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Business Insurance Guide

Updated: May 1, 2026Written byRai AntonioReviewed byDavid Krug
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Workers' compensation insurance explained

How workers' comp works, who needs it, and what it costs.

Workers’ compensation pays medical bills and lost wages when an employee is injured on the job. It’s the oldest form of business insurance and is required by law in nearly every state.

Who needs workers’ comp

In most states, you need workers’ comp the moment you have one employee — sometimes even an independent contractor in disguise. Specific thresholds:

  • California, New Jersey: 1 employee
  • Most states: 1-3 employees
  • Texas: technically optional, but most businesses carry it anyway
  • Sole proprietors with no employees: typically exempt, but optional

Misclassifying an employee as a contractor doesn’t avoid the requirement — if the state determines they were really an employee, you face fines plus potentially the full cost of any uncovered injury.

What it covers

  • Medical treatment for work-related injuries
  • Rehabilitation
  • Lost wages while recovering (typically 2/3 of normal pay)
  • Permanent disability benefits
  • Death benefits for fatal injuries

What workers’ comp protects YOU from

The “grand bargain” of workers’ comp: employees get guaranteed coverage without proving employer negligence; employers get immunity from negligence lawsuits by injured employees. Without workers’ comp, an employee injured on the job can sue you personally.

How premiums are calculated

Workers’ comp premiums are based on:

  1. Class code: industry risk classification (office workers are cheap; roofers are expensive)
  2. Payroll: rate per $100 of payroll
  3. Experience modifier (mod): your claim history vs. industry average
  4. State: rates vary significantly by state

Example: an office-based business with $500K payroll might pay $1,000-$2,500/year. A construction business with the same payroll might pay $15,000-$50,000/year.

How to lower workers’ comp costs

  • Safety programs: documented safety training, proper PPE, regular hazard inspections
  • Return-to-work programs: get injured employees back to modified duty quickly
  • Proper class codes: misclassification (a roofer coded as office worker) creates audit risk; correct classification often saves money
  • Claim management: handle reported injuries quickly, work with the carrier
  • Annual audits: report actual payroll accurately — overstatement costs you money

State funds vs. private carriers

Some states (Ohio, North Dakota, Washington, Wyoming) require workers’ comp through a state fund — no private market exists. In other states, you can shop private carriers including AmTrust, Travelers, The Hartford, Berkshire Hathaway Direct, biBERK.

Independent contractors

If you use independent contractors, they should carry their own workers’ comp (or workers’ comp waivers in states that allow). Verify before each project — if the IRS or state reclassifies your contractor as an employee, you can be liable for their injuries.