Self-Employed Workers Compensation in 2023 - Do You Need It?
When you work for yourself, getting injured on the job can be financially devastating without workers compensation coverage. Rules vary by state on whether self-employed individuals like sole proprietors, partners, and independent contractors must carry workers comp insurance. Understanding coverage options in 2023 can help you make smart decisions to protect yourself.
Workers Comp Basics
Workers compensation provides benefits like:
Medical treatment costs
Partial wage replacement if you can’t work
Vocational rehabilitation
Permanent disability awards
It covers injuries, illnesses, or deaths occurring in the course of employment. Premiums are paid by employers, not employees.
Employer-Provided Coverage
The only way most employees are covered by workers comp is through policies paid for by their employer. You’re not responsible for premiums as an employee of a company.
But when you work for yourself, you must handle your own coverage. Rules vary whether it's legally required or optional.
Sole Proprietor and Partner Coverage
In most states, sole proprietors and partners in a partnership are exempt from mandatory workers compensation. Since they own the business, they can opt out of coverage for themselves.
However, they still must cover any W-2 employees under workers comp. Only the owners can exempt themselves.
Purchasing a policy to cover yourself is optional but recommended for sole proprietors in risky professions like construction. Rates are fairly affordable when obtained through an individual plan versus under a commercial policy.
Single-Member LLC Coverage
Rules for single-member LLC owners mirror sole proprietors. Most states do not require workers comp coverage for the LLC member owner.
But coverage is still advisable based on the risk level of your line of work. Low-risk writers or consultants may skip it, whereas risky roles like electricians warrant protection.
As with sole proprietors, if your LLC has any employees, you must cover them.
Multiple Member LLC Coverage
For LLCs with multiple members, workers comp rules get murkier. In some states, each member can exempt themselves from coverage.
But other states make elective coverage mandatory for LLCs with multiple members, treating it more like a partnership or corporation.
Check your state laws to see if multi-member LLCs mandate owners carry workers comp. States like California and New York require it. If uncovered, members risk being unable to seek damages.
For LLCs with employees, members must still purchase insurance for workers regardless of their own exemption status. Never skip employee coverage.
Independent Contractor Coverage
True independent contractors operating under their own business entity are responsible for securing their own coverage if desired, either under a workers compensation policy or disability insurance.
Some independent contractors skip coverage relying on health insurance. But workers comp covers lost income from an inability to work, unlike health insurance.
Purchasing even elective policies is wise for independent contractors in occupations prone to injuries like tradespeople. Shop individual plans marketed to independents.
Partnership Coverage
As with sole proprietors, partners are typically exempt from compulsory workers compensation for themselves by default in most states. However, they must still cover employees of the partnership under a policy.
For partners engaged in hazardous occupations like manufacturing or construction, voluntary coverage just for themselves is recommended for protection in case of an accident or occupational illness. Rates are reasonable on individual plans.
State-Specific Laws
A few states like California, New York, New Jersey require workers compensation for business owners, including partners and LLC members. Other states make it voluntary.
Check with your state workers compensation board to confirm the exact statutes for your entity structure and occupation. Don't operate on assumptions.
Purchasing coverage even if technically exempt is smart depending on your risk level. Injuries bankrupt many self-employed individuals who skipped coverage.
Occupational Risk Levels
The general rule of thumb is the greater your injury risk, the more essential protection is.
High-risk occupations like construction, manufacturing, plumbing absolutely warrant workers compensation coverage or disability insurance for owners.
Low-risk professions like consulting or writing may be comfortable self-insuring and paying medical expenses as incurred.
Know the safety record of your field before opting out of coverage. Don't take unnecessary gambles.
Pricing Factors
Premium costs for self-employed coverage are based on:
Your occupation's risk class code
Your annual income
Claim history
Higher risk occupations and income levels raise rates. Fortunately pricing is still generally affordable, especially with a clean history.
Benefits of Coverage
Benefits of voluntarily purchasing workers compensation as a self-employed individual include:
Protection if injured and unable to work
Avoiding high medical bills if hospitalized
Peace of mind and financial security
Keeping your health insurance just for regular expenses
Eligibility for permanent disability awards
For most solo entrepreneurs, the costs justify the protection against financial ruin. Your income relies solely on your own efforts.
Shopping for Coverage
Look for workers compensation policies marketed to self-employed individuals and small entities when shopping. Many carriers offer this class of insurance.
Search for options at independent insurance agencies as well who can compare multiple carriers. An agent provides guidance on appropriate coverage levels.
Conclusion
Rules vary on whether self-employed proprietors must carry workers compensation. Most states exempt sole proprietors and partners, with variable laws for LLCs. But purchasing voluntary coverage is wise depending on your occupational hazards. Protect yourself and your business by understanding the regulations in your state. Don't leave yourself exposed financially in case an accident does occur. Being properly insured provides peace of mind.