Workers' comp pays your employees' medical bills and lost wages when they get hurt on the job, and every state except Texas requires it the moment you have even one employee. In exchange, the injured worker gets defined benefits and gives up the right to sue you. The traps that catch contractors are thinking a 1099 gets you out of it, ignoring your experience mod, and getting the year-end payroll audit wrong.
Required in every state except Texas
Workers' comp is the exclusive remedy for employee work injuries in nearly every state: the worker collects defined benefits, and in return cannot sue you over the injury. Every state except Texas requires comp once you have employees. Texas lets an employer opt out (a "nonsubscriber"), but most commercial contracts require comp anyway as a condition of getting the job.
Exactly when you cross into "employer," whether that is your first employee or a small threshold, and how the state treats family members and part-timers, varies. Route the trigger for your state to Working in Your State.
The two parts: benefits and employer's liability
A comp policy has two sides that do different jobs.
- Part A, benefits. This pays the injured worker's medical treatment, rehabilitation, and disability wage replacement under your state's benefit schedule. There is no dollar cap on Part A; the carrier pays the claim in full to the state limits.
- Part B, employer's liability. This covers you when someone brings a civil lawsuit over a work injury, for example a worker not covered by comp, or a spouse suing for loss of consortium. Part B has limits, usually written as three numbers: per accident / policy limit for disease / per employee for disease. A common baseline is $100,000 / $500,000 / $100,000, but your state sets the minimum and you can usually raise the limits for very little extra premium. Route the exact minimum to Working in Your State.
How the premium is built (and the experience mod)
Workers' comp premium is calculated as a rate per $100 of payroll, multiplied by your class code and your experience modification rate (EMR).
- Class code reflects how risky the work is. Higher-risk trades carry much higher rates. Roofing class codes are among the very highest in construction.
- EMR compares your loss history to the average for your trade. 1.0 is average. Below 1.0 means better-than-average claims and earns a discount; above 1.0 means worse and adds a surcharge. A clean safety record pulls your mod down and can meaningfully cut your cost over a few years, while a bad claim follows you for about three years.
The experience mod is the single biggest lever you control. Safety is not just about avoiding an OSHA citation; it directly prices your comp.
Why paying a worker on a 1099 does not dodge comp
Putting a worker on a 1099 does not remove your comp exposure if that worker is really an employee. State agencies and your own comp auditor look at the substance of the relationship, not the label on the check (see 1099 vs W-2: which are you really). Misclassification in construction is a high-enforcement target.
Two ways it bites:
- If a "1099 sub" without their own comp gets hurt on your job, you can end up covering the claim and paying state penalties, because in substance they were your employee.
- At your year-end audit, payments to subs who cannot show valid coverage get reclassified as your own payroll, charged at the sub's trade rate, which is often the highest rate on the sheet.
So the 1099 does not save the money. It hides the bill until audit or until someone gets hurt.
Ghost policies and owner/officer exemptions
Two things solo operators and small S-corps run into:
- Owner/officer exemptions. Many states let a sole proprietor, owner, or corporate officer exempt themselves from carrying comp on their own body. It lowers cost, but it means no comp benefits if the owner gets hurt, so you need your own health and disability cover to fill that gap. Who can exempt, and how many officers, varies by state.
- Ghost policies. A ghost policy is a minimum-premium comp policy for an owner-only business with essentially no covered payroll. It exists mainly so a solo operator can hand a GC a workers' comp certificate and get on site, without actually covering the owner. The catch: a ghost policy does not cover anyone you later put on the payroll, and the year-end audit will catch that extra payroll and bill you.
Exemption eligibility and ghost-policy rules are state-specific, so confirm yours before relying on either. See Working in Your State.
The year-end audit is where it bites
Your comp premium at the start of the year is an estimate based on projected payroll. At year-end the carrier audits your actual payroll and trues it up: under-report and you get a bill for the difference; over-report and you get money back.
Ignore or refuse the audit and the carrier can cancel the policy and add an Audit Noncompliance Charge, which in some states can run as high as double the original premium. To stay clean:
- Keep accurate payroll and split it correctly by class code (office staff and field crew are not the same rate).
- Collect a valid certificate of insurance from every sub before they start, so their payments are not reclassified as your payroll.
- Never lowball payroll at inception to get a cheaper deposit. It always comes due at audit.
Common questions
Do I need workers' comp if it's just me?
In most states a sole owner with no employees is not required to carry comp on themselves, but the rules vary and many contracts require it anyway. Some states let owners exempt themselves; some require coverage once you use any labor beyond yourself. Even where you are exempt, a GC may refuse to let you on site without a workers' comp certificate, which is why solo operators sometimes carry a minimum "ghost" policy. Check Working in Your State.
Does workers' comp cover me, the owner, if I get hurt?
Not automatically. In many states owners and officers are exempt from comp on themselves unless they specifically elect to be covered. If you are exempt and get hurt, there are no comp benefits for you, so you need your own health and disability insurance to fill that gap. If you want coverage on yourself, you usually have to opt in and pay premium on your own payroll. The rules vary by state, so check Working in Your State.
Can I put my crew on 1099 to avoid workers' comp?
No. Paying a worker on a 1099 does not avoid comp if they are really an employee in substance. State agencies and your comp auditor look at how the relationship actually works, not the paperwork, and construction misclassification is heavily enforced. If a 1099 worker without their own coverage gets hurt, you can still be liable plus penalties, and at audit their pay gets reclassified as your payroll at the sub's trade rate. The 1099 hides the cost, it does not remove it.
What is an experience mod (EMR) and why does it matter?
Your experience modification rate is a multiplier on your workers' comp premium that reflects your claims history against the average for your trade. 1.0 is average; below 1.0 discounts your premium and above 1.0 surcharges it. A clean safety record drives your mod down and saves real money over a few years, while a serious claim raises it for about three. It is the biggest lever you control over comp cost, which is why safety and comp price are directly linked.
Why did I get a big workers' comp bill at the end of the year?
Because comp premium starts as an estimate on projected payroll and is trued up at a year-end audit against your actual payroll. If your actual payroll came in higher than estimated, or if you paid subs who could not show valid insurance and their pay got reclassified as yours, the audit generates a catch-up bill. Ignoring the audit can add an audit noncompliance charge on top. Keeping accurate payroll and collecting sub certificates avoids the surprise.
The honest bit
- Workers' comp is required in every state except Texas once you have employees, but the exact trigger, the benefit schedule, the employer's-liability minimum, and owner/officer exemption and ghost-policy rules all vary by state. Route the specifics to Working in Your State and verify at your state workers' comp agency.
- Ghost policies and officer exemptions are established practice, but they are state-specific and easy to get wrong, so confirm before relying on one.
- This is general guidance, not legal or insurance advice. If a worker is seriously hurt, or you are facing a misclassification audit, get your broker and, for real stakes, an attorney involved.
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Sources
- US Department of Labor - State Workers' Compensation Officials · Workers' compensation is STATE law, administered by a state agency, which is why the rule about who must be covered changes at the state line and why this guide routes every figure to the state page
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