Workers’ Comp and Unemployment Insurance Basics for Small Business Owners

As your business grows and you begin to hire employees, two critical responsibilities come into play: workers’ compensation insurance and unemployment insurance. These aren’t just check-the-box obligations — they protect your team, your reputation, and your bottom line.

In this guide, we’ll break down the basics of each, what’s legally required, and how to stay compliant without stress.

What Is Workers’ Compensation Insurance?

Workers' comp is insurance that covers medical expenses, lost wages, and rehabilitation costs if an employee is injured or becomes ill as a direct result of their job.

It typically covers:

• On-the-job injuries (e.g. falls, burns, strains)

• Occupational illnesses (e.g. chemical exposure)

• Lost wages during recovery

• Ongoing medical care

• Disability or death benefits in severe cases

Do you need it?

• In most states, yes — even if you only have 1 employee.

• Requirements vary by state and industry.

• Some states allow exemptions for business owners or family members, but that doesn’t mean you should go without it.

Skipping workers’ comp can result in major fines, lawsuits, or criminal penalties.

What Is Unemployment Insurance?

Unemployment insurance (UI) is a state and federal program that provides temporary income to workers who lose their jobs through no fault of their own (e.g. layoffs, downsizing).

🧑‍💼 Employers fund UI by:

• Paying state unemployment tax (SUTA) based on your state’s rates and your “experience rating”

• Paying federal unemployment tax (FUTA) — generally 6.0% on the first $7,000 of each employee’s wages (subject to credits)

UI Benefits help former employees:

• Cover basic living expenses while they look for new work

• Stay afloat during economic downturns

Why These Protections Matter

For Your Business:

• Avoid legal and financial penalties

• Build trust with your team

• Reduce turnover and improve morale

For Your Employees:

• Assurance that they’ll be cared for if something goes wrong

• Support through transitional periods

How to Stay Compliant

1. Register for coverage when hiring employees

2. Post required notices (state and federal labor law posters)

3. Report injuries promptly and accurately

4. File unemployment tax reports quarterly

5. Work with a payroll or HR partner to avoid mistakes

Pro Tip: If you use contractors or freelancers, make sure they’re correctly classified — misclassifying can trigger retroactive workers’ comp and unemployment liabilities.

Final Thoughts

Protecting your team means protecting your business. Workers’ comp and unemployment insurance might seem like just more red tape, but they’re critical tools for building a resilient company.

Don’t wait until an accident or audit forces your hand. Be proactive, get covered, and operate with confidence.