To estimate the workers’ compensation cost for an employee, divide payroll by 100, then multiply that number by your workers’ compensation insurance rate:
(Annual Employee Payroll / 100) x Workers’ Compensation Insurance Rate = Estimated Workers’ Compensation Cost
Our online quoting tool makes it easy. Or, read on for step-by-step instructions, and other factors that play a role in your final workers’ compensation quote.
How Is Workers’ Comp Insurance Calculated?
Workers’ compensation insurance costs are calculated based on what your business does (classification code), your total payroll and other factors the insurance carrier might use to assess your business risk (history of workers’ compensation claims, for example). And because workers’ compensation is regulated at the state level, workers’ compensation rates differ based on the state where employees work.
Payment Plan Options
While policies are nearly always active for 12 months, a workers’ compensation insurance quote might be represented as an annual premium or the monthly payment. Your preferred payment plan and any changes in your payroll throughout the year will also influence your final cost.
Some insurance carriers offer a pay-as-you-go option. Pay-as-you-go options are gaining in popularity because the employer makes payments each time they run payroll. That means the employer is only paying for what what are liable for at a given time. As employees and payroll increase or decrease, their workers' compensation premium will change.
How to Estimate Workers' Compensation Cost
1. Add Up Payroll for Each Employee
A workers’ compensation insurance policy is based on payroll, regardless of whether the employee is full-time, part-time, temporary or seasonal. Begin with the gross payroll for each employee.
Tips for Calculating Payroll:
- Gross payroll for each employee can be rounded to the nearest $1,000.
- If you’re unable to calculate the exact payroll for the year (for example, if a worker is paid hourly), estimate projected payroll. Your final work comp premium can be adjusted up or down at the end of the policy year to account for over- or under-estimating payroll.
Note: If hiring any independent contractors, check your state regulations for whether you could be held liable for their workers’ compensation coverage.
2. Find Your Classification Code(s)
Your classification code is one of the most important details to get right if you want an accurate workers’ compensation quote.
Class codes are four-digit numbers that are assigned to businesses based on industry. By grouping together similar businesses, data can be collected on workplace injuries and workers’ compensation claims. This data is then used by the rating agency to assess the relative risk associated with that type of work, and assign a rate based on recent losses (claims that have been filed and paid out).
To determine your classification code, consider:
- What is the primary product or service you sell? Carpentry, commercial cleaning, HVAC repair, etc.
- What other tasks do your employees perform? Common roles include sales, clerical or delivery.
- Do you have any contractors or sub-contractors that need coverage? If yes, what do they do?
WorkCompOne’s online quoting tool makes it easy: Search keywords to find your classification code — or enter the four-digit number, if you know it.
For more on classification codes, read Workers Comp Insurance Cost: How to Avoid Overpaying.
3. Look Up Your Workers' Compensation Rate
While many classification codes are standardized across the United States, workers' compensation cost is based on the rate set by your state’s rating agency or bureau. Check with your state’s workers’ compensation regulatory body to find out which agency sets workers’ compensation rates. Many U.S. states use the National Council on Compensation Insurance (NCCI), while others use their own state rating bureau.
From there, you may be able to look up or contact the rating bureau to get the rate for your classification code.
A workers’ compensation rate is represented as the cost per $100 in payroll. For example:
- A rate of $1.68 means that a business with $100,000 in payroll would pay $1,680 annually in work comp premiums.
- A rate of $0.35 means that a business with $100,000 in payroll would pay $350 annually in work comp premiums.
This will give you an estimate; not an exact quote. In most states, insurance companies are allowed to deviate from the “advised rates” published by the state’s rating agency. In some cases, the advised rate may differ greatly from the one an insurance company offers you.
For the most accurate rate and best price, request a quote from several insurance carriers. Or, use an independent agency, which can shop around and present you with the most competitive quote.
How Are Workers’ Comp Rates Determined?
The state rating bureau sets the rate or baseline cost of workers’ compensation insurance by collecting and analyzing loss data—workers’ compensation claims data. This data can show patterns, such as changes in:
- Number of or types of claims being filed.
- Cost per claim paid out.
- Total healthcare costs for workers’ comp claims.
- Days of work (payroll) missed by injured workers.
While rates are specific to each class code, statewide rates are often raised and lowered at the same time and as a percentage. These rate adjustments are made to reflect changes in performance of the state’s workers’ compensation system as a whole; for example, lower healthcare costs or fewer claims as a result of improved workplace safety.
To learn more about workers’ compensation insurance rates, read Workers’ Compensation Insurance Rates: What They Are & How They’re Set.
4. Calculate Estimated Workers’ Compensation Cost Per Employee
To find an estimate of cost per employee, multiply the rate by the employee payroll.
For example: This Hawkins, Indiana plumbing business has two plumbers employed, who makes approximately $50,000 per year. It also has one plumbing apprentice who makes $25,000 per year, and one part-time office manager, who handles clerical tasks and is paid $21,000 per year.
The owner enters these details into a spreadsheet to calculate the cost per employee. When added up, Hawkins Plumbing has a total payroll of $122,000 annually:
Rates are expressed per $100 in payroll, so he divides the plumbers’ payroll and clerical payroll by $100, then multiplies that number by the rate for each class code. The workers’ comp rate for plumbers (NCCI code: 5183) is $1.68, and the rate for clerical or office workers (NCCI code: 8810) is $0.35.
Also note that Dustin Henderson’s part-time employment does not impact his coverage. His full annual payroll must be included, and coverage for all employees must be in effect for the entire year.
Based on these 2018 rates in Indiana, Hawkins Plumbing could expect to pay approximately $2,123 in annual workers’ compensation cost — or, less than $200 per month.
If operating in a base rate state, this total amount is your workers’ compensation premium, before credits and debits are applied (more on that below). Base rate states require all insurers to use the workers’ compensation rates set by the state rating agency.
For those not in base rate states, the premium could vary based on the insurer you choose. Insurance carriers must submit their rates to the state’s regulatory body for approval, but rates may vary based on their individual history of losses.
Shop around for several quotes to compare, and keep in mind other factors like reputation and customer service before making a final decision.
Your True Workers’ Compensation Cost
Your payroll and rate will give you a good estimate of workers’ compensation costs, but your final premium may look a little different. Why?
A workers’ compensation rate assigns a price tag to businesses within the same industry, but workplace safety and workers’ compensation claims can vary widely from one company to the next.
The insurance company may take other factors into consideration when calculating a quote, so it better reflects the characteristics of your business.
Common factors include:
- Loss history, or past workers’ compensation claims filed.
- Premium discount for companies with larger premiums (usually only applies to businesses with a premium above $10,000 per year).
- Experience Modifier, which is assigned to larger companies after several years in business, for either poor or excellent claims history.
- Premium credits for such things as a formal safety program, safety officer on staff, or other measures of your company’s commitment to a safe workplace.
The insurer may apply credits or debits to the premium to determine the final quote you’re offered.
To save money on your workers’ compensation policy, ask an insurance agent for advice and programs or trainings that may qualify your business for savings.
You Might Also Like: 12 Ways to Save Money on Small Business Insurance
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Editor's note: This post was originally published in April 2019 and has been updated for comprehensiveness and clarity.