Workers’ compensation insurance covers medical care and lost wages for employees injured on the job. Most states require it the moment you hire your first employee. No federal workers’ comp law exists for private employers. States regulate it individually, which is why the answer to “do I need it” depends entirely on where your business operates. I’ve helped set up coverage in states with a one-employee threshold and in states where you can’t buy a private policy at all. The variation catches a lot of first-time employers off guard.
What Workers’ Compensation Actually Covers
Workers’ compensation pays for medical treatment, a portion of lost wages, rehabilitation costs, and death benefits when an employee gets hurt or becomes ill because of their job. It operates on a no-fault basis. That means the employee doesn’t have to prove the employer did anything wrong to receive benefits.
What It Doesn’t Cover
Workers’ comp generally excludes injuries from intoxication, willful misconduct, or a self-inflicted injury. Some states also exclude horsing around or clear safety-rule violations. Ordinary carelessness on the job still qualifies for coverage, since the entire point of a no-fault system is that fault usually doesn’t matter.
Do You Need It? It Depends Entirely on Your State
Your state, your industry, and your employee count determine whether you must carry workers’ comp. No federal baseline exists to fall back on. Thresholds range from one employee in some states to four or more in others, and industries like construction often face stricter rules than general business.
Two States That Show How Different the Rules Get
Florida requires non-construction employers to carry coverage once they reach four employees. Construction businesses there need it starting at one employee, including the owner. Arizona takes a stricter approach across the board: any employer with one or more employees, full-time or part-time, must carry coverage, with no separate construction threshold at all. Check your own state’s labor or insurance department directly to confirm your specific threshold. It’s the same due diligence you’d apply when confirming your state employer registration as a first-time employer.
Texas Is the One Outlier
Texas is the only state where private employers can legally skip workers’ comp entirely. Coverage there is elective, not mandatory. The tradeoff is real: opting out forfeits the “exclusive remedy” protection that normally shields employers from direct injury lawsuits. An uninsured Texas employer can be sued directly and face uncapped damages if an employee gets hurt.
The Four States Where You Can’t Buy Private Insurance
North Dakota, Ohio, Washington, and Wyoming run monopolistic state funds. Employers in those states can’t purchase workers’ comp from a private insurer at all. They must buy through the state fund instead. Monopolistic state fund policies also skip standard employer’s liability coverage. Businesses there typically need a separate “stop gap” endorsement if they want that protection.
How Workers’ Comp Premiums Are Calculated
Workers’ comp premium follows a consistent formula across states: payroll divided by 100, multiplied by a class code rate, multiplied by an experience modification factor. The class code reflects how risky your type of work is. The experience factor reflects your specific claims history compared to similar businesses. Accurate payroll records are the foundation here, the same records you rely on when running payroll each pay period.
Class Codes Set Your Starting Rate
The National Council on Compensation Insurance, or NCCI, assigns four-digit class codes by occupation. The rate per $100 of payroll can differ enormously between codes. Most states use NCCI’s system. California, New York, New Jersey, Pennsylvania, and the four monopolistic states run their own independent rating bureaus instead.
The Experience Modification Factor Rewards Good Claims History
Every new business starts with an experience modification factor of 1.00, which is the industry average. A better-than-average claims history over the trailing three years drops that number below 1.00 and lowers the premium. A worse-than-average history pushes it above 1.00 and raises the premium accordingly.
Pay-As-You-Go vs. the Traditional Annual Audit
Traditional workers’ comp billing requires a large upfront deposit, often 25 to 33% of the estimated annual premium. Insurers calculate that deposit from a projected payroll figure, then reconcile it at a year-end audit. If actual payroll came in higher than estimated, you owe more. If it came in lower, you get a credit. Either way, the audit can produce an unpleasant surprise months after the fact.
