Workers Compensation insurance for a Sole Proprietorship

Workers Compensation insurance covers medical costs and lost wages for work-related injuries and illnesses. Workers Compensation insurance is required in almost every state for businesses that have employees.


Every state has different laws regarding how Workers Compensation insurance works for a Sole Proprietorship. A sole proprietorship with no employees typically is not required to purchase workers compensation insurance In New Jersey. Depending on the type of business entity you have established, you as the owner may be able to opt out of Workers Compensation coverage; however if your company is a NJ corporation then you are considered an employee of the company and therefore must carry Workers Compensation.


All owners of a sole proprietorship should weigh the risk of not carrying workers compensation insurance before they decide to not carry this coverage. Since your health insurance provider might deny coverage for a work-related injury, having workers compensation could be essential. You need to check with your health insurance carrier to better understand what is and is not covered before you make the decision on whether or not to carry workers comp. coverage.


Keep in mind that even if you are self-employed, your clients may require you to have your own workers comp. coverage as a way to limit their own liability – further they may want you to verify that you have coverage by providing them with a certificate of insurance. Many businesses have faced workers comp. claims from independent contractors or even family members who were injured on the job. As a precaution, clients may require any sole proprietors they hire to carry their own coverage.


If you hire subcontractors, you may have to carry workers compensation insurance. Each state has its own workers’ comp. laws, and its own way of determining whether someone is truly a contractor or subcontractor. If you’re a sole proprietor or general contractor, your state might view a subcontractor as your employee and require you to have workers’ comp. for them. If one of your subcontractors is injured while working for you and the state determines that the worker really should have been categorized as an employee, it could result in fines and liability to your company. Generally, these penalties involve reimbursing the state workers uninsured employers fund, as well as a financial penalty consisting of a percentage of the total amount paid out of the fund for the employee. Even if your subcontractors have their own coverage, your state may still determine they are technically your employees. In this case, you’re responsible for covering them with workers compensation insurance.


As a sole proprietor, you may not have full time W-2 employees, but that does not mean that your state won’t view part-time employees or non-W-2 workers as employees.


Even if your sole proprietorship is a limited liability company (LLC), your LLC could still be in financial jeopardy if your state’s department of labor concludes that a contractor should have workers compensation benefits.


If the worker in question doesn’t offer the services they provide to you to the general public as well, there’s a possibility that they could be legally considered your employee.


If your non-W-2 employee is legally classified as your employee, you could face hefty fines for worker misclassification, depending on the type of violation.


To mitigate the risk of these penalties, sole proprietors should meet with an attorney before hiring any contractors to determine if the workers they’re hiring are indeed contractors and to check their state’s laws to determine if workers’ comp. obligations require the worker to be classified as an employee.


Your Workers’ Comp. premium is determined based on the following factors:

  • Payroll
  • Location
  • Number of Employees
  • Industry and Risk Factors
  • Coverage Limits
  • Claims History


As you can see from the brief outline above Workers Compensation insurance for sole proprietors can be tricky – this is why I strongly recommend all sole proprietors discuss these issues with an attorney prior to establishing your sole proprietorship business through your states Secretary of State; then find yourself an insurance broker/agent who has a strong background in this coverage to discuss coverage details and options.