Key Takeaways

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Most business owners can exempt themselves, but not their employees. Sole proprietors, business partners, LLC members, and corporate officers can often opt out of workers' comp coverage for themselves, but you still need to cover an employees you hire.

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Exemptions save money but create liability. While skipping workers' comp eliminates premium costs, you become personally responsible for all injury-related expenses, which can range from $15,000 for minor accidents to over $2 million for severe injuries.

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Many clients require coverage even if you're exempt.  Government contracts and large private companies typically require proof of workers' comp insurance before hiring contractors, potentially limiting business opportunities for exempt owners.

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Certain worker types are exempt from coverage requirements depending on your state. Independent contractors, agricultural workers, domestic employees, and real estate agents are often exempt from workers' comp requirements.

What Is a Workers' Compensation Exemption?

Most businesses with employees must have workers' compensation insurance, and exemptions are rare. If you have even one employee, you want coverage regardless of your business structure or industry. Exemptions primarily apply to business owners themselves: sole proprietors, partners, LLC members and corporate officers who can exclude themselves from coverage while still protecting their employees.

A workers' compensation exemption lets specific individuals or businesses opt out of workers' compensation insurance. Workers' compensation insurance typically covers medical expenses and lost wages for employees injured or made ill by their jobs.

Who Qualifies for a Workers' Compensation Exemption

Eligibility for workers' compensation exemptions varies by state and business type, but certain types of business owners and employees commonly qualify to opt out of mandatory coverage. Common exemption categories include:

Business Owners

  • Sole proprietors with no employees (most straightforward exemption)
  • Business partners when no employees work outside the partnership
  • Corporate officers who meet state ownership requirements
  • LLC members in most states

Specific Worker Types

  • Independent contractors (must meet classification criteria)
  • Agricultural workers and seasonal farm laborers
  • Domestic workers like housekeepers and nannies (varies by state)
  • Real estate agents and brokers are typically exempt because they're classified as independent contractors rather than employees.  

Special Situations

  • Family-owned businesses where only family members work
  • Nonprofit organizations with volunteer-based operations
  • Contract-based businesses with minimal full-time employees

Common Exemption For Business Types

Certain types of businesses may qualify for a workers' compensation exemption. Common examples include the following:

  • Self-employed workers often qualify for a workers' compensation exemption.
  • Business partnerships, particularly those without employees other than the partners, may be able to opt for an exemption.
  • Family-owned businesses may qualify for exemptions, especially if the employees are all family members.
  • Some nonprofit organizations can qualify for exemptions, depending on the nature of their operations and the type of work their volunteers and staff perform. Religious organizations, educational institutions and charitable nonprofits with 501(c)(3) status qualify for exemptions for clergy, teachers and non-manual workers.
  • Businesses that operate seasonally, such as certain agricultural operations or holiday-themed stores, may qualify for exemptions due to their temporary and fluctuating workforce.
  • Contract-based businesses that rely on independent contractors rather than employees are eligible for exemptions.

Important: We strongly recommend having workers' compensation insurance as it protects employees and employers from real financial risks. Requirements vary significantly by state, and misclassification of workers can result in penalties. Most exemptions apply only to owners, not employees.

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Workers’ Compensation Exemptions by State

Employee Count Thresholds determine when coverage becomes required in most states. Small businesses often get exemptions based on how many people they employ:

  • 1-2 employees: About 15 states don't require coverage for very small businesses
  • 3-4 employees: Most common threshold — roughly 25 states require coverage at this level
  • 5+ employees: Nearly all states mandate coverage once you reach five employees

See the workers comp state employee count threshold guidelines here.

What This Means for Your Business

  • Check Your State's Specific Rules because these general patterns have exceptions. Contact your state's workers' compensation board or department of labor for exact requirements.
  • Consider Multi-State Operations carefully. If you have employees in multiple states, you'll need to meet the most restrictive state's requirements.
  • Don't Assume Exemptions Transfer when expanding to new states. An exemption in Tennessee might not apply if you start operating in California.
  • Plan for Growth by understanding when you'll need coverage. If you're currently exempt with two employees, know that hiring a third might trigger mandatory coverage in your state.
State
Employee Threshold
Key Exemptions
Notable Rules

California

1+ employees

Sole proprietors; corporate officers with 10%+ ownership

Criminal offense to not provide coverage

Texas

Optional for all

Complete opt-out allowed

Only state allowing full exemption; 28% of businesses opt out

Florida

4+ (1+ construction)

Sole proprietors; partners; up to 3 officers in construction

3-5 day processing for exemptions

New York

1+ employees

Very limited: sole proprietors only

$1,000-$50,000 fines; potential felony charges

Pennsylvania

1+ employees

None for business owners

Strictest state: no owner exemptions; felony penalties

Illinois

1+ employees

Sole proprietors; partners; corporate officers; LLC members

$500/day penalty; felony for willful violations

Ohio

1+ employees

Various owner exemptions

Monopolistic state fund only

Georgia

3+ employees

Sole proprietors; partners

Officers/LLC members count toward threshold

North Carolina

3+ employees

Sole proprietors; some partners

Standard 3-employee threshold

Michigan

1+ employees

Family-only businesses

Must use paper form WC-337

Pros & Cons of Getting a Workers’ Compensation Exemption

Workers' compensation exemptions can reduce immediate insurance costs, but they transfer financial and legal risks to your business. We recommend careful evaluation of your specific situation, industry risks, and financial capacity to handle workplace injuries.

