Workers compensation insurance helps businesses provide benefits like medical care and replacement wages to workers injured on the job. Businesses are required by law to purchase workers compensation insurance in every state except Texas. Costs vary widely, ranging from less than $100 to thousands a year per employee, based on risk factors.
We’ll share workers compensation insurance costs, coverage, state requirements and suggestions on how to buy it.
How Workers Compensation Insurance Works
Workers compensation insurance is paid for by the employer, not the employee and covers an employee’s medical expenses and lost income if he or she is injured on the job. It’s designed as no-fault insurance limiting your risk of workplace lawsuits, fines or penalties while providing employees with the support they need to recover, such as surgery, rehabilitation, medications or disability pay.
The four types of employee benefits that workers compensation insurance always covers are medical costs, lost wages, disability and death benefits, as shown below. In addition, most policies include what’s called employer’s liability coverage to protect you and your business assets from fines and lawsuits as well.
In the rare case of a work-related death, it provides benefits to the workers family. Should a family sue, it can often help cover your legal fees.
Companies that have one or more employees are generally required to purchase workers compensation coverage. There are many exceptions, however, which we outline in our state map below. Nonetheless, it is a best practice to carry workers compensation insurance even if your state law does not mandate it. The employer’s liability alone makes it worthwhile.
Specific rules and coverages vary by state. In fact, some states provide workers compensation to businesses. In other states, it can be purchased like any other business insurance.
States also determine the exact rates you pay. Those rates are based on a dollar amount per $100 of payroll. For example, if you have office workers, your workers compensation costs will likely be less than $1 in workers comp for every $100 they earn.
Workers Compensation Requirements Vary by State
In most states, you are required by law to purchase workers compensation insurance for employees. However, some states require coverage for business owner and partners while other states don’t. In addition, some only mandate coverage once you reach a certain number of employees, such a three or five. Still others require workers compensation for specific industries, such as construction. We’ve provided a state map for you to view what the basic requirements are in states where you employ workers.
For workers comp coverage, we recommend reaching out to The Hartford. For more than 30 years, they have assisted small business owners in finding the right policy to fit their coverage needs. In addition, they provide nurse case managers to help get your employees back to work and save you money. Get your insurance quote for free with no obligation.
Who Workers Compensation Is Right For
Workers compensation is best for all businesses as part of their risk management strategy. Without workers compensation, employees would likely sue you for injuries sustained on the job. You may also be required to pay their lost wages and medical expenses. Failing to provide workers compensation when it’s required by your state may result in fines or jail time for you.
Here are the businesses that need workers compensation insurance:
- Businesses in most U.S. states: If your business employs workers in a state that mandates workers compensation for all employers — like Arizona — which requires it even of sole proprietors who hire family members, then you’ll need to comply with state law.
- High-risk industries: If your business is in a high-risk industry like construction, you’ll need workers compensation to protect your business from lawsuits, submit bids on subcontracts and reduce the cost of employee injuries. For example, a business in Mississippi isn’t required to have workers comp if it has four or fewer employees. However, even if not required, you should have it if you’re in a business where injuries are common.
- Subcontractors: Most clients will require you to show that you’ve got workers comp coverage on your employees. That’s because they’ll often be held liable for any worker injuries among your employees working on their job site if they don’t.
- Any business that wants to reduce risk: Any business that wants to keep its risks and employer costs under control should invest in workers compensation once they hire their first employee. Similar to other business insurance, it protects your business assets by reducing your risk of business lawsuits. In some states, a worker could sue you personally if he or she is injured in your business when you’re not adequately insured.
In general, like all business insurance, workers compensation insurance protects your assets. It significantly reduces or eliminates the likelihood of a lawsuit through what’s known as exclusive remedy. It ensures workers job-related injuries or illnesses are covered, saving them from having to prove fault in order to receive benefits. If you want to see just how expensive it can get, take a look at this injury cost calculator from the Occupational Safety and Health Administration (OSHA).
