Are you paying insurance premium on your subs' materials?

A remodeling contractor, about $1.2 million a year, most of it done by subs. In December I went through every name in his subcontractors account to see who still needed to send a W-9.

Some of the names were not subs. A tile supplier. A shop that builds trusses. The company that made his hats. His answer each time was the same: that’s just material. No W-9, no 1099. They were in the wrong account.

For taxes, that is a small fix. For insurance, it can be a big one.

Your workers’ comp and general liability premiums are set on payroll and on what you pay subs, most of all subs who don’t carry their own coverage. When the carrier audits you, the auditor starts with your subcontractors account. Every dollar in it looks like labor until your paperwork says otherwise. A truss package sitting in that account can get rated like a crew.

The same thing happens inside a real sub’s invoice. Say a sub bills you $20,000 for a job, one line, labor and materials together. That reads as $20,000 of labor. If $8,000 of it was materials, many carriers will only charge on the $12,000, but only if the invoice shows the split. If that sub has no insurance of their own and you are covering them under your policy, the split decides whether you pay premium on $12,000 or $20,000.

None of this changes what you owe the sub. It changes what you owe the carrier.

What to do before year end:

1. Move material-only vendors out of subcontractors and into materials.
2. Ask every sub to show labor and materials as separate lines on the invoice.
3. For subs without their own certificate, make that split a condition of payment.
4. Ask your agent how your carrier rates subs at audit. It varies by carrier and by state.

In QuickBooks Online, click the gear icon, then Chart of accounts. Find your subcontractors account and click View register, or Account history in newer files. Sort by payee and circle every name that only sells you materials. Each dollar from them is a dollar an auditor may treat as labor.

If you’re not sure what’s in your sub account, start the 5-minute intake.