Do sole proprietors need workers’ compensation insurance?

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Sole proprietors are not required to purchase workers' compensation insurance, but it may be beneficial to do so.
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When you’re a sole proprietor and all the decisions fall on your shoulders, inevitably important business questions arise, including: Does a sole proprietor need workers’ compensation insurance?

Sole proprietors with no employees typically are not required to purchase workers' compensation insurance. However, if you’re injured on the job, a sole proprietor workers’ comp policy can help pay for medical expenses and replacement wages while you recover.

If you are a sole proprietor with no employees, there are several considerations before deciding whether or not to purchase workers’ comp insurance.

Even if you don’t need workers’ comp, clients may request it

While you may be legally exempt from purchasing workers’ compensation insurance, it's not unlawful for a company to require an independent contractor to have workers' comp, even if that contractor has no employees.

Even if you’re the sole employee, your clients may require you to have your own workers' comp coverage as a way to limit their liability. Why?

Many businesses have faced workers’ comp claims from independent contractors who were injured on the job. As a precaution, clients may require any sole proprietors they hire to carry their own coverage.

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Compare workers’ comp rates by state
The cost of your business's workers' compensation insurance varies state by state.

If you hire subcontractors, you may need workers’ comp

Every state has its own workers’ comp laws, but every state also has its own way of determining when someone is truly a contractor or subcontractor. Some states will view subcontractors as your employees and require you to have workers’ comp for them.

If one of your subcontractors is injured while working for you and the state determines that the worker really should have been categorized as an employee, it could result in fines and liability.

“A sole proprietor faces a number of penalties if they do not have workers’ compensation insurance,” says Ken Gauvey, an attorney specializing in employment law and labor litigation and the owner of the Law Practice of Ken C. Gauvey, a Baltimore attorney specializing in employment law and labor litigation. “These penalties apply if the sole proprietor is determined to be an employer to an injured subcontractor. Generally, these penalties involve reimbursing the state workers’ uninsured employer’s fund, as well as a financial penalty consisting of a percentage of the total amount paid out of the fund for the employee.”

If your solution is to hire subcontractors with their own workers' comp coverage, you’ll need to rethink that strategy. Even if subcontractors have their own coverage, your state may still determine they are technically your employees. When that happens, you’re responsible for covering them with workers’ comp.

“While it may be a good idea to require contractors and subcontractors to carry their own coverage, the Workers' Compensation Commission may still determine that the sole proprietor was an employer – resulting in penalties against the sole proprietor,” Gauvey says.

Protect your small business with workers' compensation insurance

Non-W-2 workers can be considered employees

As a sole proprietor, you probably don’t have full-time W-2 employees, but that doesn’t mean that your state won’t view part-time or non-W-2 workers as employees.

“Sometimes small business owners believe that if they classify somebody as an independent contractor, by putting that label on them, that is sufficient,” says Peri Berger, an attorney at Harris Beach. “They think, ‘Well, I’m not hiring this person full time; I’m not going to give them a W-2; therefore, I don’t have to worry about all that workers’ comp stuff.’ But that’s just not how it works.”

If the worker in question doesn’t offer the services they provide to you to the general public, there’s a strong chance they could be legally considered your employee, Berger says. And if that’s the case, it could cost you.

“Frankly, the liability is enormous, and I think people don’t realize it,” says Berger. “The fines [for worker misclassification] are huge. It can be several hundred dollars a day, depending on the violation that you’re dealing with.”

Berger recommends sole proprietors:

  • Meet with their attorney before hiring any contractors to determine if the workers they’re hiring are indeed contractors
  • Check state laws to determine workers' comp obligations if the worker is determined to be an employee

In addition to workers’ compensation insurance, sole proprietors may find that they need:

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