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, there are also things you can do on your own to get a ballpark price, which includes calculating payroll for each employee type.
Find Your Estimated Workers’ Compensation Cost
Before we dive into the finer details, let’s take a look at the basic formula for calculating the workers’ compensation cost for an employee:
Estimated Workers’ Compensation Cost = (Gross Annual Employee Payroll / 100) x Workers’ Compensation Insurance Rate
But that last number — your rate — isn’t the same for every business. 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.
1. Categorize Employees
In the example above, 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 your 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 your employees 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 which of your workers need to be covered, read Which Employees Legally Need to be Covered by a Workers' Comp Policy?
For more on how to accurately categorize employees, read Workers Comp Insurance Cost: How to Avoid Overpaying.
A Quick Note on 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. Learn more about rates here: Workers’ Compensation Insurance Rates: What They Are & How They’re Set.
You’ll need a class code for each type of employee, 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
2. Pull Annual Payroll Numbers
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 employees, 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 payroll 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, and depending on the state workers’ compensation laws.
Keep in mind that payroll totals will be updated during the annual insurance audit, which is why they can be estimates of anticipated payroll when a policy is purchased. The business will be credited or debited the difference based on actual pay at that time.
3. Add Up Total Payroll Costs
Once payroll has been pulled, find the total payroll for each class code, and total payroll overall. Payroll numbers can be rounded to the nearest thousand dollars.
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.
A Real World Example
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 workers’ rate (NCCI code: 8810) is $0.16, and we’ll round this payroll to $20,000. A $20,000 payroll with a workers’ compensation rate of $0.16 would cost just $32 per year.
Total Payroll Breakdown:
Plumbing payroll: $140,000
+ Clerical payroll: $20,000
Total payroll = $160,000
Workers’ Compensation Cost Per Employee:
Plumbers (5190): $2,016
+ Clerical (8810): $32
Total estimated premium = $2,048 for workers’ compensation coverage
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.
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