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Workers' compensation insurance for self-employed people: Here's what to know

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September 20, 2022

This story originally appeared on Simply Business and was produced and distributed in partnership with Stacker Studio.

Workers' compensation insurance for self-employed people: Here's what to know

For many employees who work for other people, the only person you have to think about providing insurance for is yourself and your family. Many small businesses and larger companies will also have various insurance options for their employees. But for the self-employed, things are a bit more complicated.

Self-employed workers work only for themselves, and they work directly with clients. Slightly more than 6% of workers in the U.S. were self-employed in 2020, according to the latest data from the Organisation for Economic Co-operation and Development, an intergovernmental organization created to increase economic growth and world trade. For those who are self-employed, many of them own businesses that employ others, from small law offices to construction companies. Employing even a few other people for these entrepreneurs or professional practices typically comes with the requirement to carry workers' compensation.

Workers' compensation is a form of insurance that provides benefits—including medical expenses, lost wages, and rehabilitation—to people who become injured or disabled while on the job. The rules for workers' compensation vary by state, and often by industry. There are different rules for different types of workers each self-employed person hires.

Simply Business compiled a list of what self-employed people should know about workers' compensation using government data and regulations as well as internet research. It's important to note that workers' comp requirements vary widely depending on where you live. Continue reading for the most important highlights to learn more. 

Two contractors work on a construction site
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Worker's comp rules vary by state

While carrying workers' compensation for your small business is often a good idea, whether you're actually required to do so as a business owner depends on where you live. Some states base whether you need to have workers' compensation on the size of your business. For example, in Alabama, businesses with five or more employees need to have workers' compensation.

But within those rules, there may be exceptions based on types of business. Taking a closer look at the Alabama workers' compensation law, it requires that even businesses smaller than five people have workers' compensation, if the business is involved in construction. So make sure to check specific regulations in your state before determining what kind of coverage you'll need.

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High-risk workers' compensation insurance is required for certain industries

Since the purpose of workers' compensation is to mitigate risk, not all industries are created alike when it comes to the rules for who has to carry it. Jobs that involve sitting at a desk, for example, are inherently less risky than those that require operating heavy machinery, such as a forklift or backhoe. Varying across states, many specific workers compensation guidelines are built to address these risks.

Florida is one such state. For businesses operating in Florida, workers' comp is required for anyone working in the construction industry. The industry is defined broadly to take into account all sorts of activity that carries risk—including homebuilding, excavating, clearing, and repair work.

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Rates are based on the type of job

Rates for workers' compensation are also determined largely by the riskiness and type of work performed. To standardize this, and make it fair for employers and insurers alike, the National Council on Compensation Insurance has created a rate table that shows how to calculate workers comp rates. The rate table has more than 600 job classifications. These take into account not only how potentially dangerous the work undertaken has the potential to be, but also how expensive medical treatment and rehab would be, as well as how long a worker's recovery might take. The complexity of determining these calculations may be one reason there are so many potential classifications.

Female physiotherapist examining a man's injured arm.
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Most health insurance policies don't cover work-related injuries

Why is workers' compensation necessary, given that individuals are now required to purchase health insurance? Most health care is structured for individual insurance to cover injuries sustained off the clock, and workers' comp to cover those acquired while working.

One benefit for employees is that workers' comp helps cover a portion of their wages even when they're sick or injured. One of the primary functions of workers' compensation is to provide what would otherwise be lost wages—which benefits employers too, as insurance will cover these lost wages.

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Independent contractors are not covered unless they obtain a plan for themselves

One major caveat to workers' compensation laws comes with regards to those who are not employees, leaving many wondering: Do independent contractors need workers' comp? If a business employs independent contractors rather than employees, they will likely not be required to purchase workers' comp for independent contractors. However, businesses will want to make sure they are complying with the rules for classifying independent contractors, as compared to employees.

If a court finds that a business has mistakenly classified an employee as an independent contractor, they may be found liable for any injury that worker sustains on the job. Employers will want to thoroughly acquaint themselves with the rules that make the distinction between independent contractors and employees, as penalties for misclassifying workers can be stiff.

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