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    Pros of a workers compensation exemption

    • Immediate Cost Savings: Eliminates workers' compensation premium payments, which can be substantial for small businesses
    • Reduced Administrative Burden: Less paperwork, fewer insurance-related compliance requirements
    • Direct Control: Handle workplace safety and injury response according to your own protocols
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    Cons of a workers compensation exemption

    • Unlimited Personal Liability: You become personally responsible for ALL injury-related costs with no cap
    • Lost Wage Obligations: May be liable for extended periods of worker income replacement
    • Legal Defense Costs: Must pay attorney fees and court costs for injury-related lawsuits
    • Business Relationship Impact: Many clients/contractors require proof of workers' comp coverage
    • Bank/Lender Concerns: Financial institutions may view exemptions as increased business risk

    If you don't qualify for an exemption and choose not to buy workers' comp insurance, the following are risks: 

    • Lawsuit Vulnerability: Injured workers can sue directly for damages without workers' comp protections
    • State Penalties: Fines and penalties for operating without required coverage are severe ($500+/day in some states)
    • Criminal Liability: Some states impose criminal penalties for willful non-compliance
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    Real-world cost scenarios

    • Minor Slip-and-Fall: $15,000-$50,000 (emergency room, imaging, physical therapy)
    • Broken Bone: $25,000-$75,000 (surgery, rehabilitation, lost wages)
    • Back Injury: $50,000-$200,000+ (ongoing treatment, potential disability)
    • Severe Injury: $500,000-$2,000,000+ (major surgery, long-term care, permanent disability)

How to File a Workers' Compensation Insurance Exemption?

In most states, you will need to file a form if you want to be exempt from workers' compensation requirements. This form can be used to certify that you are not required to have workers’ compensation insurance for certain types of workers. If you are eligible and are willing to accept the risk of an exemption, here are the steps:

  1. 1

    Verify Your eligibility

    Check your state's specific requirements and ensure you meet all criteria. Requirements can change, so verify current rules with your state's workers' compensation office.

  2. 2

    Gather required documentation

    • Business registration documents
    • Proof of ownership
    • Employee information (if applicable)
    • Financial records
    • Previous insurance certificates
  3. 3

    Complete the application

    • Find your state's exemption form (usually called "Notice of Election to Be Exempt" or "Certificate of Exemption")
    • Fill out completely and accurately
    • Pay required filing fees
    • Submit by deadline
    • State-Specific Filing Information
      California: Form WC-1 through Department of Industrial Relations
      Florida: Online application through MyFloridaCFO.com
      Georgia: Form WC-1 through State Board of Workers' Compensation
      New York: Form C-105.2 through Workers' Compensation Board
      Tennessee: Form C-62 through Department of Labor and Workforce Development
  4. 4

    Maintain your exemption

Alternatives to Workers' Comp Insurance

  1. 1

    Pay-as-You-Go Workers' Compensation

    These policies adjust your premiums based on actual payroll throughout the year rather than requiring large upfront payments. This option works well for businesses with seasonal fluctuations or unpredictable income. Instead of paying estimated premiums for the year, you pay based on your current payroll.

  2. 2

    Minimum Premium Policies

    Insurance carriers offer these policies at their lowest possible premium while covering administrative costs. These policies are good for very low-risk businesses with few employees who want basic protection without high premiums.

  3. 3

    Ghost Policies

    Provide certificates of insurance without traditional coverage. Self-employed contractors often use these to meet client requirements for proof of workers' comp insurance. While ghost policies don't provide actual coverage, they satisfy contractual obligations that require insurance certificates.

Why Clients Require Workers' Comp Coverage

Many clients and contractors require proof of workers' compensation insurance before starting projects, even from exempt business owners. This requirement protects them from potential liability if you're injured while working on their property or project.

Government Contracts almost always require workers' comp coverage. Federal, state and local agencies typically won't award contracts to businesses without proper insurance documentation. This requirement can exclude exempt sole proprietors and independent contractors from lucrative public sector opportunities.

Large Private Companies often have similar requirements. Corporate clients want to avoid the risk of being held liable for contractor injuries. If you don't have workers' comp coverage and get injured on their job site, they might face lawsuits or workers' comp claims.

Construction and High-Risk Industries have particularly strict requirements. General contractors typically require all subcontractors to carry workers' comp insurance, regardless of exemption status. The construction industry's high injury rates make this coverage essential for managing liability exposure.

Health Insurance vs. Workers' Compensation Coverage

Health insurance doesn't replace workers' comp coverage. The two serve different purposes and have different rules about work injuries.

Your Health Insurance May Not Cover Work Injuries. Most health insurance policies exclude work-related injuries and illnesses. If you break your arm on a job site, your health insurer might deny the entire claim.

Workers' Comp Replaces Lost Wages. Health insurance covers medical bills but won't replace your paycheck when you can't work. Workers' comp provides partial wage replacement — usually two-thirds of your weekly pay.

Legal Protection Works Differently. Workers' comp prevents employees from suing you for workplace injuries. Health insurance doesn't provide this legal shield.

Don't assume health insurance covers everything. If your work involves physical risk, workers' comp fills important gaps that health insurance won't cover.

FAQ

Below, we answer some of the most common questions about the people and businesses eligible for workers' compensation exemptions and how these exemptions work.

What is a workers' compensation exemption?

Who is exempt from workers' compensation insurance?

What is a workers' compensation waiver?

How do you get a workers' compensation waiver?

Do exemptions apply if I work in multiple states?

How often do I need to renew my workers' comp exemption?

About Mark Fitzpatrick


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Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.

Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!

Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.


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