Workers Compensation Insurance Cost
The cost of workers comp insurance varies widely depending on your industry and location. It can run from less than $100 per year to thousands of dollars per year per employee based on several factors. For example, if you hire workers in jobs where work-related injuries are more likely to occur or in a location where insurance premiums are higher, you’ll often pay more.
“Insurance underwriters look at medical expenses and time lost from work as it compares to the industry you’re in. It’s not unusual for a larger construction company to have a few claims a year. That’s expected. But, excessive claims may increase your rates over time.
In essence, she adds, workers comp rates are based on several factors, including the job classification code, your business’ workers comp claims experience and your total payroll.”
— Kyla Davenport, Small Commercial, The Hartford
On top of that, you may pay commissions to your provider that can range from a few percentage points to double digits.
How Workers Compensation Is Calculated
According to The Hartford, the premium a business will pay can be determined with a simple formula that considers the job type, the business’ claims history and their total payroll. In fact, workers compensation is always quoted as a rate per $100 of payroll.
Classification Code Rate x Experience Modification Rate x Payroll (per $100)
Below, we describe how the first three of these pricing factors work.
A classification code is used to determine the level of risk for different types of jobs. There are hundreds of codes managed by the National Council on Compensation Insurance (NCCI). For example, workers in a bar are classified as code 0984. Workers in a beauty parlor are in class code 9586 and workers in a lawn maintenance service are classified with a code of 9102. Here is an alphabetical list of workers compensation classification codes you can refer to.
Codes are updated every five years. Each classification code is then assigned a class code rate by the state. For example, the same class of job, such as 8810 for clerical office, might be charged a higher workers compensation classification code rate in California than in Utah.
Classification Code Rate Examples
To give you a better idea of how much workers compensation insurance costs for a typical business, we analyzed rates across specific industries. The chart below shows standard workers comp rates in Florida for 2018:
Examples of Workers Compensation Costs by Job
(per $100 of payroll)
(Employee earning $40,000/year)
Data Source: Floridawc.com
Using Florida’s rates as an example, an accounting firm would pay $44 per year for workers compensation insurance per staffer. On the other hand, the cost to cover a plumber, landscaper or roofer runs in the thousands. Plumbers get eye injuries, landscapers use power tools and, sometimes, roofers fall off of roofs. Those increased risk factors are why a roofer’s rates may be more than $8,000 per year per employee.
Now, let’s take a look at how that rate, which varies by state, can be modified.
Experience Modification Rate
An experience modification rate (EMR) is a multiplier that starts at 1.0 and is applied to determine whether an employer should pay more or less based on the number and types of workers comp claims they’ve had. You’ll recall from grade school that if you multiply a number by one, it doesn’t change the value. So a rate of 1.0 means no modification.
New businesses start with an EMR of 1.0. After about three years of claims history, a business with fewer than average workers comp claims might be assigned an EMR below zero, for example, .095. When multiplied by the classification code rate, this lower value will reduce the employers’ costs for workers compensation. In other words, employers with good safety records are rewarded with lower rates.
After you’ve been in business for more than three years, your workers comp rates will go up or down annually depending on your claims history, just like they would for any other kind of insurance.
“A good experience modification rate is something all businesses want to strive for. It is a direct reflection of their dedication to ensuring a safe work environment for their employees.
If a business meets the criteria and has a clean loss history, an experience modification rate less than 1.00 will earn them a credit on their policy, which helps reduce their premium.
Conversely, if they have poor claims history, it can earn them a debit modification that will increase their premium. A rating over 1.00 is considered a debit modification rate.”
— Jim Davidson, Sales Manager, AP Intego Insurance Group, LLC
Workers compensation rates are then applied based on your total payroll. Since you don’t know what your total annual payroll will be at the start of each year, you’ll have to estimate. That payroll estimate will be used to calculate your workers compensation premium.
Then, at policy year-end, the insurance company may conduct what’s called a workers compensation audit. If they find that your total annual payroll was higher than estimated, you’ll be expected to the pay the difference in premiums as a lump sum at year-end.
