Small Business

Small Business Worker's Compensation Insurance

Updated on January 07, 2020


Updated January 7, 2020

Workers’ compensation insurance is one way that small business employers can help protect the people that work for them. Employers have a general legal obligation to provide a safe environment for their employees but accidents are still possible in any small business. Despite an employer’s best efforts, sometimes employees get hurt and that is where workers’ compensation insurance for small business comes into play. Workers’ compensation insurance for small businesses might also protect your business from bankruptcy if an employee were to get badly hurt on the job.

What is workers’ compensation insurance for small businesses?

To put it simply, workers’ compensation insurance is insurance you can buy to cover employment-related injuries and illnesses. For example, the restaurant employee who slips on the wet floor in the kitchen might file a “workers’ comp” claim to cover his or her medical bills.

The basic concept of workers’ compensation insurance is simple enough, but in practice, it can feel very complex. For example, workers’ compensation insurance is different from small business health insurance.

In the example of the restaurant server falling in the kitchen, the medical bills are usually paid by workers’ comp insurance, and not the health insurance company, but why? Workers’ compensation insurance is designed to cover qualified work-related accidents. That same server would turn in a claim to her health insurance company if she fell in her own kitchen at home and ran up medical bills.

Who mandates workers’ compensation insurance for small business?

State rules generally govern workers’ compensation insurance for small businesses, which is part of the reason it might be confusing for some people. In most areas, whether or not a small business must carry workers’ compensation insurance depends are a number of factors including the how many people it employs. A small business that is a sole proprietorship might be exempt from workers’ comp. As a sole proprietor, when you’re the only one at risk, you can generally expect your health insurance company to deal with your covered medical expenses.

How does workers’ compensation insurance define a small business?

You may be well versed on small business health insurance rules, but keep in mind that there are often different rules and regulations when it comes to workers’ compensation for small businesses.
A small business with more than five employees is likely to need workers’ compensation insurance in most states, and the number could be even lower in some areas. This classification is different from the rules governing small business health insurance, which require any company with 50 employees or more to create health insurance options.

Companies with even a few employees should budget for workers’ compensation insurance. It’s important to talk to a licensed insurance broker to find out workers’ compensation insurance requirements for small businesses in your state. According to the Insurance Journal, in the majority of states, a small business with even one employee must carry workers’ compensation insurance.

What injuries does workers’ compensation for small businesses cover?

Workers’ compensation for small businesses may cover any injury sustained in the workplace or in the course of employment. A delivery driver injured in an auto accident while on the clock may qualify for workers’ compensation. This insurance might also cover illnesses linked to employment as defined by the state. A good example of this is lung damage directly related to exposure to chemicals used on the job. Rules vary among states and industries. As the business owner, you might have to pay certain costs, such as a deductible.

Does workers’ compensation insurance for small businesses only pay medical bills?

Workers’ comp might cover other expenses, such as:

  • Replacement income
  • Cost for retraining
  • Living costs for permanent disabilities
  • Benefits for survivors in the event of an employee death

The downside is they may not pay the full amount. There are caps in place for most of these kinds of claims, and you might have to pay a deductible and/or other cost-sharing amounts. Workers’ compensation stops as soon as the injured party returns to work. On the plus side, payments from workers’ compensation for small businesses are generally tax-free.

Should every employee be covered by workers’ compensation insurance for small businesses?

In states where a business is required to carry workers’ compensation insurance, most employees should have that coverage, with a few exceptions. These exceptions may vary among states, but might include:

  • Independent contractors
  • Business owners
  • Volunteers
  • Employees of private homes
  • Farmers and their workers
  • Maritime employees
  • Railroad employees
  • Casual workers

A casual worker is someone not considered an employee such as a “temp”. The actual definition varies from state to state, though.

If you are a small business owner, find out what your responsibilities are when it comes to workers’ compensation insurance. Much like with small business health insurance, the rules and regulations might vary based on the specifics of your small business. This may include what kind of services or products you provide, and which state you operate out of.

This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.

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