Workers' Compensation Insurance for Small Business, Explained

Workers’ compensation insurance pays an employee’s medical bills and part of their lost wages after a work-related injury or illness, whoever was at fault. In almost every state, a business with employees is required to carry it.

The short version:

Each state sets its own rules on who must be covered. Check yours as soon as you hire.
It pays medical care, wage replacement, disability benefits, and death benefits.
In exchange, employees generally cannot sue the employer over the injury.
The premium is driven by payroll, the type of work, and your claims record.

This is general information, not insurance or legal advice. Requirements differ by state, so confirm yours with your state workers’ compensation agency or a licensed agent.

A construction worker silhouetted on scaffolding against a grey sky

Who has to carry it

Workers’ compensation is run by the states, not the federal government, and the rules differ:

Most states require coverage once you have one or more employees.
Some states set a threshold of several employees before it becomes mandatory, sometimes with different thresholds for construction.
Texas is the well-known exception: most private employers there may choose not to carry it, but they then lose important legal protections if an employee is hurt.
Four states, Ohio, North Dakota, Washington, and Wyoming, require employers to buy coverage from a state fund rather than a private insurer.

Owners, partners, and LLC members are often allowed to exclude themselves. Whether you should is a separate question, since your health insurance may not cover a work injury. In Florida this is done with a certificate of exemption, Tennessee keeps an exemption registry for construction owners, New York uses the CE-200 certificate for permits, and an owner-only policy that covers nobody is what the trade calls a ghost policy.

Not carrying required coverage can mean fines, stop-work orders, and personal liability for an injured worker’s costs. The federal Small Business Administration lists workers’ compensation among the insurance businesses with employees are required to have.

What it pays for

Medical care for the injury or illness, usually without a deductible for the employee.
Wage replacement for time off work, typically a set fraction of the worker’s pay, subject to state maximums.
Disability benefits, temporary or permanent, partial or total.
Rehabilitation and retraining in some states.
Death benefits to dependants, and funeral costs.

Most policies also include employer’s liability coverage, which protects the business if it is sued in connection with a workplace injury in ways the workers’ compensation system does not cover.

The trade-off behind it

Workers’ compensation is a no-fault system. The employee does not have to prove the employer did anything wrong, and gets benefits quickly. In return, workers’ compensation is usually the employee’s exclusive remedy: they generally cannot sue the employer for the injury. Exceptions exist, such as intentional harm, and an employee can still sue a third party who caused the injury.

What it does not cover

Injuries outside the course of employment, including the ordinary commute in most cases.
Injuries caused by intoxication or deliberate self-harm.
Independent contractors, who are not employees. See the warning below.

How the premium is calculated

The basic formula is the same nearly everywhere:

Premium = (payroll ÷ 100) × class rate × experience modifier

Payroll. The more you pay in wages, the more you pay in premium.
Class code. Each type of work has a rate reflecting how risky it is. Clerical work has a low rate; roofing has a high one.
Experience modifier. Once a business is large enough to be rated, its own claims history adjusts the premium up or down. A modifier below 1.0 means fewer claims than expected.

Try it with your own numbers in the workers’ comp cost calculator. The premium you pay at the start is an estimate. After the policy year the insurer audits your actual payroll and settles the difference.

What it costs by state

Workers’ comp rates are set state by state, so the same payroll can cost more than four times as much in one state as in another. The best public comparison is a study Oregon’s Department of Consumer and Business Services publishes every two years. It prices the same mix of jobs in every state, using rates in effect on January 1, 2024, and reports an index per $100 of payroll (Oregon DCBS).

The national median in the 2024 study was $1.09 per $100 of payroll. Hawaii had the most expensive rates and North Dakota the least expensive.

How to read it: the index is not your rate. It is weighted toward Oregon’s 50 largest job classes, so a roofing company and an accounting firm in the same state will pay very different amounts. Use it to see whether your state is expensive or cheap overall, then get quotes for your own class codes. To turn your payroll into a first estimate, use the workers’ comp cost calculator, which uses the same rates.

