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PROTECT YOUR BUSINESS|WORKERS' COMP

Workers Comp Insurance for LLCs and Sole Proprietorships: Important Info You Need Now

6-minute read

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Susan Hamilton

Susan Hamilton

23 February 2022

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As a business owner, you turned your expertise into an enterprise. And you went one step further by establishing a formal business structure for your new company.

Whether you’re a Limited Liability Company (LLC) or a sole proprietorship, it’s time to think about workers compensation insurance.

You’ve likely heard of workers comp, but maybe you’re unclear about workers compensation requirements. Now that your business is up and running, you need to determine if you need this type of insurance. If you have employees, there’s a good chance you do.

We’re here to walk you through the insurance requirements for LLCs and sole proprietors and help you determine if you need workers compensation insurance.

Let’s get started.

Workers Compensation Insurance — What Is It?

Workers compensation is insurance that covers an employee’s medical expenses and other losses in the event of a work-related injury. Most businesses with employees are required by law to carry workers compensation insurance. Despite its name, workers comp benefits employees and business owners:

  • For employees, workers comp provides financial assistance for medical expenses and lost wages due to injury or illness on the job.
  • For business owners, workers comp minimizes the risk of lawsuits and helps protect employers against workers compensation claims.

Here’s how workers comp insurance works:

  1. You, the business owner, pay the policy premiums.
  2. If an injury, illness, or other medical issue happens to an employee while working for you, that employee files a workers compensation claim.
  3. The employee files the workers comp claim against your workers comp policy — not you.
  4. The insurance company that holds your policy works with the employee to come up with a settlement for their claim.

Your employee can recoup their financial losses, and you’re able to continue running your business without the distraction of a messy lawsuit.

Workers Compensation Insurance: How to Know if You Need it for Your LLC

As the owner of an LLC, you may be required by law to carry workers compensation insurance once you hire your first employee.

There are different state laws for workers compensation insurance, so you need to know your state’s rules, regulations, and requirements. If your LLC operates in more than one state, you will need to comply with each state's particular laws.

One piece of advice: You should consider workers comp for your LLC even if you haven’t reached your state’s requirements.

For example, your LLC may employ two employees in a state that doesn’t require workers comp for companies with fewer than three employees. So you may put off getting coverage, and that could be a big mistake.

It takes only one employee to have an incident, which happens all the time. The U.S. Bureau of Labor Statistics has estimated that there were 2.7 million employee workplace injuries and illnesses in 2020 alone.

If one of your two employees has an accident, that could result in medical expenses or legal fees high enough to put your business at risk.

The bottom line: If your company has one or more employees, you should consider investing in workers compensation insurance to protect your business.

What happens if you don’t get workers comp for your LLC?

If your business requires workers comp insurance and doesn’t carry it, you could get hit with an expensive noncompliance fee — or in some states face jail time!

It’s not just only about doing the right thing legally. Having workers comp coverage shows you care about your business and the people who help keep it running every day.

Workers Compensation Insurance: Do I Need It if I’m a Sole Proprietor?

The name “sole proprietor” may lead you to believe that you’re operating your business on your own, but that’s not always the case. At some point, you may gain a partner, employ part-time help, or do business with a contractor. There’s no limit to the number of people you can hire as a sole proprietor.

A sole proprietorship with no employees is not typically required to purchase workers compensation insurance. However, the laws are different in every state, so you should know your state’s requirements.

While you may not need to purchase workers comp insurance for yourself, you will likely need coverage if you employ one or more workers, even if they are part-time or seasonal employees. Sole proprietor workers comp is based on payroll, so part-time versus full-time employment generally doesn’t matter.

What about independent contractors?

Independent contractors are typically responsible for securing their own workers compensation insurance. They also are responsible for ensuring that their subcontractors are covered.

Since workers compensation is mandated at the state level, the rules vary, making it difficult to determine an individual’s role in your business. As a sole proprietor, it’s critical that you understand the difference between an employee and a contractor before you get WC insurance.

