Workers' Compensation Insurance: The Small Business Owner's Guide

  • Accracy
  • 26th Nov, 2023

If you have employees, chances are you're required by law to get them workers' compensation insurance.

Workers' Compensation Insurance: The Small Business Owner's Guide
Operations

If you have employees, chances are you're required by law to get them workers' compensation insurance. Workers compensation insurance is mandated at the state level and is required in all but one state.

What is workers' compensation insurance?

Workers' compensation insurance pays for the wages and healthcare of employees who get injured or sick on the job. States have introduced their own laws which have been in effect for more than seven decades and are enforced with fines and penalties.

Before workers' compensation, the only way employees could cover these costs was by suing their employer. This was expensive for companies, and even worse for employees.

In 1911, Wisconsin was the first state to successfully implement workers compensation laws in the US. By 1949, all state governments had created a compromise between employees and employers. The result? Workers' compensation insurance (otherwise known as "workers' comp", or sometimes "workman's compensation").

These laws require employers to purchase workers' compensation insurance for their employees. They also ensure that workers receive benefits regardless of fault. In exchange, workers who receive workers' compensation insurance give up their right to sue the company.

Further reading: A Comprehensive Guide to Small Business Insurance

 

Workers compensation when newly incorporated

Workers' compensation is regulated by the states, which means rules vary widely. Texas is the only state where most private employers aren't required to get workers' compensation. However, you're required to if your company does business with the government in the state.

The minimum number of employees you hire before you're required to sign up varies by state. In California, for example, you must sign up for workers' compensation if you have a single employee. In Georgia it's three, and in Florida it's four.

For a detailed breakdown of requirements for each state, see this list.

What happens if I don't get workers' compensation?

Most states will fine businesses that don't comply with workers' compensation laws. The fine depends on the number of employees, the reason why the company avoided getting insurance, and the number of days it went without insurance.

Here's a breakdown of the penalties across the ten states with the most registered small businesses:

  • California: The fine ranges from $10,000 to a maximum of $100,000 depending on the number of employees. In some cases, the business faces up to a year of imprisonment.
  • Texas: Since workers compensation insurance isn't mandatory in Texas, not purchasing workers compensation classifies businesses as a "nonsubscriber." In the case of a workplace injury, the business can be sued and will not be able to use employee negligence as a defense in court.
  • Florida: Noncompliant businesses are given a stop-work order. Financial penalties are twice the amount of insurance premiums that would have been paid over the previous two years.
  • New York: For businesses with five or fewer employees, penalties range from $1,000 to $5,000. For businesses with more than five employees, penalties increase to a range of $10,000 to $50,000.
  • Illinois: The penalty for not having workers compensation insurance is $500 per day with a minimum of $10,000. If the lack of insurance is deemed knowing and willful, it is a Class 4 felony with prison sentences ranging from one to three years.
  • Georgia: In the case that an employee gets hurt, the business is responsible for covering all associated costs. If the business is found to be willfully negligent, fines range from $1,000 to $10,000 and you risk imprisonment of up to one year.
  • Pennsylvania: The business is responsible for covering all associated costs with the injury. The individual deemed responsible for not having coverage can be criminally charged with penalties ranging from $2,500 to $15,000 and prison sentences ranging from one to seven years.
  • Ohio: The Bureau of Workers Compensation (BWC) sets premiums each year and sends businesses a payment schedule. Failure to pay results in a penalty of $30 plus 15% of the premium due. In case of injury, the business covers all costs and reimburses any claim expenses.
  • North Carolina: Failure to secure coverage results in a fine of $1 per employee per day with a minimum of $50 per day and a maximum of $100 per day. This means the minimum penalty for a year of no coverage is $18,250.
  • New Jersey: Financial penalties start at up to $5,000 for the first 20 day period of noncompliance. Every 10 day period following increases the penalty by up to $5,000. For example, one month of noncompliance has a penalty of up to $10,000.

What does workers compensation cover?

Worker's compensation benefits cover the following injury-related expenses:

  • Medical care
  • Disability
  • Lost wages
  • Rehabilitation
  • Death (families of workers who die on the job get a payout)

It covers both short and long term injuries, work-related illness, and also rehabilitation. On the employer side, it also covers employers' legal defense costs.

How generous these benefits are varies by state. Check out the website of your state's workers' compensation board for detailed information about benefits.

What does it not cover?

An injury might not be covered by workers' compensation if:

  • A workplace injury is self-inflicted
  • Occurs while the employee wasn't on the job,
  • Occurs while an employee is violating company policy
  • The employee is intoxicated or under the influence
  • Happens when an employee is committing a crime
 

Can my business still get sued if I have workers' compensation?

