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Workers’ compensation insurance for sole proprietors
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 sole proprietors need workers’ compensation insurance?
A sole proprietorship with no employees typically is not required to carry workers' compensation insurance. However, some states, such as California, will require specific types of contractors to carry this policy, even if they don’t employ anyone else.
Even when it's not required by law, workers’ comp insurance is a wise choice because of the financial protection it provides. Also, it could be required in order to attain a job.
More specifically, sole proprietors are strongly encouraged to purchase a policy to:
Fulfill the terms of a contract
While you may be legally exempt from purchasing workers’ compensation coverage if you’re a business owner, other companies may require an independent contractor to have workers' comp, even if that contractor has no employees. This is especially true for those who work in fields that are noted for work-related injuries, such as roofing and construction.
Even if you’re self-employed, your clients may require you to have your own workers' comp coverage as a way to limit their own liability. You would be able to show proof of insurance to your clients with a workers' comp certificate of insurance (COI).
As many sole proprietors are normally exempt from workers' comp requirements, a workers' comp ghost policy may be an effective alternative option. It can help self-employed individuals provide a COI without having to pay for a full workers’ compensation policy.
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. A workers' comp policy would pay your medical bills and cover the cost of medical treatment if you're injured while working, which is crucial since health insurance can deny work-related injury claims.
Workers' compensation benefits also include temporary or permanent disability benefits, supplemental job displacement benefits, and death benefits.
Is workers' comp required if you only hire subcontractors?
View video transcript.
Required in most states, workers’ comp protects employees from on-the-job injuries.
And while self-employed individuals and independent contractors are exempt from coverage requirements, they might purchase a policy to fulfill a contract or cover medical bills and lost wages from a work-related injury.
In most cases, personal health insurance won’t cover work-related mishaps or lost income from an injury on the job.
Depending on your state, if you hire subcontractors, you may be required to provide workers’ compensation for them.
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Each state has its own workers’ compensation laws, and its own way of determining whether someone is truly a contractor or subcontractor. If you’re a sole proprietor or general contractor, your state might 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.
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.
Even if subcontractors have their own coverage, your state may still determine they are technically your employees. In this case, you’re responsible for covering them with workers’ comp. 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).
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How much does workers’ compensation insurance cost?
Workers’ compensation insurance costs an average of $45 per month. Your premium is calculated based on a number of factors, including:
- Payroll
- Location
- Industry and risk factors
- Coverage limits
- Claims history
Are non-W-2 workers considered employees?
As a sole proprietor, you may not have full-time W-2 employees, but that does not mean that your state won’t view part-time employees or non-W-2 workers as employees.
Even if your sole proprietorship is a limited liability company (LLC), your LLC could still be in financial jeopardy if your state’s department of labor concludes that a contractor should have workers’ compensation benefits.
If the worker in question doesn’t offer the services they provide to you to the general public as well, there’s a possibility that they could be legally considered your employee.
If your non-W-2 employee is legally classified as your employee, you could face hefty fines for worker misclassification, depending on the type of violation.
To mitigate the risk of these penalties, sole proprietors should:
- Meet with an attorney before hiring any contractors to determine if the workers they’re hiring are indeed contractors.
- Check their state's laws to determine if workers' comp obligations require the worker to be classified as an employee.
Workers’ compensation laws in your state
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Other types of business insurance for sole proprietors
In addition to workers' compensation insurance, sole proprietors may also need the following types of insurance coverage:
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 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, a commercial auto policy would cover the legal bills, medical expenses, and property damage.
For sole proprietors, your personal auto insurance policy 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.
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.
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Updated: October 30, 2023
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