Business Owner's Guide to Buying Workers’ Compensation Insurance

Knowing how to buy workers' compensation insurance for small business to protect your employees in case of a work-related injury or illness should be a top priority for any business owner. Not only is it the right thing to do, but it's a legal requirement for companies with employees in most states.

If you're unsure how to get workers' comp insurance, this guide will walk you through the key aspects you need to know and help you buy workers' comp online.

Understanding Workers' Compensation Insurance

Workers' compensation insurance is a type of business insurance that provides crucial coverage for employees who experience work-related injuries or illnesses. When you get workers' compensation insurance, it typically covers medical expenses, lost wages, and rehabilitation costs if an employee gets hurt on the job. It also helps protect employers by safeguarding against devastating financial consequences from employee lawsuits over workplace injuries.

Workers' Compensation vs. Other Types of Business Insurance

While workers' compensation insurance covers work-related injuries and illnesses for employees, other important types of business insurance protect your company in different ways. Two common business insurance policies often confused with workers' comp are general liability insurance and group health insurance.

Here's a breakdown of the key differences between the three policy types:

• Workers' compensation insurance covers medical expenses, lost wages, and rehabilitation costs if an employee is injured or becomes ill on the job. It's designed to protect employers and employees from the financial impact of workplace injuries.
• General liability insurance covers bodily injury, property damage, and personal or advertising injury (slander, stolen ideas) claims from third parties (nonemployees). It helps pay for legal defense costs, settlements, and judgments if your business is sued. Coverage might be necessary for leases, contracts, and some professional licenses.
• Group health insurance provides medical coverage for employees with illnesses and injuries that aren't work-related. It helps cover the cost of medical care, such as doctor visits, hospital stays, and prescription drugs, but it doesn't protect the business from liability claims.

Legal Requirements for Workers' Compensation Insurance

Most businesses in the United States must have workers' comp insurance, but the specifics can vary. For instance, it's mandatory in every state except in Texas — where most private employers can opt out — and South Dakota, which does not mandate coverage at all. However, some states, such as Alabama and Florida, do not require coverage until a specified employee threshold is met in certain industries. Before buying workers' compensation insurance, you must understand your state's laws to make sure you get the proper coverage.

Requirements for Your Business

Each state has laws that outline the requirements for whether your business needs workers' comp insurance. It can depend on several factors, such as the number of employees, business type, gross wages paid, and location. In some areas, companies must buy workers' comp insurance when they hire their first employee. But other states don't require it until you have two, three, or five employees.

Texas is a notable exception — it's the only state that allows private-sector employers to opt out of workers' compensation entirely. If you choose to buy coverage, you can get it through a licensed insurer or a certified self-insurance program. South Dakota is also unique in that it doesn’t mandate workers’ comp coverage, though it strongly recommends it. In both cases, going without means losing certain legal protections against employee lawsuits for workplace injuries.

How To Buy Workers' Compensation Insurance

If you're wondering where to get workers' compensation insurance, you have a few choices: a private insurance company, a state insurance fund, or a state-run monopolistic fund. Businesses in North Dakota, Ohio, Washington, Wyoming, Puerto Rico, and the Virgin Islands rely on a monopolistic state fund for coverage.

You can buy workers' compensation insurance online, over the phone, or through an agent. For many business owners, the most convenient route is to buy workers' comp online using a website like Paychex. Paychex can also connect you with a licensed agent who helps you quickly compare workers’ compensation insurance quotes from top insurers, purchase coverage, and manage your policy digitally.

Step 1: Determine Your State's Requirements

Workers' comp laws vary significantly from state to state, including who must be covered, where you can get coverage, and the penalties for noncompliance. To determine your obligation to buy workers' compensation, consult with your state's workers' compensation board or Department of Labor.

Step 2: Assess Your Business Needs

After reading up on your state's requirements, the next step is to assess your business's specific insurance needs. Start by evaluating the size of your workforce (both full-time and part-time employees) — it's a primary factor in determining your obligation to purchase workers' compensation insurance.

Next, consider the nature of your employees' work and the risks they face. If your business is in an industry like construction or manufacturing, you'll typically face a greater potential for workplace injuries, which can result in higher insurance costs than those in lower-risk fields.

Finally, assess your payroll size. Insurers usually base workers' comp premiums on total payroll, meaning larger payrolls generally translate to higher premiums.

Before looking for quotes, gather key documentation including your company's Employer Identification Number (EIN), a detailed description of operations, total annual payroll figures, and past claims history. If your business is high-risk (like construction) or particularly complex, working with an agent or broker can help you find specialized coverage and verify that your classification codes are accurate — which directly affects how much employers pay for workers’ compensation insurance.

Step 3: Explore Your Coverage Options

Coverage options can depend on the insurance company you choose. You'll typically have the most choices if you obtain workers' compensation insurance from a private business insurance company.

Paychex Insurance Agency offers a variety of solutions tailored to the unique needs of different businesses. By partnering with A-rated national carriers, Paychex can help you secure the right coverage, whether you're a small business, LLC, or have hundreds of employees.

