Workers' Compensation Insurance for Self-Employed People: Here's What to Know

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For many employees who work for other people, oftentimes the only people you have to think about providing insurance for is yourself and your family. Many small businesses and larger companies will also have various insurance options for their employees. But for the self-employed, things are usually a bit more complicated.

Self-employed workers work for themselves, and interact directly with clients. Slightly more than 6% of workers in the U.S. were self-employed in 2020, according to the latest data from the Organisation for Economic Co-operation and Development, an intergovernmental organization created to increase economic growth and world trade.

For those who are self-employed, many of them own businesses that employ others, from small law offices to construction companies. Employing even a few other people for these entrepreneurs or professional practices typically comes with the requirement to carry workers' compensation.

Workers' compensation is a form of insurance that can provide benefits—including medical expenses, lost wages, and rehabilitation—to people who become injured or disabled while on the job. The rules for workers' compensation vary by state, and often by industry. There are different rules for different types of workers each self-employed person hires.

Simply Business compiled a list of what self-employed people should know about workers' compensation using government data and regulations as well as internet research. It's important to note that workers' comp requirements vary widely depending on where you live. Continue reading for some of the most important highlights of workers’ comp to learn more.

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Workers’ comp rules vary by state

While carrying workers' compensation for your small business is often a good idea, whether you're actually required to do so as a business owner depends on where you live. Some states base whether you need to have workers' compensation on the size of your business. For example, in Alabama, businesses with five or more employees need to have workers' compensation.

But within those rules, there may be exceptions based on business type. Taking a closer look at the Alabama workers’ compensation law, it requires that business owners with fewer than five employees have workers' compensation, if the business is involved in construction. So make sure to check specific regulations in your state before determining what kind of coverage you may need.

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Workers’ compensation insurance is required for certain higher risk industries

Since the purpose of workers' compensation is to mitigate risk, the requirements for carrying it may differ depending on the riskiness of the industry a business is in. Jobs that involve sitting at a desk, for example, are inherently less risky than those that require operating heavy machinery, such as a forklift or backhoe. Varying across states, many workers compensation guidelines are built to address these risks.

Florida is one such state. For businesses operating in Florida, workers' comp is required for any business working in the construction industry. Construction is defined broadly to take into account all sorts of activity —including homebuilding, excavating, clearing, and repair work.

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Rates are based on the type of job

Rates for workers' compensation are also determined largely by the riskiness and type of work performed. To standardize this, and make it fair for employers and insurers alike, the National Council on Compensation Insurance has created the Scopes Manual.

The manual has hundreds of job classifications and provides information related to employee classification codes, including definitions and a list of employees who fall under a specific code. The manual can be purchased online from the NCCI website.

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Most health insurance policies don't cover work-related injuries

Why is workers' compensation necessary if an individual is covered by health insurance? Most health care is structured for individual insurance to cover injuries sustained off the clock, and workers' comp to cover those acquired while working.

One benefit for employees is that workers' comp helps cover a portion of their wages even when they're sick or injured on the job. This benefits employers too, as insurance will cover these lost wages.

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Independent contractors are not covered unless they obtain a plan for themselves

One major caveat to workers' compensation laws comes with regards to those who are not employees, leaving many wondering: Does your business need workers’ comp when hiring independent contractors?

If a business employs independent contractors rather than employees, they will likely not be required to purchase workers' comp. However, businesses will want to make sure they are complying with the rules for classifying independent contractors, as compared to employees.

If a court finds that a business has mistakenly classified an employee as an independent contractor, they may be found liable for any injury that worker sustains on the job. Employers will want to thoroughly acquaint themselves with the rules that make the distinction between independent contractors and employees, as penalties for misclassifying workers can be stiff.

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