State Workers Compensation Rules
As if different rates weren’t complicated enough, each state has different rules. For example, most businesses in Texas aren’t required to buy workers compensation insurance. However, California requires workers compensation insurance for all employees, even those employed in another state who work temporarily in California.
Some states may require that you provide insurance for yourself as a business owner, your 1099 contract employees or subcontractors and your company partners. Furthermore, other states require that all employees are covered from day one. Others mandate workers comp only when your business has a threshold number of workers, such as one, three or five.
On top of that, states provide exemptions to these rules like not requiring workers comp for part-time babysitters (Alaska), seasonal laborers (Maine) or family members (Idaho) as examples. In some cases, it depends on how much the worker earns or what your total payroll is.
For more about workers comp laws in your particular state, refer to our map above, check this state-by-state guide from the National Federation of Independent Business (NFIB), and/or do an internet search for workers compensation or the department of insurance in your state.
Workers Compensation Requirements Vary by Industry
In addition to workers compensation costs being unique to each industry, 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, regardless of whether their employee counts are below the required limit. Even in Texas, government contractors are required to provide workers compensation to their employees.
What Workers Compensation Insurance Doesn’t Cover
Workers compensation 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 traveling 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 driving through a fast food restaurant on their lunch break, this probably would not be covered, unless the injury happened during the course of doing business, such as heading to a client meeting or making a quick stop between service calls in the company vehicle.
Workers compensation generally doesn’t cover:
- Psychological issues or stress
- Self-inflicted injuries or accidents due to employee roughhousing
- Injuries while employees are commuting to or from work
- Injuries that happen while an employee is committing a crime or when an employee is in violation of company policies
- Drug or alcohol-related incidents
For more on what’s covered and not covered by workers comp insurance, The Hartford has a helpful guide.
Workers Compensation Systems & Providers
In most states, you can purchase workers compensation insurance on the private market, just like any other type of business or commercial insurance policy. In a few states, however, you need to buy it exclusively through the state workers compensation fund. Many accounting and payroll software vendors are also able to set up workers compensation insurance for you through their business partners.
Here are seven different ways to obtain or purchase workers compensation insurance.
We often recommend buying workers compensation insurance through whoever does your payroll. This way, you know your coverage is up to date, and the premiums can be set up on auto pay from your business bank accounts. In addition, payroll software has state rules built into their database. They’ll take out the correct taxes, and apply the correct workers comp rates.
Payroll software is best if you’re just starting out and want to provide your employees with a smooth payroll system that provides workers compensation as well as legally-compliant payroll services.
We recommend Gusto as a great option for not just payroll, but also for workers compensation insurance as it serves as an insurance broker in many states. Gusto is quick to set up and easy to use. It provides employee onboarding, employee self-service and direct deposit, and you can add employee benefits as well.
If you’re managing your business with payroll software like QuickBooks, you can often add on services like workers compensation for an upcharge. If you use a bookkeeper, you can ask him or her if workers compensation is something obtainable through the accounting software he or she uses on your behalf.
Private Insurance Carrier
A business or commercial insurance provider can offer workers compensation. This is best if you need to buy other insurance such as commercial general liability and/or BOP, and you want all your business insurance policies in one place.
Due to package discounts, excellent claim services and reduced workers comp costs, we recommend The Hartford as a one-stop business insurance carrier that can provide you with pay-as-you-go workers comp coverage for your business.
Commercial insurance brokers work with multiple carriers to find you the best rates. For example, they may offer one carrier for your errors and omissions (E&O) insurance, another for your BOP and still another for your workers comp so that your overall insurance expenses are lowered. They often provide more personal service to answer your questions as your business grows, and all your billing is in one place.
For a commercial insurance broker who can offer competitive business insurance and workers compensation quotes, we recommend AP Intego. For example, it can quote The Hartford alongside other workers compensation carriers to find you the best rates overall.
Professional Employer Organization
A professional employer organization (PEO) is best if your EMR isn’t great and your existing premiums are too high. That’s because instead of being quoted based on your claims history, you’ll have the benefit of your employees being pooled with others. That results in a group rate that’s often lower than what your business might qualify for on its own.
