Workers’ compensation insurance pays for medical care and a portion of lost wages when an employee is injured or becomes ill because of their job. In exchange, employees generally cannot sue the employer for that injury. Most states require businesses with employees to carry it, but rules, exemptions and benefits vary by state.
For small business owners, workers’ comp is often the first legally required policy once you hire. Here is how it works and what you should check before buying.
What Does Workers’ Compensation Insurance Cover?
Workers’ compensation typically covers:
- Medical expenses for work-related injuries and illnesses.
- Lost wages, usually a percentage of the employee’s pay while they recover.
- Rehabilitation, such as physical therapy.
- Disability benefits for temporary or permanent impairments.
- Death benefits for dependents if a work injury is fatal.
Many policies also include employer’s liability insurance, which can help if an employee sues, for example claiming negligence beyond what workers’ comp covers.
What Workers’ Comp Does Not Cover
- Injuries to independent contractors, in most cases.
- Injuries caused while intoxicated or through intentional self-harm, in many states.
- Injuries that happen outside work duties, such as during a personal errand.
- Injuries to customers or visitors, which fall under general liability insurance.
Who Needs Workers’ Compensation Insurance?
Requirements depend on your state. Factors that commonly matter include:
- The number of employees you have.
- Whether workers are full-time, part-time or seasonal.
- Your industry, as construction often has stricter rules.
- Whether owners or officers choose to include themselves.
Some states require coverage as soon as you hire your first employee. Others set a minimum number of employees, and at least one state lets most private employers opt out under specific conditions. Always check with your state’s workers’ compensation agency or a licensed agent.
Misclassifying employees as contractors to avoid coverage can lead to penalties. If you work alone or use freelancers, read insurance for gig workers and freelancers.
How Workers’ Comp Premiums Are Calculated
Premiums are generally based on three elements:
- Classification codes: each job type has a rate reflecting its risk. Office work usually costs less than roofing.
- Payroll: rates are typically applied per $100 of payroll.
- Experience modification: businesses with fewer past claims may receive a lower modifier over time.
Because premiums depend so much on payroll and job type, costs vary widely between businesses and states. Some policies use an estimated payroll at the start, then adjust after a year-end audit.
Where to Buy Workers’ Comp
Depending on your state, you may buy coverage from:
- Private insurance companies.
- A state-run fund, in states that offer one.
- Self-insurance, usually reserved for larger employers that meet strict requirements.
Some insurers offer pay-as-you-go billing linked to payroll, which can help cash flow for small businesses.
What to Do When an Employee Gets Hurt
- Make sure the employee gets medical care right away.
- Document what happened, when and where.
- Report the injury to your insurer promptly, within any state deadline.
- Complete the required state forms.
- Plan a safe return-to-work process when the employee is ready.
A clean, timely process helps claims move smoothly. Our guide on how to file an insurance claim covers general best practices.
Read also: Does an LLC need insurance? · How insurance companies calculate your rates
Workers’ comp for small and growing businesses
Small businesses often hire their first employee before they think about workers’ compensation. Because some states require coverage from the first employee, buy coverage before the start date rather than after. As you grow, keep your payroll estimates and job classifications accurate: underestimating can lead to a large bill after the year-end audit, while overestimating ties up cash until the audit refund.
Workers’ comp vs. other business policies
| Policy | Covers | Does not cover |
|---|---|---|
| Workers’ compensation | Employees’ work-related injuries and illnesses | Customer injuries, contractor injuries in most cases |
| General liability | Injuries and property damage to third parties | Your own employees’ injuries |
| Professional liability (E&O) | Claims of mistakes or negligence in your services | Bodily injuries to employees |
| Business owner’s policy (BOP) | General liability plus business property | Workers’ compensation, which is bought separately |
Ways to control workers’ comp costs
- Classify employees correctly and keep payroll records current.
- Build a written safety program and train employees.
- Report injuries promptly so claims are handled efficiently.
- Offer light-duty return-to-work options when appropriate.
- Ask about pay-as-you-go billing to match premiums with actual payroll.
- Compare quotes when your policy renews.
Independent contractors and gig workers
Independent contractors are generally not covered by your workers’ compensation policy, but misclassifying employees as contractors can lead to penalties and unpaid claims. Self-employed people usually are not required to cover themselves but may be able to buy coverage for their own injuries in some states, which some clients require.
Checklist before you buy workers’ comp
- Confirm your state’s requirement and whether you must buy from a state fund or can use a private insurer.
- List every employee, their job duties and annual payroll.
- Check that each job is assigned the correct classification code.
- Decide whether owners or officers will be included or excluded, where your state allows a choice.
- Ask about premium audits, payment options and safety program discounts.
- Keep your certificate of insurance ready for clients and landlords who request it.
Related reading: what is a business owner’s policy, gig worker insurance and small business insurance cost.
How claims affect your workers’ comp premium
Workers’ comp pricing is not fixed once you buy a policy. Many insurers and state rating bureaus use an experience modification factor (often called an experience mod or EMR) once a business has enough payroll history. A factor of 1.0 represents the average expected loss for businesses in your class. A business with fewer or smaller claims than expected can earn a factor below 1.0 and pay less; one with more frequent or costly claims can see a factor above 1.0 and pay more for several years.
Because the calculation usually weighs how often claims happen more heavily than how large they are, a pattern of small, preventable injuries can hurt your premium more than a single larger accident. That is why a written safety program, prompt injury reporting and a return-to-work plan for light duty matter: they reduce both the number and the cost of claims.
Practical steps that protect your rate
- Train new hires on safety before their first shift and keep records of the training.
- Report every injury to your insurer quickly; late reporting tends to increase claim costs.
- Offer modified or light-duty work so injured employees can return sooner.
- Review your payroll classifications each year so you are not paying a riskier class rate by mistake.
For a broader view of business costs, see small business insurance cost.
FAQ
Can I pay workers’ comp as I go?
Many insurers offer pay-as-you-go billing that bases each payment on actual payroll, which can reduce the large deposit and the year-end audit adjustment. Availability varies by insurer and state.
Does workers’ comp cover illnesses caused by work?
Generally yes, if the illness is shown to be caused by job duties or workplace exposure. Occupational disease rules and deadlines vary by state, so report symptoms early.
Do I need workers’ comp if I have only one employee?
In many states, yes. Some states require coverage from the first employee, while others set a higher threshold. Check your state’s specific rules.
Does workers’ comp cover remote employees?
Generally, yes, if the injury happens while performing job duties. Proving a home injury is work-related can be more complex.
Are business owners covered by workers’ comp?
It depends on the state and business structure. Sole proprietors and some officers may be excluded by default but can often choose to opt in.
Can an employee sue if they receive workers’ comp?
In most cases, workers’ comp limits lawsuits against the employer. Exceptions exist, such as intentional harm, depending on state law.
