Do I Need Workers’ Comp Insurance?

Workers' comp provides financial protection when workplace injuries happen. According to the National Council on Compensation Insurance (NCCI), the average workers' compensation claim costs $44,179. This amount can bankrupt a small business paying out of pocket.

Most states require coverage as soon as you hire your first employee, and you're risking severe consequences without it. Pennsylvania can impose up to one year in jail and $2,500 in fines for each day without coverage, with intentional violations becoming felonies carrying up to seven years imprisonment and $15,000 fines. California charges up to $100,000 in penalties plus potential jail time.

You don't need workers' comp for 1099 employees because independent contractors buy their own coverage. Some states require certain contractors to purchase coverage, and most businesses require proof before signing contracts. Without proof of coverage, the contractor's wages get added to your audit, increasing your premiums.

Misclassifying employees as 1099 contractors causes serious problems. If authorities determine your workers are actually employees, you'll face reclassification, back premiums, penalties and liability for uninsured injuries.

Most states don't require workers' comp if you're self-employed with no employees. However, buying coverage voluntarily is smart financial protection.

Self-employed workers' comp covers medical expenses from job-related injuries and replaces a portion of lost wages while you recover. Many clients also require proof of workers' comp coverage before signing contracts, so you'll need it for certain jobs.

Most states don't have workers' comp requirements for employers without employees.

Using occasional contractors gets tricky. If you frequently use the same people or control their work, your state views contractors as employees. Colorado's independent contractor guidelines require businesses to verify contractor status carefully. 

Before hiring any contractor, ask for their certificate of insurance (proof of coverage document). It protects you from unexpected liability if they get hurt on your job site.

Many clients also require a certificate of insurance before signing contracts, making coverage essential for landing certain jobs, regardless of legal requirements.

State laws control when your business needs workers' comp insurance. Most states require workers' comp with your first hire, but employee thresholds change dramatically depending on where you operate. Here are the workers’ comp requirements per state:

*State workers' compensation requirements change frequently. Consult with your state's workers' compensation board or insurance professional for current requirements specific to your situation.

Adding employees to your business triggers workers' comp insurance requirements in most states. Sole proprietors can usually exempt themselves, but several situations change this rule. Family employees, corporate structure and high-risk industries often require coverage regardless of business size. Research your state's thresholds before hiring to avoid expensive penalties.

It's normal for small business owners to ask, "Do I need workers' compensation?" We answered frequently asked questions to clarify when you need it and when you don't.