Do I Need Workers’ Comp Insurance?

Workers' comp acts as your safety net when workplace injuries happen, and they happen more often than you'd expect. According to the National Council on Compensation Insurance (NCCI), the average workers' compensation claim costs $44,179. That's enough to 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 they're independent contractors. However, some states require certain contractors to buy their own coverage, and most businesses require it regardless. Without proof of coverage, contractor costs get added to your audit, increasing your premiums.

Misclassifying employees as 1099 contractors triggers serious consequences. 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 can be 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, making it essential for landing certain jobs.

Generally, no. Most states exempt businesses without employees from workers' comp requirements.

Occasional contractors can add complexity, though. If you frequently use the same people or control their work, your state might view them as employees. Colorado addresses this situation in its independent contractor guidelines, requiring 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. While most states require it with your first hire, the employee thresholds change dramatically depending on where you operate. Workers’ comp requirements per state are as follows:

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.