Workers' compensation payroll calculation is simply annual gross wages for all workers covered by the policy — whether you're looking for a new policy quote or submitting the payroll calculation report for an audit.
In this post, we break this down further — What does annual gross wages include? Which workers are covered by a workers' compensation policy? — so you get the right coverage for the best price.
Workers' Compensation Payroll Calculation
Employers need to calculate payroll for workers' compensation insurance in order to get an accurate quote. These may be estimated because they reflect the upcoming policy year.
At the annual policy audit, actual wages must be calculated and reported to reflect any changes.
This is not the same thing as wages paid out to injured workers. (As part of a workers' compensation claim, each state sets a percentage of weekly wages paid out to workers who are temporarily too injured or ill to work.)
What Counts As Payroll?
- Overtime pay
- Holiday, vacation and sick leave pay
- Social Security and Medicare tax contributions (payments by employer for the employee part)
- Commissions, profit sharing or incentive plans
- Prevailing wages
- Annuity plans
Excluded from "gross wages" are tips or other gratuities, payments for group insurance or group pension plans, expense reimbursements and other fringe benefits.
Workers' Comp Payroll: Dos and Don'ts
A few things to keep in mind when pulling wages for workers' compensation insurance:
- Reported payroll should be the total employee pay anticipated for the upcoming year.
- It's ok to estimate annual gross earnings when getting a policy quote. Make sure to pull actuals for the annual insurance audit
- Add up payroll separately for each classification code. For example, two janitor with salaries of $30,000 and $25,000 would be reported as $55,000 annual payroll for janitorial services. The office manager with a salary of $20,000 would be reported separately as $20,000 payroll for clerical services.
- Wages can be rounded to the nearest $1,000.
- Include wages of all workers to be covered by the insurance policy. This should include W-2 employees and any other workers required by state law. Owners, officers, LLC members, partners and family members may be exempt, or they may be able to opt out of coverage.
Some states have a payroll cap, which limits the amount reported for each employee. For example, in Nevada only the first $36,000 of each employee's wages are reported. If the employee makes less than $36,000 per year, their true salary is reported. Overlooking your state's payroll cap can result in paying more than necessary for workers' compensation insurance.
How Changes in Payroll Impact Workers' Comp
Payroll is multiplied by an assigned rate to calculate the insurance premium. This means total employee wages are directly tied to workers' compensation insurance costs.
Workers' compensation costs will increase or decrease based on:
- Number of employees: Adding or losing headcount will dramatically change total payroll, and therefore, workers' comp costs.
- Salaries and wages: Raises, salary adjustments and commission all impact total payroll.
- Types of hires: A company with four carpenters and one office manager will have a very different workers' compensation premium than one with six accountants, because of the relative risk for injury and assigned insurance rate.
And unlike the workers' compensation insurance rate set by the state rating bureau, payroll is in a small business owner's control.
Pay-As-You-Go Workers' Compensation Policies
Some insurance companies offer "pay-as-you-go" insurance, which is calculated based on payroll practically in real time.
Pay-as-you-go options are gaining in popularity because small business owners can make payments each time they run payroll. That means employers are only paying for the workers' compensation coverage they're actually liable for at any given time. If they add or lose employees, the premium will update — instead of waiting until the annual audit to receive a credit or debit.
If you opt for a pay-as-you-go payment plan, talk to your insurance agent for when and how to pull payroll numbers. Some payroll software providers integrate directly with insurers, to make payroll reporting easy, efficient and accurate.
Find Your Estimated Workers’ Compensation Insurance Cost
How much does workers’ compensation insurance really cost?
The best way to get an accurate quote is to speak directly with an insurance agent — or get a quick online quote personalized for your business. However, the basic formula for calculating a workers’ compensation quote is:
Estimated Workers’ Compensation Cost =
(Gross Annual Employee Payroll / 100) x Workers’ Compensation Insurance Rate
To get an idea of how much your business might pay for workers' compensation coverage, follow these steps.
1. List Employees Covered By The Workers' Compensation Insurance Policy
Only workers covered by the workers' compensation insurance policy need to be included in the payroll calculation. If state law legally requires your business to carry coverage, this likely means that all employees must be included. This means all W-2 employees whether they're full-time, part-time, seasonal or temporary and salaried or hourly.
But other people often work for the business, too — particularly in very small businesses. Owners, officers, partners, LLC members, family members, etc. all fall into this category. The rules governing these workers differ on a state-by-state basis, and in some cases allow them to opt out or opt in to coverage.
Whether it's mandatory or voluntary, if these workers are going to be included in coverage, their wages must be included in the payroll calculation. If the owner is covered by the policy, submit total payroll including owner's compensation.
2. Categorize Employees by Classification Code
The rate for a clerical worker in Indiana is one-fifth the rate for a plumber, because of the higher risk for injury in plumbing compared to office work.
