Workers’ Comp for Small Contractors: Do You Need It & How Payroll Audits Work
Mr. Hoots explains workers’ comp for small contractors when you need it, owner exclusions, 1099 subs, rates, and how the payroll audit actually works.
Hoo’s there? Mr. Hoots. If you swing a hammer or wire a panel for a living, let’s talk Workers’ Compensation – the coverage that pays for employee injuries (medical + lost wages) and helps you stay compliant with state and GC requirements.
What is Workers’ Comp?
Insurance that pays benefits if an employee is injured or gets sick because of work. It usually covers:
- Medical bills & rehab
- Lost wages (a portion)
- Death benefits (if the worst happens)
It also generally protects you from most employee injury lawsuits tied to workplace injuries.
Do I need it if I’m a one-person shop?
It depends on your state and your contracts.
- Sole owner/no employees: Some states allow you to opt out; others still require WC for permits/GCs.
- Hiring helpers (W-2 or 1099): If you direct their work, your state (and your GC) may treat them as employees for WC purposes.
- GC requirement: Many GCs won’t let you on site without a WC COI, even if your state doesn’t strictly require it.
Hoot tip: “1099” doesn’t automatically mean “not my employee.” If you control the how/when/where, plan for WC.
Owner inclusion vs. exclusion
- Include owners/officers: Adds protection for you on the job. Premium is based on an estimated owner payroll (states set min/max).
- Exclude owners/officers: Lowers premium, but you’re not covered if you get hurt. Some jobs/leases require owner inclusion—check the contract.
How premiums are calculated (plain English)
- Class code (your trade’s risk level) × payroll ÷ 100 × rate
- Adjusted by credits/surcharges, experience mod (if applicable), and state fees
- You pay based on estimated payroll up front → then comes the audit
The payroll audit (no sweat)
At the end of the policy term, your carrier asks for:
- Payroll reports (often by class code)
- Certificates for any subcontractors
- Owner inclusion/exclusion confirmations
If your actual payroll was higher than estimated, you owe the difference; lower, you may get a refund/credit.
Hoot tip: Keep subcontractor COIs (GL + WC) on file all year. Missing COIs can be treated as your payroll at audit time.
What about “ghost policies”?
A minimum-premium WC policy with owners excluded—often used to meet a GC/permit requirement when there are no employees. It does not cover you (the owner). If you hire help or the GC treats you like you did, expect issues at audit. Use carefully.
COI + endorsements GCs ask for
- Workers’ Comp + Employers’ Liability limits (e.g., $100k/$500k/$100k or higher)
- Waiver of Subrogation (sometimes)
- Primary & Non-Contributory is less common on WC, more on GL—follow the contract
Quick safety wins (that also help your rate)
- Tailgate talks + PPE on site
- Ladder, lockout/tagout, trenching basics
- Documented subcontractor screening (licenses, COIs)
What I need to quote WC
- Your legal entity & FEIN
- Class codes / description of work (e.g., residential electrical, light comm.)
- Estimated annual payroll (by role)
- Owner include/exclude preferences
- Subcontractor use? % and trades (keep those COIs!)
Common questions
Can I pay monthly?
Often yes—depends on premium size and carrier.
Do 1099s need to be on my WC?
If they lack WC and you control their work, the state/GC may treat them like employees. Get their WC COI or be ready to pick them up.
What happens if I don’t carry WC?
Fines, stop-work orders, and being stuck with medical bills if someone is hurt. Some states are strict—don’t risk it.
Mr. Hoots’ Bottom Line
If you’ve got anybody helping, even part-time, plan for Workers’ Comp. It protects your crew, keeps GCs happy, and saves you from wallet-breaking surprises at audit time. Tell me your payroll and subs, and I’ll hoot back a smart, compliant setup.