Workers’ compensation insurance for sole proprietors

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

Workers’ compensation 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 purchase workers' comp. However, if you’re injured on the job, a workers’ compensation policy can help pay for medical bills and replacement wages while you recover. Since your health insurance provider might deny a claim for a work-related injury, having workers' comp could be essential.

Some businesses may contractually require sole proprietors to buy worker’s comp insurance for themselves, especially if they work in fields that are noted for work-related injuries, such as roofing and construction.

If you have a sole proprietorship with no employees, there are several considerations before deciding whether or not to purchase workers’ comp insurance, such as the workers’ comp laws in your state.

While you may be legally exempt from purchasing workers’ compensation insurance if you’re self-employed, other companies may require an independent contractor to have workers' comp, even if that contractor has no employees.

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—and they might want to verify that you have a certificate of insurance (COI).

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

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.

Each state has its own workers’ comp 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.

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 might also need these kinds of business insurance coverage:

• General liability insurance
• Commercial auto insurance
• Errors and omissions insurance (also known as E&O or professional liability insurance)

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