As a small business owner, sometimes you use independent contractors to help you manage your workflow. Whether you’re a contractor or a data scientist, there’s always the chance that something can go wrong when you’re on site, injuring one of your employees. If that happens, would they be protected?
The answer to that question depends on the specifics of your existing insurance policies. This is your guide to understanding workers’ comp insurance, why you need it, and how it applies to independent contractors.
Workers’ compensation 101
Workers compensation insurance is designed to help protect you from liability in the case that an employee or independent contractor is injured or becomes ill on the job. In most states, if you have an employee, it’s legally required that you have workers’ comp insurance.
Your employees and independent contractors – if a worker is injured in the course of the job, workers compensation helps guarantee your employees have the resources they need to recover
Your small business – if a worker or contractor is injured, your insurance can cover their expenses so that medical bills and costs (or legal costs, should the case go to court) don’t put you out of business
What types of costs can workers’ comp cover?
When you purchase a workers’ comp policy to cover your employees and independent contractors, it can help cover the following kinds of expenses:
Accidents and injuries – Say you’re a furniture installation professional who uses a crew to complete jobs. Should one of your employees incur an injury while working, workers’ comp helps cover their medical bills and costs if they sustain a work injury.
Illness – Say you’re a debris removal professional who works with a large team. Should a member become ill as a result of exposure to waste, workers’ comp would help cover the cost of their treatment.
Repetitive Stress Injury – Say you’re a translator who employees a real-time typing interpreter to work alongside you. Should they develop carpal tunnel as a result of their work, workers’ comp could help cover their medical costs.
Disability – In a scenario like the above, a chronic injury or illness could prevent an employee from working and lead to lost wages. Workers’ comp would help cover their losses.
While most states require businesses to carry workers comp for their employees, they may not require that you cover your independent contractors. Let’s take a look at workers comp for independent contractors.
Does my business have to provide workers’ comp?
There are no federal regulations regarding workers’ compensation, but all states (save for Texas) require that large and mid-sized businesses cover their employees. However, these rules may not apply to your small business. For example, according to The National Federation of Independent Businesses (NFIB):
- In many states, Sole Proprietorships and LLCs don’t need to take out coverage.
- In Kansas, businesses with a payroll under $20K don’t need to provide workers’ comp.
- In North Carolina, businesses with under three employees don’t need to provide workers’ comp.
Check out the NFIB’s database for information in your state.
Employees vs. independent contractors
However, while most businesses are required to cover their employees, they may not be required to cover their independent contractors. Here, it’s important to note that who counts as an “employee” vs an “independent contractor” may look different to the IRS than it does to your state.1
From the IRS’s perspective, your employees are paid on W2s, and their taxes are withheld. Independent contractors, by contrast, are paid on 1099s with no tax withholding.
Because some businesses try to classify their employees as independent contractors to avoid giving them insurance or workers’ comp, states have their own laws to classify employees vs. independent contractors.
So why would you take out a workers’ compensation policy if your state doesn’t require it? Imagine a scenario like the following.
You’re a small business owner with an LLC in a state that doesn’t require you to take out workers’ compensation. You hire an hourly employee and pay them in cash to help you complete a job, providing them materials and directly managing their output. They injure their foot in the course of their work, and they sue your company for damages.
Your state decides that your contractor is an employee, and now you’re responsible for their medical costs. On top of that, your business is fined for failing to provide workers’ comp in the first place.
When it comes to protecting your business—and the crew you work with—it’s better to be safe than sorry. That’s one reason why you may want to provide workers’ comp to employees and independent contractors, even if it’s not legally required.
Doesn’t my insurance already cover that?
If you don’t have a workers’ comp policy, the answer is no. As a small business owner, you may have one or both of the following policies:
- General liability insurance to cover client and third-party bodily injury, personal injury, advertising injury, and property damage
- Professional liability insurance to cover errors and mistakes related to your work
However, independent contractors are not clients or third parties, and their injuries are not covered by general liability insurance. Likewise, professional liability insurance can protect you from client-facing errors, but not your failure to insure your employees and independent contractors.
What if I’m an independent contractor?
If you’re an independent contractor who is worried about workplace safety, you may choose to take out your own workers comp for independent contractors policy.
After all, there are some scenarios in which you know you’re not an employee, and you also know that there’s a chance of workplace injury. Even if you have health insurance, that doesn’t mean it can cover all the costs related to an accident at work, especially when it comes to lost wages. That’s why independent contractor workers compensation is also a smart thing to invest in.
Protect yourself and your employees
As a small business owner, it’s important to guard yourself against medical claims and costly lawsuits that could harm your business. In order to grow your business in the healthiest way possible, make sure you understand the kinds of insurance you can use to protect yourself from risk:
- Small business insurance (general liability insurance and professional liability) can provide insurance coverage against client and third-party claims.
- Workers’ comp can provide insurance coverage to your employees and independent contractors.
- If you’re an independent contract, you can consider taking out your own workers’ comp policy in addition to your health insurance.
With workers’ comp, take one more worry off your plate so you can focus on what matters—your business.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.