Does a Small Business Owner Have to Have Workers' Comp Insurance?

Workers' compensation insurance is a type of coverage that is designed to protect both employers and employees when someone is injured on the job. While this type of insurance is carried by most businesses, some small businesses do not have to carry this coverage. Understanding the rules associated with workers' comp can help you avoid penalties or lawsuits.

State Laws

When it comes to requiring workers' compensation insurance for businesses, states have the power to make their own laws in this regard. The majority of states require most businesses to have a workers' compensation insurance policy for their employees. In fact, the only state that does not require this is Texas. If you have a business in Texas, you have the option to buy workers' compensation insurance, but you are not obligated to.

Small Businesses

State also determine the laws that govern what types of businesses have to carry workers' compensation insurance. Many small businesses can be exempted from being required to provide this type of insurance for their employees. If you are a sole proprietor, you will not have to carry this kind of insurance on yourself. Some states allow you to get out of providing coverage if you have below a certain number of employees. For example, if you have fewer than five employees, you may not have to purchase the insurance.


Although you may not be required to have workers' compensation insurance because of your state laws, it is generally a good idea to do so if you have any employees. If you have employees and one of them is injured on the job, he could sue you for medical bills, pain and suffering and lost wages. This could devastate your business and ruin any chances you had of being successful over the long-term. It can provide you with peace of mind as a business owner.

Other Exemptions

Besides businesses with few employees, some of the businesses can also be exempt from workers' compensation insurance coverage. For example, some real estate brokerages do not have to carry workers' compensation on the agents of the company. In some cases, states do not require farms to carry workers' compensation insurance on farm hands. Any other business that uses independent contractors instead of employees can also get out of paying for workers' compensation insurance on its workforce.