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

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

But what exactly is it? How does it work? And can you deduct it from your taxes?

Here’s everything you need to know.

What is workers’ compensation insurance?

Workers’ compensation insurance pays for the wages and healthcare of employees who get injured or sick on the job.

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.

State governments in the early 20th century 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 received 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

Am I required to have workers’ compensation?

Workers’ compensation is regulated by the states, which means rules vary widely. But unless you’re in Texas, your state almost certainly requires you to have workers’ compensation if you have employees.

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.

In New York state, fines can reach upwards of $50,000 for companies with more than five employees. In other states, noncompliance is actually a crime. (In states like California and Massachusetts, it can even result in jail time.)

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
  • 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
  • Risk of on-the-job injury
  • Worker experience
  • Worker classification
  • A whole bunch of exceptions

You can use tools like The Hartford’s small business insurance quote finder to look up policies and rates available in your industry and state.

How do I lower my costs?

You have a few options, including:

  1. Lower the risk of injury in your workplace by implementing some kind of risk control program

  2. Provide your employees with safety training

  3. Enroll in a dividend plan, which insurers use to reward employers for having a good track record and minimizing losses

  4. Self-insure, or pool your losses with a group of other employers through a group insurance plan

  5. 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.

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.

Texas and Oklahoma are the only states 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 either state.)

Is workers’ compensation deductible?

You can deduct the premiums you pay from your federal and state tax returns if you run a sole proprietorship, partnership or LLC and you’re required by law to have workers’ compensation.

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).

What about contractors?

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.

This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. Bench assumes no liability for actions taken in reliance upon the information contained herein.

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