What is a Contractor Tax bond?
Contractor tax bonds are a subset of the broader financial guarantee bond category that must be filed with the state government agency responsible for regulating tax payment activity in the contractor’s jurisdiction.
Contractor tax bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a contractor tax bond, will also be referred to as the “surety company” or the “bond company”. Contractor tax bonds refer to the contractor as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Contractor Tax bond required?
Contractors are required to purchase financial guarantee bonds by state statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the state is compensated for damages resulting from a contractor failing to pay applicable taxes. The surety company provides the government a guarantee (the surety bond) that the government will receive payment for financial damages due to a violation of the statutes and regulations referenced in the bond form up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, contractors are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension and civil action.
How much does a Contractor Tax bond cost?
Contractor tax bonds generally cost between 2% and 8% of the bond limit.
Example: $10,000 Contractor Tax Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 680 or above | 2.0% | $200 |
| 650-679 | 2.5% | $250 |
| 625-649 | 4.0% | $400 |
| 600-624 | 5.0% | $500 |
| 550-599 | 7.0% | $700 |
| 500-549 | 7.5% | $750 |
The actual cost of a specific contractor tax bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the contractor’s license & payment history, experience and creditworthiness.
Is a Credit Check Required for Contractor Tax Bonds?
Credit checks are typically required for contractor tax bonds.
How does the wording in the bond form impact the cost of a Contractor Tax bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and contractor (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the contractor via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a contractor tax bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 contractor tax bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Contractor tax bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the contractor and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the contractor failing to pay premiums due, claim payouts, or material changes in the contractor’s credit score. Contractor tax bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Contractor tax bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.