Workers’ Compensation Insurance
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Workers' compensation for the self-employed and independent contractors

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Workers' compensation insurance

Workers’ compensation insurance covers medical costs and lost wages for work-related injuries and illnesses. This policy is required in almost every state for businesses that have employees.

When do independent contractors need workers’ comp?

People who work for themselves and don't have employees are generally not required to purchase workers' compensation insurance. However, independent contractors might purchase a policy to:

Fulfill the terms of a contract

Some businesses require anyone performing work for their company to carry their own insurance policies, including independent contractor workers' compensation insurance. This limits the company's liability, and the chances that the business will financially responsible if a contractor is injured on the job.

Guard against medical bills and lost wages

Even if you already have health insurance, most policies exclude coverage for work-related illnesses and injuries. Purchasing independent contractor workers' comp insurance ensures that if you're injured while working, your medical bills will be covered. Workers' comp can also help replace wages that are lost during recovery from an injury or illness.

Is workers' comp required if you have no employees and only hire subcontractors?

If you hire subcontractors, you may be required to purchase workers' comp coverage depending on how the laws in your state classify when workers are considered employees. Even if subcontractors have their own workers' comp policy, your state might still require you to provide workers' comp coverage for them.

Are the laws governing workers’ comp the same in every state?

No, which is why it can often be confusing for the self-employed, independent contractors, and small business owners with no employees to know when they might be required to purchase workers' compensation coverage.

For example, the state of Texas generally doesn't mandate that anyone purchase workers' comp coverage, but New York requires coverage as soon as a business hires one employee. It's important to review the workers' compensation laws in your state to make sure you are in compliance.

As many independent contractors are normally exempt from workers' comp requirements in several states, a workers' comp ghost policy may be an effective alternative option. It can help self-employed individuals provide a certificate of insurance (COI) without having to pay for a full workers’ compensation policy.

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How do you know if someone is a contractor or an employee?

The laws determining if a worker is classified as a contractor or an employee can be confusing, open to interpretation, and can vary from state to state. Traditionally, workers who receive a W-2 tax form are considered employees and those who receive a 1099 are contractors. However, you might be required to provide workers' compensation for 1099 contractors depending on the laws in your state.

If a contractor working for you is injured and your state determines the worker should have been classified as an employee, you could face fines or even jail time for not carrying a workers' compensation policy. The penalties vary by state.

Consider talking with a business attorney to make sure your workers are not misclassified, and that you have the appropriate workers' compensation coverage.

How much does workers’ compensation insurance cost?

Male business owner calculating number of employees and other factors

Workers’ compensation insurance costs a median of $47 per month. Your premium is based on a number of factors, including:

  • Payroll
  • Location
  • Number of employees
  • Industry and risk factors
  • Coverage limits
  • Claims history

What are the penalties for failing to carry independent contractor workers’ comp insurance?

Every state has its own set of laws governing workers' compensation, including what the penalties are for failing to carry coverage. For example:

  • In Arizona, you can be assessed a civil penalty of $1,000.
  • In Massachusetts, you can face civil fines of up to $250 a day, criminal fines of up to $1,500, and jail time.
  • In New Jersey, failure to carry workers' comp is considered a criminal offense punishable by a fine of $10,000 or imprisonment for up to 18 months.

Check with your state or your attorney to make sure you are classifying workers properly and, if required, purchase workers' compensation insurance to avoid these costly penalties.

Other insurance for independent contractors

In addition to workers' compensation insurance, independent contractors may need:

Commercial auto insurance

Every state requires this coverage for vehicles that are registered to a business, or the ability to compensate someone in case of an auto accident. In the event of an accident, an independent contractor's commercial auto policy would cover the legal bills, medical expenses, and property damage.

For the self-employed and independent contractors, your personal auto insurance might not cover you when you drive your own vehicle for business use. If you drive your personal vehicle for work, you should consider hired and non-owned auto insurance (HNOA) to make sure you're protected.

General liability insurance

If a client is injured at your workplace, it could result in an expensive lawsuit. If you operate your business out of your home, it’s unlikely that your renter’s or homeowner’s insurance would cover this.

General liability insurance gives you financial protection from such third-party accidents.

Commercial property insurance

Commercial property insurance offers financial protection for your workspace and its contents, and is often required by landlords to sign a lease. If you own or rent a workspace, or if you have expensive equipment, inventory, and other business assets, commercial property insurance would help pay for the repair or replacement if your business property is stolen, damaged, or destroyed.

Business owner's policy

If you intend to buy both general liability and commercial property coverage, you can reduce your insurance costs by bundling them into a business owner’s policy (BOP). It combines both coverages under one policy, and usually has lower insurance premiums than buying each policy separately from the insurance company.

Errors and omissions

Errors and omissions insurance, also known as E&O or professional liability insurance, can offset the cost of a lawsuit if a dissatisfied client sues you over your work. Those who offer professional advice and services buy this coverage in case a client accuses them of making a mistake, missing a deadline, or failing to deliver on a contract.

Workers' compensation

Workers' compensation covers medical costs and lost wages from work-related injuries and illnesses. It’s required in most states for businesses that have employees. Some independent contractors are required to have this coverage to work in riskier professions, such as roofing and building trades.

People who work for themselves and don’t have any employees generally aren’t required to have workers’ comp insurance, but it's still a good idea to carry coverage. Health insurance can deny claims for work-related injuries, which means you could end up facing medical bills and lost income while unable to earn a living.

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Updated: August 18, 2022
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