How Workers' Compensation Exemptions Work - and How to Get One

Exemptions for Independent Contractors, Sole Proprietors, Owners

Injured construction worker wrapped up in a ladder and holding his head
Photo: Stewart Cohen/Getty Images

Workers compensation is a state-based program that provides insurance benefits to employees who become ill or injured on the job. All businesses with employees must pay the cost of workers' compensation insurance based on the number of employees.

Workers' compensation benefits provide monetary awards to employees who have been injured or became ill on the job. Benefits may also be awarded to dependents of workers who have been killed because of a work-related accident or illness. 


Workers' compensation programs are administered by states. The federal government administers disability compensation for federal workers, through the Department of Labor's Office of Workers' Compensation Programs.

Workers' Compensation Exemption

In all states, businesses hiring employees must pay for state workers' compensation insurance coverage to protect both the workers and the business in the event that an employee becomes injured or ill due to a workplace accident.

Workers exchange their right to sue their employer for negligence in the event of an accident when they agree to accept employment and be covered by the workers’ compensation benefit, as required by state law.

Some states use a Workers' Compensation Waiver or Exemption form to allow certain individuals such as independent contractors to be exempt from workers' compensation payments. Some states use the term "self-employed" or "sole proprietor."

Exempting Independent Contractors

Each state has different regulations that exempt certain types of workers from being covered by workers' compensation insurance. The most common type of excluded worker is an independent contractor. Independent contractors are not employees; an independent contractor is a self-employed individual.

Independent business owners who do contract work for a business can attempt to exempt themselves from being covered by workers' compensation insurance in their state. The terms "waiver" and "exemption" mean essentially the same thing; the two terms are used interchangeably.


The US Department of Labor has a list of all the state workers' compensation offices. And this list of state workers' compensation offices includes exceptions for each state. Check on your state's website for details.

Applying For an Exemption

The requirements for filing a workers' compensation exemption differ widely from state to state. Some states automatically exempt non-employees, while other states include them and require an exemption application.

Florida's application, for example, begins by asking you to describe the general category of exemption (construction or non-construction) and within non-construction, whether the exemption is for an officer of a corporation or a member/owner of an LLC.

The application then asks about the business, including the type of work done or service(s) performed by the business. The exemption is only applicable to the scope of business listed. The applicant must give information about the company's worker's compensation insurance carrier. 

Employees vs. Independent Contractors

The IRS has specific criteria for determining whether workers qualify as an independent contractor or employee. However, each state also has its own established guidelines for workers’ comp purposes, and these can differ from the IRS guidelines.

If a business classifies its workers as independent contractors and exempts them from workers’ comp coverage, the company leaves itself open to potential fines and penalties for unpaid payroll taxes if the state decides the workers have been classified incorrectly.

Typical Exemption Statements and Applications

This is a brief list of how individual states handle exemptions from workers' compensation:

If you are a sole proprietor or independent contractor in Arizona, you can file a form stating that you are doing business as (name of company), or you are an independent contractor for (name of company) and you're not an employee of that company for workers' compensation benefit purposes. 

Sole proprietors in Colorado can buy workers' compensation coverage for themselves, but they aren't required to do that.

Illinois exempts sole proprietors from workers' compensation coverage, but they can purchase their own insurance. Employees who are family members must be insured unless they are corporate officers, work in a seasonal agricultural business, or are immediate family members who live with the employer. 

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  1. Cornell Legal Information Institute. "Workers Compensation." Accessed April 6, 2020.

  2. Stetson Law Review. Johnson, Victoria. "Florida Workers' Compensation Act: The Unconstitutional Erosion of the Quid Pro Quo." Page 1. Accessed April 6, 2020.

  3. Florida Division of Workers' Compensation. "Exemptions." Accessed April 6, 2020.

  4. IRS. "Understanding Employee vs. Contractor Designation." Accessed Apil 6, 2020.

  5. Industrial Commission of Arizona. "Filing a Sole Proprietor / Independent Contractor Statement." Accessed April 6, 2020.

  6. Colorado Department of Labor and Employment. "Self-Insurance." Accessed April 6, 2020.

  7. National Federation of Independent Businesses. "Workers' Compensation Laws – State by State Comparison." Accessed April 6, 2020.

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