Workers’ Compensation Insurance for Small Businesses

Workers’ compensation insurance pays medical bills and lost wages when an employee is injured or becomes ill because of their job. In exchange, it generally protects employers from being sued by employees over workplace injuries. For most employers, it is required by state law.

What workers’ compensation covers

• Medical expenses: doctor visits, hospital care, surgery, prescriptions and rehabilitation.
• Lost wages: a portion of the employee’s income while they recover.
• Disability benefits: for temporary or permanent disabilities.
• Death benefits: payments to dependents and funeral costs if a work-related injury is fatal.
• Employer’s liability: most policies also include coverage if an employee sues the employer over a workplace injury.

Is workers’ comp required?

Each state sets its own rules. Most states require employers to carry workers’ compensation as soon as they have employees, while others set a minimum number of employees or have special rules for certain industries, such as construction. Texas is the main exception where coverage is optional for most private employers. Penalties for not carrying required coverage can include fines, stop-work orders and personal liability for injury costs. Check with your state’s workers’ compensation agency.

Do sole proprietors need it?

Business owners without employees are often not required to carry workers’ comp, but some choose to buy it because clients or general contractors require it, or because their health insurance may not cover work injuries.

How premiums are calculated

Workers’ comp premiums are mainly based on three elements: your payroll, the classification code that describes each employee’s job and its risk level, and your experience modification rate, which reflects your claims history compared with similar businesses. Accurate employee classification is one of the easiest ways to avoid overpaying.

How to reduce workplace injuries and costs

• Train employees and document safety procedures.
• Provide the right protective equipment.
• Report injuries quickly and support return-to-work programs.
• Review your classifications and payroll estimates every year.

Frequently asked questions

Are independent contractors covered by my workers’ comp?

Generally no, but misclassifying employees as contractors can create liability. If a contractor does not have their own coverage, some states may treat them as your employee for workers’ comp purposes.

Can I buy workers’ comp only for part of the year?

Policies are usually annual, but premiums are based on actual payroll, often adjusted at the end of the term through an audit.

What is a workers’ comp audit?

At the end of the policy period, the insurer reviews your actual payroll and classifications and adjusts the final premium.

Related business insurance guides

• Small business insurance overview
• Independent contractor insurance
• Small business insurance cost

This page is for general information only and is not insurance, legal or tax advice. Requirements, coverage and prices vary by state, industry and insurer. Review policy documents and speak with a licensed agent before buying.