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 the self-employed and independent contractors need workers’ comp?

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

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Fulfill the terms of a contract

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

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Cover medical bills and lost wages after a work-related injury

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 care will be covered.

Workers' compensation benefits also include temporary or permanent disability benefits, supplemental job displacement benefits, and death benefits.

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

If you hire subcontractors, even if they work part-time, you may be required to purchase workers' comp insurance 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.

Workers' comp may also be required for high-risk construction jobs like roofing, whether or not you hire employees.

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

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

For example, the state of Texas generally doesn't mandate that anyone purchase workers' comp insurance, 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.

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

If required, a minimum premium workers' compensation policy may be a good fit. This type of policy sets your premium charges at the minimum premium (i.e., the smallest amount of money that an insurance company will sell to a business).

Other types of business insurance for independent contractors

In addition to workers' compensation insurance, there are a few other business insurance policies that independent contractors and sole proprietors may need:

Commercial auto insurance

Every state requires commercial auto insurance 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

A client injury or property damage at your workplace 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 these accidents.

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

Commercial property insurance

Commercial property insurance offers financial protection for your workspace and its business 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.

Errors and omissions insurance

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.

Contractor's tools and equipment insurance

Contractor’s tools and equipment insurance is designed for construction and installation contractors that work at different job sites. It protects movable tools and equipment wherever they are stored and pays for repair or replacement if they are lost, damaged, or stolen.

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Updated: January 17, 2023
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