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Do I Need Workers’ Compensation Insurance If I’m Self-Employed?

Reuben Dourte

Account Executive at Ruhl Insurance
Reuben Dourte is an account executive at Ruhl Insurance in Manheim, PA where he specializes in farm and agribusiness insurance risks. He received his Accredited Advisor in Insurance designation in 2015.

Workers’ compensation insurance: the three words that give many employers a sudden anxiety attack. There are plenty of things to worry about beyond just the costly nature of this mandatory insurance coverage, including compliance, audits, independent contractors, claims management, safety committees, and the list goes on.

The question arises, what about those business owners who chose to go it alone, those solopreneurs of the world? Do workers’ compensation statutes affect them? Are they governed by the same insurance requirements and regulations as other business owners who employ a workforce?

The right answer is to always check with your state and local laws, and consult an attorney specializing in workers’ compensation. But, for sake of discussion, there are a few preliminary things to keep on your radar and help initiate the conversation.

Coverage availability for sole proprietors

Whether a sole proprietor must carry workers’ compensation insurance or even whether such insurance is available to them is specific to the workers’ compensation laws set forth in each individual state. Bear in mind that some states, like Pennsylvania, have recently made workers’ compensation coverage available to individuals who own and operate his or her own business.

However, this doesn’t mean that private insurance companies will offer a policy to sole proprietors who employ zero workers. Some companies may require the business to have at least one employee on payroll in order for a workers’ compensation policy to be written for that particular business. If they will write the policy, the business owner can elect to be covered and have their wages included in payroll audits by simply NOT excluding themselves from coverage.

Insurance buyer beware, some states will have minimum payrolls they attribute to sole proprietors or LLC/corporation owners, meaning that a payroll audit will be calculated based on the greater of your actual payroll or the state’s minimum payroll amount for sole proprietors. For sole proprietors who wish to be covered by workers’ compensation, but who have no employees, sometimes the State Worker’s Insurance Fund is the only place to find coverage. Be warned, this is usually the most expensive place to buy.



Opting out of workers’ compensation

As state rating bureaus begin stricter enforcement of workers’ compensation statues, (as we have seen in recent years), it will likely become more important for sole proprietors, who do not wish to carry workers’ compensation on themselves, to file exemption forms with their state. These forms are verification that you are indeed a sole proprietor, independently in business for yourself. This helps to establish that your relationship with those who hire you for work is that of an independent contractor.

Auditors inspecting the books of a general contractor who hired you for a job could require them to establish that, as an independent contractor/sole proprietor, you have indeed excluded yourself from workers’ compensation insurance. If this cannot be established, they could potentially include the payment you have received for your work performed as payroll within the general contractor’s workers’ compensation audit. This will not be a pleasant conversation to have with the GC and could prevent you from winning future jobs with that company.

Imagine a situation in which a sole proprietor logging contractor has been injured cutting wood which would be sold at a saw mill. Since no workers’ compensation policy was in place, and no exclusion was filed by the sole proprietor, the workers’ compensation benefits from the saw mill’s policy may have to be applied to the sole proprietor. Depending on the laws of the state which you are operating in, the compensatory nature of workers’ compensation statutes can cause benefits to be provided in situations like this that seem unlikely, and even unfair at times.

For this reason, many insurance companies will elect not to insure businesses who utilize sole proprietors who do not carry workers’ compensation policies; making it harder to win jobs and contract bids if you do not have the appropriate coverage. As a sole proprietor, you should also be able to establish that you are in business for yourself. Among a laundry list of other criteria, one necessary way of establishing yourself as a bona-fide independent contractor is providing a certificate of general liability.

The case for comp

In addition to avoiding compliance issues or audit pitfalls for general contractors, workers’ compensation for sole proprietors does provide some pretty significant benefits. For starters, if you are a sole proprietor, you are taking on a significant financial risk for the opportunity to be your own boss and hopefully realize financial reward above and beyond what may be possible through conventional employment. This means that your livelihood is directly connected to your physical and mental abilities. 

Unlike health insurance, workers’ compensation provides wage loss benefits. The duration and amount of these benefits vary by state and by the amount of payroll you have claimed for yourself. In some states, you may collect wage losses in cases of permanent disability for nearly 10 years. In some states, you may also replace up to two thirds of your wages through this tax exempt compensation.

Workers’ compensation insurance can also provide medical payments for treatments associated with your workplace injury for the rest of your life. This means if you lose a limb, or need physical therapy for your entire lifetime, workers’ compensation will pay for this; and it does it without a co-pay or high health insurance deductible. Protecting your income stream, while also protecting yourself against the onerous costs associated with medical procedures, is a wise way to increase the stability of your business and your family’s future. As a sole proprietor, you are betting on yourself, having a stop gap in place to counter an unforeseen and unfortunate situation is a prudent action.


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Conclusion

No one enjoys insurance premiums, and workers’ compensation can often times be the most costly portion of your insurance portfolio. One of the benefits of being a sole proprietor is that you may be able to avoid this coverage mandate.

However, for the reasons discussed above, it is imperative that you discuss the correct exclusion processes to correctly exempt yourself in your state. Likewise, depending on the structure of your business, the debt load you carry, your overall financial viability or liquidity of assets, you may want to consider electing to carry this coverage for yourself as a sole proprietor. It may be the best and most affordable way to continue and preserve your hard earned business after you are injured in a workplace accident.

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