Landing that first big job where you need an extra pair of hands is exciting. But before your new employee picks up a hammer, you've got some insurance homework to do. The moment you transition from solo handyman to employer, you're stepping into a whole new world of legal requirements and liability exposure. Here's what you need to know to protect your business, your employee, and yourself.
The Workers' Comp Trigger: Why Your First Employee Changes Everything
When you're working solo, workers' compensation insurance is optional in most states. The second you hire someone—even part-time, even for a single project—that changes. Almost every state in the country requires workers' comp coverage as soon as you have one employee on the payroll.
Texas is the notable exception where workers' comp remains optional even with employees, though about 90% of businesses still carry it to limit liability. Oklahoma also gives very small employers with one or two employees some wiggle room. But in states like California, Alaska, Connecticut, and most others, coverage is mandatory from day one. Four states—North Dakota, Ohio, Washington, and Wyoming—even require you to get coverage through state-run programs rather than private insurers.
The penalties for skipping this coverage aren't just scary—they're potentially business-ending. In California, operating without required workers' comp is a criminal offense that can land you in jail for up to a year and hit you with at least $10,000 in fines. Illinois charges $500 per day of noncompliance with a $10,000 minimum. New York can charge you with either a misdemeanor or felony. And that's before we even talk about what happens if your uninsured employee actually gets hurt on the job.
Understanding Workers' Comp Costs for Handyman Businesses
Workers' compensation premiums aren't a flat fee—they're calculated based on your payroll. For handyman businesses in 2025-2026, you're looking at roughly $5 to $17 for every $100 you pay in wages. On average, handyman businesses pay around $94 per month for workers' comp coverage, though this ranges from $44 to $103 depending on your state, claims history, and the specific work your employees perform.
Here's the critical part: your employee classification determines your rate. Handyman work typically falls under workers' comp class code 5645, which covers carpentry and general handyman tasks. This is considered a moderately high-risk occupation, which is why the rates are higher than, say, office work. If you misclassify your employees to get a lower rate, you're committing insurance fraud. And when your employee gets hurt and the insurance company audits your payroll, they'll discover the misclassification, potentially void your coverage, and leave you personally liable for all medical bills and lost wages.
The good news? You have some control over these costs. Focus on workplace safety, maintain detailed and accurate payroll records, and document your safety training programs. A clean claims history can significantly reduce your premiums over time, while even a single claim can send them soaring.
Don't Forget EPLI: The Coverage Most Handyman Businesses Overlook
Workers' comp covers your employee if they get physically injured. But what about when they claim you fired them unfairly, discriminated against them, or created a hostile work environment? That's where Employment Practices Liability Insurance (EPLI) comes in, and it's coverage most new employers don't even know exists.
Small businesses with fewer than 100 employees face roughly a 12% chance of having an employment-related charge filed against them. And here's the kicker: even if you win the case and did nothing wrong, the legal defense costs average between $75,000 and $125,000. That's enough to bankrupt most small handyman operations.
Small businesses are particularly vulnerable because you probably don't have an HR department or a detailed employee handbook outlining hiring, discipline, and termination procedures. Without these formal policies, you're more likely to make a costly mistake. EPLI covers claims like wrongful termination, discrimination based on age, race, gender, or disability, sexual harassment, and violations of the Americans with Disabilities Act.
The cost is surprisingly affordable. Small businesses pay an average of $222 per month for EPLI coverage, but 36% pay less than $150 monthly. Some insurers offer it as an add-on to your general liability or business owners policy for as little as $18 per employee per year. Given the potential exposure, it's some of the cheapest peace of mind you can buy.
Payroll Reporting and Classification: Getting It Right From Day One
Your workers' comp premium is tied directly to your payroll, which means accurate reporting isn't just about compliance—it's about fair pricing. When you report payroll to your insurer, you're providing the total gross wages (before taxes and deductions) for each employee, grouped by their classification code.
Insurance companies will audit your payroll records, typically at the end of your policy period. They're checking to make sure you reported accurately and classified employees correctly. If you understated payroll, you'll owe additional premium. If you overstated it, you'll get a refund. But if they discover you've been misclassifying employees or hiding payroll to save money, you're looking at fraud charges, policy cancellation, and personal liability for any claims.
Keep meticulous records from day one. Document what each employee does, maintain detailed time cards and pay stubs, and be honest about job duties when assigning classification codes. If an employee splits time between different types of work, discuss with your insurance agent how to handle the classification. The few dollars you might save by fudging the numbers aren't worth the risk of having no coverage when something goes wrong.
How to Get Started: Your Pre-Hire Insurance Checklist
Before your first employee's start date, get your insurance in order. Contact your business insurance agent or shop online for workers' comp quotes. Be prepared to provide details about your business, expected payroll, and the specific work your employee will perform. Make sure the coverage is active before your employee starts work—not the day after, not even the same day, but before.
Review your general liability policy and consider adding EPLI coverage, either as an endorsement or as a standalone policy. Ask your agent about business owners policies (BOPs) that bundle multiple coverages together, often at a lower cost than buying each separately. Create a simple employee handbook that outlines your workplace policies, safety procedures, and termination process—this documentation helps protect you from employment claims and shows you're taking your employer responsibilities seriously.
Set up a payroll system that tracks hours, wages, and job duties accurately. Even a simple spreadsheet is better than nothing, though dedicated payroll software can make audits much smoother. Finally, verify your state's specific requirements—workers' comp laws vary significantly, and what's true in Texas might not apply in California.
Hiring your first employee is a big step for your handyman business. With the right insurance in place, you can grow confidently, knowing you've protected your business, your employee, and your financial future. Don't wait until after something goes wrong—get covered before that first day on the job.
