Workers’ Compensation Insurance Basics: What Small Businesses Need (2025)

I processed auto claims but workers’ comp was down the hall. Those adjusters had stories. Guy who fell off a ladder and was out six months. Woman who got carpal tunnel from repetitive work. Delivery driver in a car accident. Employee who slipped on ice in the parking lot.

All covered by workers’ comp. All would have been devastating lawsuits against the employer without it.

Workers’ compensation is one of those things that’s mandatory in most states if you have employees. Not optional. You have to have it. But even if it weren’t mandatory it would make sense because the alternative is getting sued every time someone gets hurt at work.

What workers’ comp covers

Medical expenses for work-related injuries and illnesses. Doctor visits, hospital stays, surgery, physical therapy, prescriptions. Whatever the employee needs to recover from a workplace injury.

Lost wages while they can’t work. Usually a percentage of their regular pay—often 60-70%—while they’re recovering.

Disability benefits if injury results in permanent impairment. Partial disability insurance, total disability, different calculations depending on severity.

Death benefits for families if employee dies from work-related incident.

Rehabilitation and retraining if employee can’t return to previous job.

In exchange for these benefits, employees generally can’t sue their employer for workplace injuries. That’s the trade-off. Workers get guaranteed benefits without having to prove fault. Employers get protection from lawsuits.

Who needs it

Almost every state requires workers’ comp if you have employees. The threshold varies—some states require it with just one employee, others kick in at 3-5 employees. Texas is weird and makes it optional but most employers have it anyway.

Sole proprietors and partnerships can often exclude themselves from coverage. But if you have W-2 employees, you almost certainly need workers’ comp.

Penalties for not having required coverage are serious. Fines, criminal charges in some states, and if someone gets hurt you’re personally liable for all their expenses plus they CAN sue you.

What it costs

Premiums are based on payroll and risk classification. Higher-risk jobs cost more. Office workers might be $0.20 per $100 of payroll. Roofers might be $15-20 per $100 of payroll. Massive difference.

Example: $100,000 in payroll for office workers at $0.25 rate = $250/year. Same payroll for construction at $10 rate = $10,000/year.

Your claims history affects rates too. More claims = higher premiums. Called “experience modification” or “mod rate.”

How claims work

Employee gets hurt at work. They report it to you immediately (this part is important—delays cause problems). You report to your insurance company. Insurance handles the claim—medical treatment, wage replacement, everything.

Employee doesn’t choose their own doctor in most states. Insurance directs them to approved providers. This is different from regular health insurance.

Claims stay on your record and affect future premiums. Another reason workplace safety matters—fewer injuries means lower insurance costs long term.

Common mistakes

Misclassifying employees as independent contractors to avoid workers’ comp. This is illegal and if someone gets hurt you’re screwed. Audits catch this stuff.

Not reporting claims promptly. Delays look suspicious and can result in denied claims.

Not having return-to-work programs. Getting injured employees back to light duty work faster reduces claim costs and helps everyone.

Ignoring workplace safety. Prevention is cheaper than claims. Basic stuff—training, equipment maintenance, addressing hazards.

Where to get it

Private insurance companies. State-run funds in some states. Some states have monopolistic funds where you MUST buy from the state.

Can often bundle with other business insurance. Shop around—rates vary significantly between carriers for the same coverage.

Liability is being suspiciously quiet which usually means she’s up to something—but the bottom line on workers’ comp is you probably have to have it, it protects both your employees and your business, and the cost depends heavily on what kind of work your people do. Don’t skip it. Don’t misclassify people to avoid it. The consequences aren’t worth it.