Ranked from most to least expensive:

Rank	State	Index rate per $100 of payroll	Compared with the median
1	Hawaii	$2.52	231%
2	New Jersey	$2.16	198%
3	New York	$1.98	182%
4	California	$1.86	170%
5	Vermont	$1.60	147%
6	Connecticut	$1.48	135%
7	Wisconsin	$1.42	130%
8	Wyoming	$1.41	130%
9	Louisiana	$1.41	129%
10	Rhode Island	$1.38	127%
11	Maine	$1.37	125%
12	Washington	$1.35	123%
13	Illinois	$1.34	123%
14	Montana	$1.34	122%
15	Oklahoma	$1.33	122%
16	Missouri	$1.31	120%
17	Minnesota	$1.25	114%
18	New Hampshire	$1.22	112%
19	Iowa	$1.21	110%
20	Alaska	$1.16	106%
21	Pennsylvania	$1.14	105%
22	South Dakota	$1.13	103%
23	Nebraska	$1.12	103%
24	Alabama	$1.11	101%
25	Idaho	$1.10	101%
26	Georgia	$1.09	100%
27	New Mexico	$1.05	96%
28	Colorado	$1.05	96%
29	South Carolina	$1.03	94%
30	Florida	$1.00	92%
31	Massachusetts	$0.97	89%
32	Delaware	$0.97	89%
33	North Carolina	$0.95	87%
34	Mississippi	$0.94	86%
35	Kansas	$0.91	83%
36	Michigan	$0.90	82%
37	Maryland	$0.89	82%
38	Oregon	$0.89	82%
39	Tennessee	$0.80	73%
40	Texas	$0.78	72%
41	Kentucky	$0.76	70%
42	Nevada	$0.73	67%
43	District of Columbia	$0.73	67%
44	Virginia	$0.73	67%
45	Indiana	$0.71	65%
46	Arizona	$0.70	64%
47	Ohio	$0.68	63%
48	Utah	$0.63	57%
49	West Virginia	$0.54	49%
50	Arkansas	$0.53	48%
51	North Dakota	$0.50	45%

Four states, North Dakota, Ohio, Washington, and Wyoming, run monopolistic state funds: you buy workers’ comp from the state fund, not a private insurer (Insureon). If you are in one of them, start with that state’s workers’ compensation agency.

Mistakes that raise the cost

Misclassifying employees. Putting office staff under a field classification means overpaying. Putting field staff under an office code means a bill at audit.
Calling employees contractors. If a state decides your “contractors” are really employees, you can owe back premiums and penalties. The IRS and each state apply their own tests.
Hiring uninsured subcontractors. In many states you can be charged premium for a subcontractor who has no coverage of their own. Collect certificates of insurance, the same way general contractors check their subcontractors’ liability cover.
Underestimating payroll. It only delays the bill until the audit.
No safety programme or return-to-work plan. Both reduce claims, and claims drive the experience modifier.

Ways to keep it affordable

Classify every employee correctly, and separate payroll by job where your state allows it.
Run a written safety programme and document training.
Bring injured employees back on light duty when a doctor approves. Shorter claims cost less.
Report injuries promptly. Late reporting makes claims more expensive.
Ask about pay-as-you-go billing, which bases premium on actual payroll each pay period.
Have a broker compare carriers, and check whether your state has a fund of last resort if you cannot get private cover.

Frequently asked questions

Do I need workers’ comp if I have only one employee?

In most states, yes. A few set a higher threshold. Check your state’s rule.

Does it cover the business owner?

Owners and officers can often choose to be included or excluded. The options depend on the state and on how the business is organised.

Are independent contractors covered?

No, but be careful. If a worker is treated as a contractor and is really an employee under state law, you may be liable for their injury and for unpaid premium. Our guide to workers’ comp for independent contractors explains the state tests and the audit.

Can an injured employee sue the business?

Usually not. Workers’ compensation is generally the exclusive remedy against the employer, with narrow exceptions.

What happens if I do not carry required coverage?

Penalties vary by state and can include fines, an order to stop work, and personal liability for the employee’s medical costs and lost wages.

Where to go from here

Check your state’s requirement first, then get quotes with accurate payroll and job descriptions. For how this fits with your other policies, read our guide to LLC insurance cost or see all the business insurance guides. Arhox is an independent publication, not an insurer or broker; our editorial policy and disclaimer explain how these guides are prepared.