Step 4: Get a Free Quote

A free workers’ compensation insurance quote online from Paychex is a quick and easy way to buy workers' comp. You'll be asked to provide basic information about your business, such as your industry, number of employees, and estimated payroll. Using that information, Paychex generates a customized quote for workers' compensation insurance for your business. The entire process takes just a few minutes, and there's no obligation to buy a policy.

You'll pay an initial premium to activate coverage. Many workers’ comp insurers offer annual or installment premiums based on estimated payroll, or payment service plans that base premiums on your actual payroll each pay period. Payment service options eliminate the need for a large up-front deposit and reduce the chance of a surprise bill at audit time.

Step 5: Consult With a Specialist

As you review your coverage options, you might have questions or need assistance navigating the process. Paychex offers the option to speak to a licensed agent. They can help you assess your business needs, compare coverage options from top-rated companies, and find the right policy at a competitive price. Knowing you understand your obligations and have the appropriate protection for your employees and business can give you peace of mind.

How To Buy Workers’ Comp Insurance When You’re Self-Employed

Self-employed individuals in certain industries with no employees generally do not need to have workers' comp insurance. However, you can purchase a voluntary policy to cover yourself in case of a work-related injury. In some industries, clients or general contractors may require it before awarding you a contract.

For self-employed and sole proprietor business solutions, the process is similar to the steps above. While cost varies by state, when coverage is optional and limited to the business owner workers’ comp insurance cost will typically be less due to minimal payroll exposure compared to businesses with employees.

How Much Does Workers' Compensation Insurance Cost?

How much workers' compensation insurance is varies based on your unique business situation. The average cost of workers' compensation per employee is $0.46 per employee hour worked, according to a September 2025 report from the Bureau of Labor Statistics. That adds up to roughly $950 annually for a full-time employee working 40 hours per week.

But how is the cost of workers’ compensation insurance for small business determined? Your specific workers' compensation costs depend on several elements.

Industry

Industry is one of the biggest drivers of workers' comp costs. Insurers assign each type of work a classification code based on its risk level, and higher-risk industries pay higher rates. Construction has some of the highest premiums, while businesses in professional services and retail usually pay less.

Industries like restaurants and hospitality, health care, manufacturing, skilled trades, senior living, and nonprofits each fall at different points along the risk spectrum. Businesses that struggle to find affordable coverage on the open market may be placed in your state's assigned risk pool — a program of last resort that guarantees coverage but typically at a higher cost.

Number of Employees

More workers mean greater exposure to potential injuries and claims, which translates to a higher premium. Keep in mind that part-time, seasonal, and temporary employees typically need to be covered as well. Even a small increase in headcount can affect your premium, so it's important to factor workers' comp costs into your hiring budget.

Payroll Size

Your total payroll is a primary variable in the workers' comp premium formula. Insurers multiply payroll (per $100) by each employee's classification code rate, so higher salaries and larger payrolls naturally produce higher premiums.

This is why keeping your payroll records accurate matters. Overestimating payroll at the start of your policy means overpaying up-front, while underestimating can result in a sizable additional premium at audit.

Location

Each state sets its own rate structures, benefit levels, and regulatory requirements, so premiums for identical work can vary by state. Those with generous benefit schedules and higher medical costs tend to charge more, while those with more restrictive systems are generally the least expensive.

If your business operates in multiple states, you'll typically need coverage wherever employees perform work. Multistate policies are available, but each state's portion is rated separately based on local rules and class code rates.

Claims History

Your past claims record directly influences future premiums through the experience modification rate (EMR). An EMR of 1.0 is the industry baseline — below 1.0 earns a discount, while above 1.0 means costlier premiums.

Your EMR is usually calculated from three completed policy years of claims history, excluding the most recent policy year, so a poor claim year can affect your EMR with increased premiums for up to three years, or sometimes longer depending on audit timing and claim development. Claim frequency usually has a greater impact than severity, since repeated small claims may signal systemic safety issues.

Ultimately, the best way to determine your cost for workers' compensation insurance is to get a customized quote from an insurance provider.

Tips for Reducing Workers’ Comp Premiums

A few strategies can help you get the cheapest workers’ comp insurance.

• Implement a safety program to reduce claim frequency. Fewer injuries can lead to a lower EMR and lower premiums over time.
• Check your policy regularly to make sure your policy accurately reflects your payroll and job classifications. Catching errors early keeps your costs accurate.
• Bundle workers' comp with other business insurance to potentially qualify for a multi-policy discount and reduce your total insurance spend overall.
• Use a return-to-work program to bring injured employees back on modified or light-duty assignments when medically appropriate. This can reduce wage-replacement costs and claim severity. It also helps employees recover faster and stay connected to their workplace.
• Maintain a drug- and alcohol-free workplace and reduce the likelihood of on-the-job injuries. Implement a formal substance abuse policy, which may also qualify you for state or carrier incentives in some jurisdictions.