This is why you could overpay if you submit one lump amount for total payroll when shopping workers’ compensation insurance.
Instead, group employees based on the type of work they do. For small businesses, this usually includes:
- Primary or governing classification: The core service you provide or work you do.
- Clerical: If you have office workers that support your core business. This includes office managers, receptionists and administrative assistants.
- Sales: If you have employees primarily devoted to sales and business development.
Note that whether or not they travel matters for workers’ compensation as well. For example, an outside sales rep that meets with prospects in person, vs. an inside sales rep working a desk job.
For more on how to accurately categorize employees, read Workers Comp Insurance Cost: How to Avoid Overpaying.
About Classification Codes
There is a class code associated with every industry, which allows insurance carriers to better categorize companies and their employees. For example:
- 5183 – Plumbing
- 5190 – Electrical
- 5403 – Carpentry
- 8810 – Clerical
- 8742 – Outside sales (includes travel)
Workers’ compensation rates are assigned to each. You’ll need a class code for each type of worker, as the associated rate helps you calculate the estimated workers’ compensation cost.
Look up class codes and rates in one of three places:
- The National Council on Compensation Insurance (NCCI)
- Your state’s regulatory body (here’s an example for Pennsylvania)
- A state rating bureau independent of the regulatory body
WorkCompOne's online quoting tool makes it easy — just type in your industry to find out your classification code.
3. Pull Annual Payroll Numbers for Covered Employees
Check your payroll to pull pay details for each employee. Here’s how to handle common employment scenarios:
- Full-time employees: Make note of the annual estimated gross earnings for all full-time employees.
- Part-time employees: You’ll use the same approach as full-time, with the only difference being that their compensation is typically lower.
- Seasonal workers: Temporary and seasonal workers also require workers’ compensation coverage. Add up all wages earned during the year. If not yet known, estimate as best you can.
- Hourly workers: Hourly workers must have the same coverage as salaried workers, but calculating wages for hourly workers can be more difficult because of their varying work schedule. Again, estimate expected gross annual pay.
- Family members: Some states require family members to be covered, while others don’t. Learn more about the requirements in your state.
- Owners: Owners, officers, LLC members and partners may be able to opt out of coverage, depending on the state workers’ compensation laws.
Keep in mind that these totals will be updated during the annual insurance audit, which is why they can be estimates of anticipated wages when a policy is purchased. The business will be credited or debited the difference based on actual pay at that time.
4. Add Up Total Annual Wages
Once payroll has been pulled, find the total for each class code, and total payroll overall. These amounts can be rounded to the nearest $1,000.
When talking to an insurance agent or getting a quote online, have these numbers in front of you to get a quick and accurate price.
Example of Workers Compensation Payroll Calculation
|Role (Class Code)||Payroll||Total Payroll By Class Code|
|Plumber (5183)||$80,000 + $50,000||$130,000|
|TOTAL COMPANY PAYROLL||$170,000||--|
5. Multiply By Workers' Compensation Rate(s)
Workers’ compensation insurance rates can vary quite a bit from one U.S. state to another, and one industry to another.
For example, the rate for a plumbing business in Indiana might be $1.68 per $100 in payroll, while the rate for clerical work is just $0.35. But move those clerical workers to California, and their workers’ compensation rate might be $0.85 — nearly 1.5x higher.
This is why multiplying total payroll by the correct rate is so important to get an accurate estimate of your potential insurance costs. It’s also why you may need to divide employees into groups based on the type of work they do, so you don’t overpay on your policy.
A Real-World Example: Estimated Wages for Workers' Compensation
Here's another scenario that's a little more realistic than the example above. Take for example an electrical business in Texas with two full-time electricians, both earning $70,000 per year, and one part-time clerical worker earning $20,200 per year.
The workers’ comp rate for electricians (NCCI code: 5190) is $1.44. Remember, rates are expressed per $100 in payroll.
So, in this case, you’d divide $140,000/$100, which equals $1,400. Then, multiply it by the class code rate of $1.44. This leaves you with a total estimated payroll of $2,016 or $1,008 per employee.
The clerical worker’s rate (NCCI code: 8810) is $0.16, and we’ll round their salary to $20,000. A $20,000 payroll with a workers’ compensation rate of $0.16 would cost just $32 per year.
Total Payroll Breakdown
|Role (Class Code)||Payroll|
Workers' Compensation Cost Per Employee
|Role (Class Code)||Payroll||Payroll / $100||Rate (per $100)*||Premium|
*Example of annual workers' compensation insurance policy, base cost
This is a good estimate for what you will pay for a policy; however, your final quote will depend on additional credits or debits determined by the insurance carrier, the business’s history of claims and the liability limits you choose.