Workers' compensation: Why it's important for small businesses

Electrician and apprentice repairing a circuit breaker from an industrial panel.

Writing a business plan, choosing a business location, financing your business, obtaining a tax identification number, business licenses and permits seems like a long list and a lot of work. Even after all those requirements are completed, there is still one very important element missing—Workers' Compensation insurance. Not only is Workers' Compensation insurance required in most states, it's also important to help protect both you and your employees from the unexpected.

After some extensive research on Workers' Compensation, we stumbled upon an article that answers most of the "what," "why," "when," even the "how much" questions. If you have a small business or plan to start your own business, check out the information below from the National Federation of Independent Business to help:

What is Workers' Compensation?

Workers' Compensation is a form of insurance that covers the medical and rehabilitation costs of your employees if they're injured on the job typically. (It also may cover some lost wages.) Typically, having insurance that covers these costs means employees give up their right to sue your business for negligence—and in turn, they get peace of mind knowing they can recover for work-related injuries without the complexity of a lawsuit.

Why does my small business need it?

Your small business should carry Workers' Compensation insurance because most states require it. Even if your state doesn't require it, your customers might not do business with you unless you carry it. State-levied penalties for not carrying Workers' Compensation can be stiff.

Specific requirements also vary from state-to-state. For example, farming employees and self-employed persons are exempt in some states. And remember, states do not provide the insurance—insurance must be purchased from companies like Foremost!

Not only is Workers' Compensation insurance required in most states, it's also important to help protect both you and your employees from the unexpected.

When should I purchase workers' compensation?

In most states, Workers' Compensation insurance is required as soon as you have one or more employees who aren't the business owner or partner.

Is it expensive?

Cost is determined by the Workers' Compensation board in your state, but most states use a similar formula to calculate rates: classification risk, multiplied by 1% per $100 of an employee's payroll.

Here's what that means: Each occupation is assigned a "risk classification" determined by two factors: frequency of injury at work and severity of the injury. Then the classification is assigned a dollar amount based on the risk. For example, clerical workers in certain states have a classification of $1.25—a lower risk. If an office manager makes $600 per week, the Workers' Compensation premium for that employee would be $7.50. Your premiums, however, can be increased or decreased based on your business' safety history, whether you offer health insurance, and other factors.



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