Workers’ compensation, or workers’ comp, is an insurance policy for employees. It pays for your workers’ medical costs if they get hurt while working for you. If you’re self-employed as a sole proprietor, getting paid through a form-1099 and not a W2, you probably don’t have workers’ comp. Although this is usually fine, sometimes sole proprietors need workers’ compensation. Does a sole proprietor need workers compensation is not a simple question, but we’ve prepared this guide to help you figure out the answer.
Does a Sole Proprietor Need Workers Compensation?
Legally, if you’re a sole proprietor and you don’t have anyone else working for you, you probably don’t need workers compensation. But if people do work for you, you might have to buy workers’ comp, as it’s often called. Even if you aren’t paying them with a W2 form, they are working part-time or as independent contractors.
Here’s an example of when you would need workers’ comp: You’re a plumber working on your own, but when you land a big job, your nephew, who’s training to be a plumber, works with you. If he gets hurt cleaning out a u-bend, you might have to pay his medical costs, which could be pretty high. Workers’ comp would be likely to cover that.
Or you’re a yoga teacher teaching a large class. Your friend is also a yoga teacher, and you ask her to teach with you so you can give individual attention to your students. You think she’s an independent contractor who’s working alongside you, not an employee who needs workers’ comp. But some states would see her as your employee and require you to have workers’ comp for her.
Every state has different guidelines, so get in touch with your state’s Workers’ Compensation Official to check what you need to do to comply with laws regarding workers comp for sole proprietors.
Do I Need Workers Compensation Insurance for Myself?
It might seem odd to buy workers compensation for yourself, but it can happen. Many companies will only hire you as an independent contractor if you have workers comp. This is because if you get hurt while doing a job for them, you could sue the company for your medical costs. Businesses know that the courts are likely to order them to pay, even though you’re an independent contractor – unless they buy workers’ comp for you, or you have sole proprietor workers’ compensation for yourself.
Most companies don’t want to buy workers comp for sole proprietors they hire to powerwash the floors or do a company photoshoot, but they also don’t want to have to pay your medical costs if you get hurt. It’s legal for a company to refuse to hire you as an independent contractor unless you have workers’ comp.
There are also benefits to buying workers’ comp for yourself. For example, if you get hurt at work and you have workers’ comp, you won’t need to use your personal health insurance to cover your medical costs. That can save you time arguing with your insurance company for reimbursement for every cost.
What is the Sole Proprietor Workers Comp Exemption?
In some states, you can get a sole proprietor workers’ compensation exemption. This is a declaration that you do not need workers’ comp because you don’t employ anybody. In California, for example, you can’t get your contractors’ license renewed unless you have proof of paying workers’ comp, or a valid sole proprietor workers comp waiver.
To get a workers’ comp exemption for sole proprietorship, you’ll have to complete the right form for your state, take it to be notarized and usually pay a small fee. Whatever the fee for the sole proprietor workers comp waiver, it’s still likely to be less than buying a sole proprietor workers compensation insurance policy.
The Insurance Policies a Sole Proprietor Should Have
While we’re talking about workers’ comp, there are other insurance policies that you really need. The most important is general liability insurance. This covers you in case someone other than you or an employee gets hurt or their property is damaged through your work. It’s also called slip and fall insurance, because it covers medical costs if someone slips and falls in your office. In most states, you can’t run a business without general liability insurance.
Sole proprietor insurance can also include:
- Commercial auto insurance, if you have a car or van for work
- Property insurance to protect your office
- Equipment insurance for expensive professional equipment
- Professional liability insurance to protect you in case your customers aren’t happy with your work or advice
You might not need every type of insurance for your business, so check out the different types of insurance for independent contractors and choose which ones you need.