Workers’ comp insurance for sole proprietors
State laws usually require businesses to buy workers' compensation insurance when they have employees. But even if you work as a sole proprietor, you may still need this coverage.
When do sole proprietors need workers' comp?
State laws don't often require sole proprietors with no employees to carry workers’ compensation insurance. However, some states, like California, require specific contractors to carry this policy, even if they operate alone.
Even when it's not required, there are still several reasons to buy this coverage. Workers' comp insurance can help IT consultants and contractors:
- Fulfill the requirements of a client contract
- Pay for medical costs in the event of a work injury
- In rare cases, comply with state laws
Let’s take a look at each of these in detail.
Your clients may require you to carry workers' compensation insurance
Your clients may want you to carry workers' compensation and other types of small business insurance to protect themselves against risk.
If you're injured on the job, they could be held responsible and end up paying for your medical bills. By asking you to carry a workers' comp policy, they know they're protected financially in the event of an injury.
When you buy a workers' compensation policy, it also saves your clients money since they don't need to purchase this protection for you. However, make sure you've factored in that cost when determining your fees.
If a client requires proof of workers' comp coverage, it may be a good idea to see if you're eligible for a type of minimum premium policy called a workers' comp ghost policy. This policy can help self-employed individuals provide a certificate of insurance (COI) without having to pay for a full workers’ compensation policy.
Workers' comp pays for medical treatment if you're injured on the job
Your job doesn't have to involve physical labor or of high-risk for the possibility of an injury. Years of typing on a keyboard could lead to carpal tunnel syndrome for a software developer. A computer repair technician could cut their hand working inside of a computer, which could put them out of work until it heals.
When you injure yourself on the job – even by tripping in your office – workers' compensation kicks in to cover the cost of medical care. That includes doctor's visits, prescriptions, and physical therapy. If you need to take time off work, workers' comp benefits supply part of your missed wages and act as a financial buffer.
This may sound like something health insurance would cover, but insurer providers can deny claims for work-related injuries. Medical bills can also add up quickly, and workers' compensation benefits can save your business in the event of a long recovery. That's why sole proprietors and independent contractors may choose to buy this coverage for themselves, even when they qualify for a waiver.
If your non-W-2 employee is legally classified as an employee, you could face hefty fines for worker misclassification, depending on the type of violation.
Are sole proprietors required to have workers' comp if they hire subcontractors?
Workers' comp laws and coverage requirements vary by state, and they often have strict rules for who qualifies as a contractor or employee. If you’re a sole proprietor, your state might view subcontractors as your employees and require you to have workers’ comp for them.
If one of your subcontractors suffers a workplace injury and the state determines the worker really should have been categorized as an employee, it could result in steep fines for failing to comply, or you could be held responsible for the injured worker's medical expenses.
Even if subcontractors have their own coverage, your state may still determine they're technically your employees. That means you're responsible for providing them with workers’ compensation coverage.
In this case, a minimum premium workers' compensation policy may be a good fit. This type of policy sets your premium charges at the lowest possible rate that an insurance company can sell to a business.
Find workers' comp requirements in your state
Do non-W-2 workers qualify as employees?
As a sole proprietor, you might not have full-time W-2 employees, but it doesn't mean your state won’t view part-time employees, freelancers, or other non-W-2 workers, as employees.
Even if your sole proprietorship is a limited liability company (LLC), your LLC could still be in financial jeopardy if your state’s department of labor determines a contractor should have workers’ compensation insurance.
If the worker in question singularly provides services to you and not the general public as well, there’s a possibility they could be legally considered your employee.
If your non-W-2 employee is legally classified as an employee, you could face hefty fines for worker misclassification, depending on the type of violation.
To mitigate the risk of these penalties, sole proprietors should:
- Meet with an attorney before hiring any contractors to determine if the workers they’re hiring are indeed contractors.
- Check their state's laws to determine if workers' comp obligations require the worker to be classified as an employee.
How much does sole proprietor workers' compensation insurance cost?
Sole proprietors pay an average of $45 per month for workers' comp coverage.
The cost of business insurance depends on:
- Number of employees
- Business revenue
- Types of business insurance purchased
- Policy limits and deductibles
What other types of business insurance should sole proprietors carry?
In addition to a workers' compensation insurance policy, sole proprietors may also need the following types of insurance coverage:
General liability insurance
A client injury at your workplace or accidental property damage could result in an expensive lawsuit. If you operate your business out of your home, it’s unlikely your renter’s or homeowner’s insurance would cover these accidents.
General liability insurance gives you financial protection from such third-party claims.
Commercial auto insurance
Every state requires commercial auto insurance for vehicles that are registered to a business, or the ability to compensate someone in case of an auto accident. In the event of an accident, a commercial auto policy would cover legal bills, medical expenses, and property damage.
For sole proprietors, your personal auto insurance policy might not cover you when you drive your own vehicle for business use. If you drive your personal vehicle for work, you should consider hired and non-owned auto insurance (HNOA) to make sure you're protected.
Errors and omissions insurance
Errors and omissions insurance (E&O), also known as professional liability insurance, can offset the cost of a lawsuit if a dissatisfied client sues you over your work. Those who offer professional advice and services buy this coverage in case a client accuses them of making a mistake, missing a deadline, or failing to deliver on a contract.
Get workers' comp for sole proprietors with TechInsurance
TechInsurance helps small business owners get free quotes for insurance and a certificate of insurance quickly. Start an application today to find the right policy at the most affordable price for your business.
You can also speak with a licensed insurance agent to help you find the best coverage for your unique risks.
