If you have employees, chances are you're required by law to get them workers' compensation insurance.
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.
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 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.
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:
Worker's compensation benefits cover the following injury-related expenses:
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.
An injury might not be covered by workers' compensation if:
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 cost for workers comp varies a lot. It depends on:
You can use tools like the quote finder by The Hartford, to look up policies and rates available in your industry and state.
You have a few options, including:
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.
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).
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:
General liability insurance usually covers these risks—look over your policy or talk to your broker to make sure you're covered.
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.
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