We recommend talking to a PEO broker like The Huldisch Group or working with a payroll expert like ADP that now offers a PEO option, ADP Total Source. A PEO takes much of the administrative burden off your shoulders and can ensure your business is compliant with federal, state and local labor laws.
If you’re on a budget, purchasing workers compensation insurance through a state-run fund may be a good option because their rates tend to be more affordable. However, it can be a hassle because you have to do all the paperwork and set up payments yourself.
In some states, unless you’ve purchased multistate insurance, the state-fund is the only option. In those states, it’s referred to as a monopolistic fund. You can see which states require you to purchase workers compensation solely through their state fund in the state map above.
In other cases, the state fund is the only one that will write high-risk businesses or insure companies that have many claims. In that case, the state fund might manage what’s referred to as an assigned risk pool.
Other states have no state fund, requiring you to work through one of the providers above, such as a commercial insurance broker or payroll provider.
The rules for providing self-insurance vary by state. Some allow it while others don’t. In general, they require the business to meet specific financial requirements or have a bond and hire an administrator. They also need you to demonstrate a commitment to loss control and conduct a feasibility study. Safety National provides additional information in their Steps to Self Insurance.
Workers Compensation Payment Options
Depending on your industry, workers compensation can be expensive. The good news is that you can pay workers compensation premiums in multiple ways. For example, you could estimate your payroll, and pay your premium at the start of the year. Paying up front could net you a discount.
You could also pay each payroll based on the exact amount due, which is often referred to as pay as you go. Additionally, you could make a down payment at the start of the year, and then pay monthly or quarterly using a payment plan.
When paying annually, you can pay the entire premium up front. Many carriers will offer a discount for doing so. You could also stretch out your payments over a timeframe, such as monthly or quarterly based on your annual payroll estimate and the carrier’s payment options.
The downside to either payment method is that you have to estimate what your premium will be. Then, at year end, you have to reconcile the difference and may need to come up with a large lump sum payment to fund the difference.
“Workers compensation billing has often been a pain point for the small business owner. The policy premium is derived from a company’s annual payroll. A traditional policy requires a business owner to estimate their annual payroll in advance and the carrier bills them based on this amount.
The problem is that many small business owners have no idea what their annual payroll will be, especially if they are a new venture. The carrier also typically requires a large down payment, usually 25 percent or more of the estimated annual premium to start the policy.
They will conduct an annual audit each year to determine the actual amount of payroll they ended up running. These audits are time-consuming and can result in the insured owing additional premium that they were not prepared to pay.”
Pay as You Go
Pay as you go is a newer alternative that can improve your cash flow and eliminate year-end surprise expenses. You tie your workers comp payments to your actual payroll cycle and payroll amounts. Only the amount due each pay period is deducted. Some, but not all, workers compensation providers can offer this option as it requires some integration with your payroll software and bank accounts.
“The pay as you go billing option is a great cash management tool for a business. Rather than being billed based on an estimate of their payroll, their premiums are calculated and collected each pay period based on the actual wages they run. There is no down payment or deposit required to initiate their policy which frees up cash flow that can be used elsewhere in the business.
This superior billing method minimizes the risk of an insured owing additional premium from an audit since their premiums are being calculated and paid each time they process payroll. When you compare pay as you go to a traditional direct bill option, it is a no-brainer which way to go.”
The Hartford provides this infographic to illustrate the difference.
How to Lower Workers Compensation Expenses
There are several ways to lower your workers compensation expense. One is to shop around for workers compensation policies offered by some of the various providers described above. Another is to put solid workplace safety practices in place.
Here is a guide from the National Safety Council on how to build safety into your organization. You can also read our workplace safety tips. Safety programs not only reduce workers comp costs but can reduce overall business costs and improving morale!
Alternatives to Providing Workers Compensation
Other than moving your business to Texas where workers comp is not required for most employers or hiring only family members in states that exempt family members, there are few alternatives to providing workers comp. It’s required in most states.