Pay-as-you-go programs calculate premium each pay period directly from actual payroll, usually by connecting to your payroll system. This removes the large deposit and keeps the eventual audit much closer to a formality than a financial event. Clean, accurate payroll records make this kind of program work the way it should. Sloppy classification or misreported hours undermine it regardless of which billing method you use. That’s exactly what a solid payroll compliance checklist catches.
Do You Need Workers’ Comp for 1099 Contractors?
Generally, no. Workers’ compensation applies to employees, and a genuine independent contractor isn’t an employee. Most businesses don’t need to cover them. Two real risks sit underneath that general rule, though. First, misclassification: a business may later discover a worker it treated as a 1099 contractor actually qualifies as an employee, creating retroactive coverage and premium exposure. Second, the “statutory employer” concept in some states and industries, particularly construction, can hold a general contractor responsible for an uninsured subcontractor’s coverage. If you’re unsure where a specific worker lands, revisit how to classify W-2 employees vs. independent contractors before you assume anyone is automatically exempt from coverage.
Common Exemptions: Owners, LLC Members, and Sole Proprietors
Most states let certain business owners exclude themselves from their own workers’ comp policy. This includes sole proprietors, partners, and LLC members above a minimum ownership threshold. The specifics vary by state and sometimes by industry. Florida, for example, applies different exemption rules to construction owners than to non-construction owners: construction owners generally must file for an exemption explicitly, since the default doesn’t exclude them automatically. This paperwork is easy to lose track of during a broader new employer setup, so track it separately from general onboarding tasks.
How FRIDAY Fits Into Workers’ Comp Compliance
FRIDAY doesn’t sell or administer workers’ compensation insurance, so this isn’t a feature pitch. Accurate payroll software gives you clean, exportable payroll and classification data. Insurers need those same numbers whether you’re on a traditional annual audit or a pay-as-you-go plan. Misclassified hours or inconsistent payroll records cause audit headaches regardless of which insurer or state fund you’re working with.
Frequently Asked Questions
How does workers’ comp work for small businesses?
A small business buys a policy priced on its payroll, industry class code, and claims history. It then reports actual payroll to the insurer, either through periodic pay-as-you-go reporting or an annual audit. When an employee gets hurt on the job, the business files the claim with its insurer, and the insurer pays the medical costs and a portion of lost wages directly.
Can a hernia be covered under workers’ comp?
Yes, if a work-related strain or injury genuinely caused it. Hernia claims tend to draw more scrutiny than acute injuries like a fall. Some states require specific documentation tying a sudden onset to a particular work incident, so check your state’s evidentiary requirements or ask your insurer directly.
How does a sole-owner LLC get workers’ comp?
In most states, a single-member LLC owner with no employees doesn’t need to carry workers’ comp on themselves. They can usually elect coverage voluntarily by filing the appropriate form with the state. This comes up often when a general contractor or client requires proof of coverage before hiring a one-person LLC as a subcontractor.
Is tendonitis covered by workers’ comp?
Yes, if you can link it to repetitive work duties. Cumulative trauma injuries like tendonitis are generally harder to prove than a single, identifiable workplace accident. An insurer will typically want documentation connecting the condition to specific job tasks performed over time.
Do I need workers’ comp for 1099 contractors?
Generally no, since workers’ comp covers employees and a properly classified independent contractor isn’t an employee. The exception is misclassification risk, along with statutory employer rules in some states and industries like construction that can make you responsible for an uninsured subcontractor’s coverage.
Disclaimer: This article is for general informational purposes only and does not constitute legal or insurance advice. Workers’ compensation requirements, exemptions, and penalties vary significantly by state and industry; consult a licensed insurance broker or your state’s workers’ compensation board for guidance specific to your business. State requirements and figures reflect information current as of June 29, 2026, and are subject to change.
Pincus Schiff is a payroll software specialist at Friday App, where he helps businesses simplify payroll, stay compliant, and automate their workflows. He writes about payroll best practices, compliance, and the latest in workforce technology.
