In most states, you are required by law to purchase workers compensation insurance that covers workplace injuries if you have employees. In this how-to guide, we’ll give the low-down on workers compensation insurance, including where to get it and how to manage coverage more easily.
Please note that this article providers general information only. If you have questions specific to workers comp coverage for your business, we recommend asking a business lawyer or insurance professional. Also, be sure to check out Gusto, our recommended payroll provider that also takes care of workers compensation insurance, health benefits, and much more. Try it free for 1 month.
What is Workers Compensation?
Workers compensation insurance covers an employee’s medical expenses and lost income if they are injured on the job. The other important piece of this insurance is that, if an employee receives workers comp wages while they are injured or ill from something that happened at work, they cannot later sue you for the incident or for negligence.
Companies that have 1 or more employees (outside of the owner(s)) are generally required to purchase workers compensation coverage. There are a few exceptions, which we outline below, but it is best practice to carry workers compensation insurance even if you do not have to.
How Much Does Workers Comp Insurance Cost?
The cost of workers comp insurance varies tremendously, depending on your industry and location. If you are in an industry where work-related injuries are more likely to occur or in a state/city where insurance premiums are higher, then you’ll pay more.
For example, for a tree trimmer, welder, or road construction worker, the cost could be $15 per $100 in payroll, or higher. On the other hand, the cost to cover a banker, architect, or attorney could be under $0.25 per $100 of their payroll. So, for an employee that earns $40,000 a year, a construction company may pay around $6000, whereas a white collar business may pay just $100.
Additionally, after you’ve been in business for a while, your workers comp rates will go up or down depending on your accident history, just like they would for any other kind of insurance.
According to Insureon, per $100 in employee wages, workers comp costs in the United States ranged from $0.75 in Texas to $2.74 in Alaska as of recent data.
Workers Compensation Insurance Cost Examples
To give you a better idea of how much workers compensation insurance might cost for your business, we analyzed rates for specific industries.
The chart below shows standard workers comp rates in Florida as of December 2016:
|Industry||Cost of Workers Comp (per $100 of payroll)||Annual Cost for Employee earning $40,000|
|Metal Fence Construction||$12.61||$5,043|
|Laundry & Dry Cleaning Store||$3.41||$1,365|
|Book or Record Store||$1.34||$536|
Where To Purchase Workers Comp Coverage
In most states, you can purchase workers comp insurance on the private market – just like any other type of insurance policy. In a few states, however, you need to buy it exclusively through the state government. This applies to North Dakota, Ohio, Washington, and Wyoming.
If you are not in one of those states or territories, then you can purchase workers compensation insurance through:
- Payroll software like Gusto
- Accounting software like Quickbooks Online
- Using a Professional Employer Organization (PEO) like JustWorks
- Using a local private insurance broker
- Using your state-run fund if you are in one of the following states: California, Colorado, Hawaii, Idaho, Kentucky, Louisiana, Maine, Maryland,
Minnesota, Missouri, Montana, New Mexico, New York, Oklahoma, Oregon, Pennsylvania,
Rhode Island, South Carolina, Texas, Utah, or West Virginia
We recommend buying workers compensation insurance through whoever does your payroll. This way you know coverage is always be up to date, and the premiums will be on auto pay from your business bank accounts.
If you’re on a budget, purchasing workers comp through a state-run fund may be a good option because rates tend to be more affordable.
Workers Compensation Insurance Exemptions
Most states require you to purchase workers compensation insurance as soon as you hire your first employee. The notable exception is Texas, where there is no requirement to buy coverage. (except for special circumstances, like construction companies working on government projects).
Additionally, some states exempt small businesses. If you operate in one of the states below and have fewer than the required number of employees or a lower annual gross payroll, you may be exempt from the workers comp requirement.
Workers Compensation State Law Exemptions
|2 or fewer employees||3 or fewer employees||4 or fewer employees||Under $20,000 gross annual payroll|
|Arkansas, New Mexico, North Carolina, Virginia, Wisconsin||Florida, South Carolina||Missouri, Tennessee||Kansas|
Bear in mind, however, that there are often requirements for specific industries even if you are exempt under the general rules. For example, construction companies may be required to provide workers comp insurance, even if their number of employees is below the threshold. Conversely, household employees (like nannies) are sometimes exempt, even in states where other types of businesses need to purchase coverage.
It’s a good idea to purchase workers compensation insurance regardless if you need to or not if you have employees. Why? Because on the job injuries can be extremely costly for your business without adequate coverage. If you want to see just how expensive it can get, take look at this injury cost calculator from the Occupational Safety and Health Administration (OSHA). That should motivate you to buy it!
For more about workers comp laws in your particular state, check this state-by-state guide from the NFIB.
What Exactly is Covered by Workers Compensation Insurance?
Workers comp insurance covers “work related” injuries of employees. This includes injuries that occur at your workplace, as well as those that occur elsewhere like on a client site or while travelling to a client site, provided the employee was doing something related to their job.
For example, a road accident in a company truck would likely be covered, as would an injury at a company party. On the other hand, if an employee was injured during their lunch break, this probably would not be covered – UNLESS the injury happens on company property or happens in the course of doing business (such as meeting a client for a lunch meeting).
For more on what’s covered by worker’s comp insurance, FindLaw has a helpful guide here.
The Bottom Line
The vast majority of businesses are required by law to buy workers comp insurance. Even those that are exempt, however, should seriously consider buying coverage. In the event of any injuries, it can protect you from a lawsuit and potentially devastating financial losses.
To find coverage and manage your payments, we recommend using Gusto, which also offers payroll software, health benefits, and more. Not only can they find you a great rate, but they’ll handle all the busywork of managing a policy. Click here for a free trial.