How is Workers’ Compensation Insurance Calculated
Your business’s classification code, your total payroll and any other factors that the insurance company might use to evaluate your risk (history or workers’ compensation claims for example) are all used to calculate your workers’ compensation insurance costs. Workers’ compensation is regulated at state level. This means that workers’ compensation rates can vary depending on where the employees work.
Optional Payment Plans
Although policies are almost always in force for 12 months, workers’ compensation insurance quotes might be presented as either an annual premium or a monthly payment. Your final cost will be affected by your preferred payment plan, as well as any changes to your payroll.
Many insurance companies offer a pay as you go option. Because the employer pays each payroll, pay-as-you go options are becoming more popular. This means that the employer only pays for what they are liable for at any given time. Their workers’ compensation premium will fluctuate as employees and payroll change.
How to estimate workers’ compensation costs
For each employee, add up the payroll
A workers’ compensation insurance policy is based on payroll, regardless of whether the employee is full-time, part-time, temporary or seasonal. Start with the gross payroll of each employee.
Here are some tips for calculating your payroll
- The gross payroll per employee can be rounded to the nearest 1,000
- You can estimate the payroll if you are unable to calculate the payroll for the entire year. To account for under- or overestimating payroll, your final work comp premium may be increased or decreased at the end the policy year.
Note: Check your state regulations to see if you are liable for any workers’ compensation coverage if you hire independent contractors.
Locate Your Classification Codes
If you need a precise workers’ compensation quote, your classification code is a must.
Four-digit numbers are called class codes and are assigned to businesses according to industry. Data can be collected by grouping similar businesses to collect information on workers’ compensation claims and workplace injuries. The rating agency uses this data to determine the relative risk of the work and then assigns a rate based upon recent losses (claims filed and paid out).
To determine your classification code, consider:
- What is your primary product or service? Carpentry, commercial cleaning, HVAC repair, etc.
- What other tasks are your employees responsible for? Common roles include sales, clerical or delivery.
- Are there any sub-contractors or contractors that require coverage? What do they do if they are?
Check out the Workers’ Compensation Rate
Although many codes are standard across the United States of America, workers’ compensation costs are determined by the rate set out by the state’s rating agency. Check with your state’s workers’ compensation regulatory body to find out which agency sets workers’ compensation rates. Many states in the United States use the National Council on Compensation Insurance, while others use their state rating bureau.
You may be able contact the rating bureau or look up the rating bureau to find out the rate for your code.
The cost of $100 per worker’s compensation is the workers’ compensation rate. This is an example:
- If a company has $100,000 in payroll, a $1.68 rate means that they would have to pay $1680 per year in work comp premiums.
- A work comp premium rate of $0.35 would mean that a $100,000 payroll business would have to pay $350 annually for work comp premiums.
This will provide an estimate, not a quote. Insurance companies in most states are permitted to alter the “advised rate” published by the state rating agency. Sometimes, the advised rate might be different from what an insurance company offers.
Request quotes from multiple insurance companies to get the best rate and lowest price. You can also use an independent agency to shop around for the best price and provide you with the most competitive quote.
How are Workers’ Comp Rates Calculated?
The state rating bureau determines the rate or baseline cost for workers’ compensation insurance. This is done by collecting and analysing worker’s compensation claims data. These data can reveal patterns such as changes in:
- Number or type of claims being filed.
- Payout of the cost per claim
- Workers’ compensation claims total healthcare costs.
- Injured workers miss days of work (payroll).
Although rates are determined by each class code, the statewide rates can be raised or lowered simultaneously and in a percentage. These rate adjustments reflect changes in the performance of the workers’ compensation system overall. For example, lower healthcare costs and fewer claims due to improved workplace safety.
Calculate Estimated Workers’ Compensation Cost Per Employee
Multiply the employee’s payroll to get an estimate of the cost per employee.
Two plumbers are employed by this Hawkins, Indiana plumbing company. They make approximately $50,000 annually. The company also employs a plumbing apprentice, who earns $25,000 annually, and a part-time office manager who performs clerical duties and is paid $21,000 annually.
To calculate the cost per employee, the owner enters all these details into a spreadsheet. Hawkins Plumbing employs 122,000 people annually.
Rates are calculated per $100 of payroll. He divides the plumber’s payroll and the clerical payroll by 100, then multiplies this number by the rate for each code. Workers’ compensation rate for plumbers is $1.68 and for office workers is $0.35.
Note that Dustin Henderson’s work part-time does not affect his coverage. The entire annual salary must be paid and all employees must have coverage.
Based on the 2018 Indiana rates, Hawkins Plumbing would expect to pay around $2,123 annually in workers’ compensation costs — or less than $200 per monthly.
This total amount, if you are operating in a state with a low base rate, is the workers’ compensation premium. Credits and debits have not been applied. (More on this below). All insurers in base rate states must use the worker’s compensation rates established by the state rating agency.
The premium for those who are not in the base rate state may vary depending on which insurer you choose. The state regulator must approve rates submitted by insurance carriers. However, rates can vary depending on the individual’s history of losses.
Compare several quotes before you make a decision.
The True Cost of Workers’ Compensation
Your payroll and rate will give you a good estimate of workers’ compensation costs, but your final premium may look a little different. What is the reason?
Workers’ compensation rates are used to assign a cost to businesses in the same industry. However, workplace safety and workers compensation claims can differ from one company to another.
Insurance companies may consider other factors when calculating a quote. This will ensure that it is more representative of your business.
These are some common factors:
- Past workers’ compensation claims or loss history filed.
- Premium Discount for Companies with Larger Premiums (normally only for businesses with premiums above $10,000 per annum).
- The Experience Modifier is a designation that larger companies are given after several years of operation for claims history with poor or excellent claims.
- Premium credits can be used to fund things like a safety officer on staff or a formal safety program.
To determine the final quote, the insurer might apply credit or debits to your premium.
Ask an agent about saving money on your workers’ comp policy. They can provide advice or programs that could qualify your company for savings.