However, here are two alternatives you might consider.
Hire Your Employees Through a Staffing Firm or Temporary Agency
If your business is small, and you only need one or two team members, you might consider hiring them through a staffing agency. In that case, you’re not technically their employer, the staffing agency is.
However, a staffing agency may charge you a rate up to 30 percent higher than you would have paid that worker if you hired them outright and had to pay workers compensation. What you save in payroll headaches, you’ll pay for in a monthly invoice.
Hire Subcontractors, Not Employees
This may be a risky option, but if the work you need to be done can be done by an independent contractor and meets the IRS standard for a contractor instead of an employee, you may be able to avoid workers comp in some states. However, there are states that require you to provide (or ensure the contractor has) workers comp insurance. So, check your state’s rules.
For more on hiring contractors vs. employees, please read our article clarifying the rules. Here’s advice from Chas Rampenthal, General Counsel at LegalZoom:
“The mistake I see most often with small business owners is misclassification of employees as independent consultants or contractors, vs. employees. Then, not allowing those contract employees to work for other companies, giving them equipment to use, tracking their time or controlling their work. I advise business owners to err on the side of hiring an employee, instead.”
— Chas Rampenthal, General Counsel, LegalZoom
Frequently Asked Questions (FAQs)
Here are questions you may have about workers compensation insurance.
Can a Business Purchase Workers Comp If They Have No Employees?
It depends. Some states like Colorado and Arizona allow sole proprietors and independent contractors with no employees to obtain workers comp. In other states like Indiana, they’re not allowed to be included in coverage.
Are 1099 Freelancers Covered by Workers Compensation?
Independent contractors may be covered in some states such as Connecticut, Georgia, Louisiana and Maine. In other states, they may be required to buy their own coverage.
What Happens If I Don’t Provide Workers Compensation Insurance for My Employees?
Some states have stiff fines. For example, in New Jersey, you could be fined $10,000 or sent to jail. In California, fines can reach six figures. Additionally, your employee could sue not just your business, but you personally in order to cover lost wages and medical expenses. Don’t risk it.
What If My Business Is in One State, but My Workers Travel to Other States for Work?
Five states have specific requirements for out of state workers. So, even if your employees are employed in Texas, they’ll need workers compensation insurance if they work in states like Nevada or New Jersey. Each state is different. Some, like Wisconsin, not only require you to have workers comp insurance but also require that the insurance is provided by a carrier licensed in Wisconsin. If your workers work outside their home state, you’ll want to be sure their workers comp coverage is valid across state lines.
What If the Only Employees Working in My Business Are My Family Members?
Idaho, Illinois and Michigan are states that allow some family members like ones who live in your home to be exempt. However, workers compensation insurance is still a good idea. For example, what if your brother-in-law burns himself in the kitchen and can’t work for two months? Who will pay his mortgage and feed his kids?
Alternatively, what if your daughter is in a serious car accident while delivering products to a customer. Auto insurance may not cover the full amount of a work-related auto accident. Workers compensation would cover the difference. In any case, check your state insurance website for state and local workers compensation insurance requirements for state and industry.
What If I Feel My Workers Have Been Incorrectly Classified?
You’ll need to pay attention to how your insurance agent classifies your employees. Some may classify them incorrectly. If so, let them know as soon as possible. In addition, the NCCI can help by providing the correct codes. Many insurance carriers will catch incorrectly classified workers when they do their annual audit.
My Employees Have Health Insurance, so Why Do They Need Workers Compensation Insurance?
If you read the fine print in health insurance coverage, it does not cover work-related injuries. The same is true of personal auto insurance. You won’t want those employees handing you an urgent care bill when they break their ankle falling off a scaffold. Health insurance won’t cover their lost wages either, but workers compensation will.
The Bottom Line
The vast majority of businesses are required by law to buy workers compensation 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 and more. Not only can they find you a great rate, but they’ll also handle all the busy work of managing your workers comp policies.