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Workers’ Compensation for Independent Contractors

Kimberlee Leonard
Kimberlee Leonard

Independent contractors have unique considerations to keep in mind when it comes to workers' compensation insurance.

Workers’ compensation is a type of business insurance that pays for the medical costs and lost wages of workers who have been injured or who have become sick on the job. In most cases, independent contractors are not employees, but they may want to get this type of coverage to protect their savings and income in the event they get hurt or sick while working. 

While most states require employers to have workers’ compensation insurance for their employees, this coverage is optional for independent contractors.

Do independent contractors need workers’ comp?

 Although independent contractors are usually not legally required to have workers’ compensation insurance, they could choose this coverage if they are subcontractors. In some cases, independent contractors may be required to obtain a policy to satisfy the requirements of a contract.

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Workers’ compensation is managed by states according to individual state laws. Some states may require a company or general contractor to provide workers’ compensation to independent contractors. In these cases, the independent contractor does not need to obtain their own policy – at least not for that job. In situations in which states don’t require independent contractors to have workers’ compensation insurance, a contract can mandate that the awarding contractor or business can demand to see proof of insurance before the contractor starts work. In these cases, the independent contractor has to obtain a policy and show the hiring firm a certificate of insurance. The certificate of insurance is provided by the insurance carrier and lists the amount of coverage and the effective date of the policy.

Why should independent contractors have workers’ compensation?

Even if a contractor isn’t required to have workers’ comp, they still may need the coverage and protection. Anyone can get hurt on the job, so every independent contractor should consider getting an insurance policy.

Consider this example: John is an independent contractor who installs computer hardware. He is at a client’s workplace, and he trips over his toolbox. He falls, breaking his wrist. Because he can’t use both hands, John is unable to work for the next six to eight weeks while his wrist heals. He must not only pay his medical bills for the broken wrist but also absorb the lack of income while he is unable to work. Workers’ compensation would alleviate this problem.

Notably, health insurance often does not suffice in these situations. If you are injured while working, your health insurance provider has the right to deny the claim and put the responsibility on the business. This means that the independent contractor can be held liable for thousands of dollars in medical bills not covered by health insurance. Moreover, because most independent contractors are sole proprietors, if an independent contractor is unable to work while injured, they lose income. So expenses go up, but income goes down.

For these reasons, every independent contractor should consider getting a workers’ compensation policy. [Looking for a workers’ comp provider? See our picks for the best business liability insurance providers.]

Bottom Line

Even though most states don’t require independent contractors to have workers’ compensation insurance, it’s still a good idea to have it.

Workers’ comp: Independent contractors vs. employees

For the purposes of workers’ compensation, employers need to make sure they properly classify workers as independent contractors or employees. Here are some indications that someone is an employee, according to the Internal Revenue Service (IRS):

  • They are given work instructions, such as where and when to work, what tools to use and where to purchase supplies.
  • They get a high level of detailed instructions for completing tasks.
  • Evaluation systems measure how work is done, not just the end result.
  • The worker is trained with ongoing procedures and methods instruction.
  • The employer is invested in the equipment the worker uses.
  • Expenses are reimbursed.
  • They receive guaranteed regular wages, potentially supplemented with commission.
  • The relationship continues indefinitely rather than for a specific project or time period.
  • They provide key business activities.

If a worker meets the definition of an employee, a business is required to obtain workers’ compensation insurance for them. It doesn’t matter how little they are getting paid or whether they are a full-time or part-time worker.

Workers’ comp: Dealing with subcontractors

If you are an independent contractor who subcontracts work to others, you’ll want to see if you need workers’ compensation insurance for them. In some states, general contractors are required to carry a workers’ comp policy for subcontractors to ensure that everyone has adequate coverage.

Even if you aren’t required to maintain coverage for subcontractors, you’ll want to protect yourself by ensuring they have a policy for themselves. Just as you could be asked to provide a certificate of insurance, you can request one from each subcontractor you use.

Workers’ comp: Hiring occasional or part-time employees

Sometimes, independent contractors may hire employees. For example, the business may need part-time or seasonal help or may be expanding and need more regular help. If you hire employees, you are likely required to obtain workers’ compensation insurance prior to their first shift. This isn’t true in every state, so make sure to check state laws. For example, Georgia requires workers’ comp insurance to be purchased if you have three or more employees. This means that, in Georgia, you can have two support staff and not carry the insurance.

Workers’ comp: Dealing with volunteers

As a general rule, volunteers doing charitable work are not considered employees. However, this rule typically applies to nonprofit organizations, so if you are a for-profit business, volunteers may be considered employees if they meet the definition and thus may be deemed eligible for workers’ compensation benefits.

In New York, for example, volunteers for for-profit businesses are considered employees and thus must have workers’ compensation provided. Remember that payment may not always be wages; it could mean, for example, room and board, or a trade in services. The same is true in Florida: If volunteers meet the definition of employees, they are entitled to workers’ compensation benefits, and you will need to have a workers’ comp policy in effect for them. It’s important to check your state’s definition of an employee to see how it pertains to workers’ comp requirements.

Image Credit: Drazen Zigic / Getty Images
Kimberlee Leonard
Kimberlee Leonard
Contributing Writer
Kimberlee has spent the past 20 years either directly involved in insurance and financial services or writing about it. She’s a former Series 7 and 65 license holder and former State Farm agency owner. As a small business insurance expert, her work can be found on Fit Small Business and Thimble.