of the judgement, you cannot pay any more than what you have. Do not over-insure yourself, but be careful to not underinsure either. And if you use your vehicle in your business, be sure to carry commercial liabilty insurance on the vehicle - many personal auto policies exclude business use in their coverage.

Again, protect your assets, and in many states your wife's and minor children's assets too, regardless of whether they participate in the business or not.

Even if you successfully defend yourself against a lawsuit, the cost of lawyers can amount to a bundle. Just because you prevail does not mean that you do not have to pay your attorneys.



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