Here are some general differences between an employee and an independent contractor:

Here are some general differences between an employee and an independent contractor:

Employee:

  • Performs services directed by you
  • Your business provides training
  • The relationship can be terminated at any time
  • Requires that you provide them a W-2 tax form

Contractor:

  • Performs services however they see fit to complete the project
  • Provides their own equipment, tools, supplies, etc.
  • Can be discharged only for failure to meet contract obligations
  • Requires that you rpovide them a 1099-NEC tax form

Misclassifying employees as independent contractors can be a costly mistake, so be sure to do the necessary research or contact a knowledgeable professional to determine if you need workers comp insurance for contractors.

Even if you’re not required by law to purchase sole proprietor workers comp for employees or contractors, you still may need a policy.

Here’s why.

Some businesses that you work with may require you to purchase workers comp insurance. If you’re a sole proprietor who works in a field where work-related injuries are common, you may need to provide proof of workers comp insurance coverage.

Let’s say you’re a sole proprietor who owns a handyman business with a couple of employees. If one of them gets injured on the job, your workers compensation insurance can help cover the cost of medical bills and lost wages while they recover. In some cases, a health insurance provider might deny claims like these if they are work-related.

A work-related accident can happen at any time, even if you don’t work in a high-risk environment. You can rest easy knowing that your business is covered with workers compensation insurance.

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How to Find Workers Comp Insurance for Your Business

Now that you know the importance of workers compensation insurance, it’s time to get the best coverage for your LLC or sole proprietorship.

We’re here to help you meet your state’s requirements and keep your employees protected.

At Simply Business, our licensed agents can help you find workers compensation insurance customized to the specific needs of your business.

You may think your small business isn’t at risk for workplace accidents, but slips and falls are common occurrences. You never know when you may need a workers compensation insurance policy to kick in.

Let’s say one of your part-time employees falls off a ladder while working for you. They need to go to the emergency room to be treated for a broken hand. The employee is treated and sent home, but they’ll need to miss four weeks of work while recovering.

In this situation, your workers compensation will pay your employee's medical bills, including any rehabilitation expenses. Your policy also could cover the employee’s lost wages (up to any statutory limits).

Carrying workers compensation insurance can provide much-need security, as having this coverage in place usually prevents an employee from suing your business.

There’s always a chance that a workplace injury or illness could lead to an employee’s death. If this unfortunate event were to occur, your policy could pay out death benefits to your employee’s loved ones.

Workers comp can cover:

  • Medical payments
  • Lost wages
  • Rehabilitation expenses
  • Death benefits

It does not cover:

  • Client or vendor accidents
  • OSHA fines
  • Work safety improvements
  • Wages for a worker who replaces the injured employee

Wondering how much workers comp coverage you’ll need? The laws regarding coverage requirements vary by state, so check out our state-based insurance hub for more information.

Following the law is important, but it isn’t the only reason to get workers compensation for your LLC or sole proprietorship.

Having the policy also can:

  • Protect your business’s finances in the event a claim is filed
  • Prevent your business from being wiped out by a catastrophic claim
  • Potentially pay for legal fees if you need to defend yourself against a lawsuit
  • Build trust with your employees
  • Give employees a sense of security that they’ll be taken care of should the worst were to happen
  • And more

When it comes to finding the best insurance, you’ll want a knowledgeable partner who will take the time to understand your needs and find the right policy for your business.

Ready to talk today?

Give us a call at 855-930-2844. You’ll be connected with a licensed insurance agent who can answer all your workers comp insurance questions.

Protecting Your LLC or Sole Proprietorship

You’ve set your company on a smart path. Don’t let a workers comp claim derail your efforts. Without workers comp insurance coverage, the expenses associated with even one claim could cause irreparable harm to your small business.

Look at it this way. Workers compensation insurance is about much more than compliance and meeting your state’s requirements. It’s a wise investment that protects your business and employees.

Susan Hamilton

Written by

Susan Hamilton

I've always loved to write and have been lucky enough to make a career out of it. After many years in the corporate advertising world, I'm now a freelance writer—running my own show and contributing to Simply Business. Fun fact: I have three desks in my house, but I still do my best thinking walking in the woods.

Susan writes on a number of topics such as workplace safety, customer sales, and workers' compensation insurance.

This content is for general, informational purposes only and is not intended to provide legal, tax, accounting, or financial advice. Please obtain expert advice from industry specific professionals who may better understand your business’s needs. Read our full disclaimer

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