The short answer is: yes.

Workers' compensation prevents workers from suing their employers in most cases. But an employee might still be able to sue if:

  • The injury was caused intentionally by the employer
  • The injury happened outside the boundaries of the worker's regular work

How much does workers' compensation cost?

The cost for workers comp varies a lot. It depends on:

  • The industry your business is in—the following have some of the highest average premiums:
  • Construction
  • Mining
  • Transportation and warehousing
  • Manufacturing and food production
  • Wholesale trade
  • Risk of on-the-job injury
  • Worker experience
  • Worker classification
  • A whole bunch of exceptions

You can use tools like the quote finder by The Hartford, to look up policies and rates available in your industry and state.

How can businesses pay less for workers' comp?

You have a few options, including:

  • **Lower the risk of injury: **There are many strategies used to lower the risk of injury. Start with reviewing your safety policy and all documentation an employee signs before starting then consider implementing some kind of risk control program.
  • Provide safety training: Go over all training documentation and make sure it adequately covers all the equipment that's used. Check OHSA guidelines for anything you may be missing.
  • Enroll in a dividend plan: Some businesses are eligible to enroll in a dividend plan. When successfully enrolled, employers are rewarded for having a clean record and not having to compensate for injury which minimizes your costs.
  • Consider self-insurance: Self-insurance is becoming more common among larger employers. By handling all claims and payouts, you save on the admin costs, but this can cost more in the long run if your business experiences one large claim or more claims than you initially planned for.
  • Garnish wages: Some states (like New York) allow the employer to garnish some small amount of wages to help pay for workers comp insurance.

How do I get workers' compensation insurance?

In most states, you can buy workers' compensation insurance through most major private insurers. This is ideal if you're in the market for multiple forms of insurance and want to bundle your expenses.

Some of the top providers include Travelers, the Hartford, Zurich, Chubb, and Liberty Mutual.

Many payroll services like Gusto also offer workers' compensation as a paid add-on.

In most states you can also buy workers' compensation through a state fund, which can be more affordable than going through a private insurer. (Visit the website of your state's workers' compensation board for more information.)

In North Dakota, Ohio, Washington and Wyoming, you have no choice. Private sales are illegal and all workers' compensation is administered by a state fund.

Is workers' compensation tax deductible?

You can deduct the premiums you pay from your federal and state tax returns if you run a sole proprietorship, partnership or LLC.

Proprietors and single-member LLCs that elect to be taxed as a proprietorship deduct workers' compensation insurance using IRS Schedule C (Line 15). Owners file this form alongside their personal tax return (Form 1040).

If you run a partnership or an LLC that elects to be taxed as one, you'll deduct it using Form 1065 (Line 10).

Independent contractors and workers compensation

Generally speaking, independent contractors aren't protected by workers' compensation. Sometimes employers will even hire contractors to avoid paying for workers' compensation.

But a contractor can hold your business liable for an injury if:

  • You provided them with an unsafe workplace, or gave them a dangerous job
  • You hired a contractor that wasn't suitable for the job
  • You failed to supervise their work properly

General liability insurance usually covers these risks—look over your policy or talk to your broker to make sure you're covered.

The Bottom Line

Workers compensation insurance is a necessary part of hiring employees and while it might feel like a pain to pay it, it ultimately protects both you and your employees in the long run.

It's also not the only insurance that should be on your radar as you expand your operations. Commercial insurance protects you from any claims from damages that occur accidentally while running your business including property damage and other liability claims.

See our guide on the cheapest small business insurance providers for more information on how to protect yourself without emptying your pockets.

Free 1 Month Bokkeeping Trial

New Customer Offer

We are offering free 1 Month Basic Bookkeeping to all new customers so you can experience Accracy's seemless and professional services.

* No Debit/Credit Card Required

Blog Posts

What is Outsourced Accounting and How Could It Help You?
What is Outsourced Accounting and How Could It Help You?

Need a little help managing your finances? Learn what outsourced accounting involves, its advantages, and whether or not it's right for you.

Find Out How Much You Owe the IRS
Find Out How Much You Owe the IRS

There's a few options to find out how much you owe the IRS. In the following guide you will find practical, fast, and online methods to help you do just that.

Finding Small Business CPAs: Tips Before You Choose
Finding Small Business CPAs: Tips Before You Choose

The best CPA could be just around the corner. On the other hand, it might cost you money and time. Learn how to find the right accountant by asking the right questions.

Ready to grow your business?