Workers’ compensation insurance for sole proprietors

Workers’ compensation insurance is required in most states for businesses with employees. If an employee is injured on the job, the injured employee can receive reimbursement for lost wages and medical care.

A sole proprietorship with no employees typically is not required to carry workers' compensation insurance. However, even when it's not required by law, workers' comp 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:

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).

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.

In addition to workers' compensation insurance, sole proprietors may also need the following types of insurance coverage:

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.

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, 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.

Compare quotes from multiple top-rated U.S. insurance companies with Insureon’s free online application. Find quotes for workers' compensation insurance for the self-employed and independent contractors, as well as other policies to protect your business.