Workers' compensation insurance for small businesses: who needs it and what it costs

Workers' compensation insurance pays for an employee's medical care and part of their lost wages after a work-related injury or illness. In exchange, employers who carry it are generally protected from being sued by the injured employee. Nearly every state requires it once you hire, though thresholds vary: California and New York require it with one employee, North Carolina and Georgia with three, Florida (outside construction) and South Carolina with four. Texas mostly doesn't require it at all.

By the Fast Insurance Group editorial teamPublished by Marcus L. Barber, former licensed Maryland property and casualty producer (2010–2012)Reviewed by Marcus L. Barber on October 17, 2026Updated October 17, 2026

This guide is general education, not advice for your situation. We're an independent publisher, not an insurer or agent, and we may earn a commission from partner links. How we make money.

What workers' comp pays

California's workers' comp division lists these core benefits, and the U.S. Department of Labor describes similar ones:

• Medical treatment for the work injury or illness.
• Wage replacement while the employee can't work, and for permanent disability.
• Vocational rehabilitation or job displacement benefits.
• Death benefits for dependents.

It's a no-fault system: the employee doesn't have to prove you did anything wrong. The tradeoff, which California describes, is that employers who carry coverage generally can't be sued by employees for work injuries. Injuries to customers and other outsiders are covered by general liability instead.

Who must carry it, by state

Texas employers who skip coverage, called non-subscribers, still have duties: they must file an Employer Notice of No Coverage (DWC Form-005) each year between February 1 and April 30, post notices at work and tell new employees in writing. For other states, the Department of Labor keeps a directory of state workers' comp agencies.

Owners and independent contractors

Owners are often treated differently from employees. North Carolina doesn't automatically count sole proprietors, partners or LLC members as employees but lets them elect coverage. Florida counts corporate officers and LLC members but lets them file for an exemption. If you're a one-person business, see business insurance for an LLC.

Be careful calling workers "independent contractors" to avoid coverage. The Department of Labor calls misclassification a serious problem that strips workers of protections they're owed, and state agencies look at how the work is actually done, not just the label.

Penalties for going without

• North Carolina: civil penalties of $1 per employee per day (at least $20 and up to $100 a day). Willfully failing to carry coverage is a Class H felony.
• California: a penalty of at least $1,500 per uncovered employee (or twice the unpaid premium, if greater) and a stop order shutting down the business; violating the stop order can bring up to $10,000 more and misdemeanor charges.
• New York: penalties as high as $2,000 for every 10 days without coverage, plus possible stop-work orders.

You may also be personally responsible for the injured employee's medical bills and lost wages.

How premiums are calculated

NCCI, the rating organization in many states, explains the basic formula:

1. Each job is assigned a classification code with its own rate.
2. The rate is multiplied by every $100 of payroll in that class. NCCI's example: $70,000 of clerical payroll ÷ 100 × $0.75 = $525.
3. An experience modifier adjusts the total: above 1.00 (a debit) if your claims are worse than similar businesses, below 1.00 (a credit) if better.

You pay an estimated premium up front, and an audit after the year sets the final amount based on actual payroll. Rates also vary a lot by state; see our cost guide for a state comparison.

Where to buy it

• Private insurers, through an agent or directly, in most states.
• A competitive state fund in some states, such as California's State Fund, which competes with private insurers and is available to all employers there.
• A monopolistic state fund in North Dakota, Ohio, Washington and Wyoming, where private workers' comp isn't sold.
• The residual (assigned risk) market if you're turned down. In Tennessee, for example, you qualify after being rejected by two or more unaffiliated insurers.

Many insurers sell workers' comp alongside a business owner's policy, though it isn't included in one.