Whether budgeting for the upcoming year or preparing information for tax season, you know there are certain small business expenses that remain relatively consistent: monthly electric bills, an annual software subscription, tools and supplies you need to operate, and so on. But when it comes to things like workers’ compensation insurance and small business policies, estimating costs gets somewhat tricky.
Formula to Calculate Workers' Compensation Cost
To estimate your workers’ compensation cost, divide total 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 CostIn other words, arriving at an estimate for workers’ compensation insurance involves a few different factors, which might change from year to year.
We’re here to help. Read on for everything you need to know to estimate your workers’ compensation cost.
Note: The following instructions will give you an estimate of workers’ compensation cost. There are other factors that can and will affect the final premium. To get the most accurate price for your business, request a quote in less than 10 minutes.
1. Determine Which Employees Need Coverage
First and foremost, you must comply with the laws of the state(s) in which your employees are performing work. Each state has its own laws surrounding workers’ comp, including who needs coverage and how it can be obtained.
Check Your State’s Employee Threshold
Very small businesses may be exempt from workers’ comp laws, but most states require you carry a workers’ comp policy if you employ at least one person.
- In California, Illinois and Arizona, businesses with one or more employees must carry workers' compensation insurance.
- In Virginia, employers with two or more employees need to carry workers’ comp.
- In Georgia and North Carolina, businesses with three or more employees must have coverage.
Keep in mind that full-time, part-time, temporary and seasonal employees are all counted as a full employee. This means that if a seasonal hire will meet your state’s employee limit, you need to have coverage in place on their first day.
Also, some states have industry-specific exceptions to the employee minimum; common ones include agriculture, domestic workers, trucking and construction.
In some states, certain people that work with and for the business — such as family members and ownership roles — might be exempt from employee rule. This could include:
- Sole proprietors
- Members of an LLC
- Family members
Some of these people can be considered non-employee workers and excluded from coverage without penalty; however, it’s important to note that they may count toward the total number of employees.
If you hire independent contractors, though, you could be held liable if they don’t provide workers’ compensation insurance for their subcontractors.
To learn more: Which Employees Legally Need to be Covered by a Workers' Comp Policy?
2. Group Employees Based on What They Do
If your business is required to carry workers’ compensation insurance, you must purchase a policy that covers your full payroll, regardless of whether employees are full-time, part-time, temporary or seasonal. However, the rate differs based on the type of work the employees do, and relative risk for injury associated with that work.
A classification code (“class code”) is a numeric code that corresponds to a standardized list of industries, and is a way for insurance carriers to categorize companies. Class codes group together similar businesses, so data can be collected on workplace injuries and workers’ compensation claims.
Examples of Class Codes
- 5183 - Plumbing
- 5403 - Carpentry
- 8810 - Clerical office employees
- 8017 - Coffee, tea or grocery dealer - Retail & salespersons
These codes are defined by the National Council on Compensation Insurance (NCCI), an independent organization that collects workers’ compensation data on U.S. businesses. Based on the work your employees do, your business is assigned a class code that influences your final premium cost.
Each carrier has its own models for evaluating risk and calculating premium cost, but generally more dangerous class codes may be difficult or more expensive to cover (such as roofing or trucking).
Keep in mind that it’s possible for a business to have more than one class code. For example, a plumbing business might have an office administrator or secretary whose class code would differ from that of an actual plumber.
Tip: Most small businesses can place their employees into the following groups:
- Primary service (plumbing, manufacturing, retail, etc.)
- Clerical or administration
- 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
To learn more: How to Determine Employee Class Codes
3. Calculate Payroll for Each Employee Type
Once you’ve determined who needs to be covered and the class code for each employee, add up the annual payroll for each group.
- Full-time employees: Find annual estimated gross earnings for all full-time employees.
- Part-time employees: Part-time workers are treated the same as full-time, though their annual payroll is likely lower by comparison.
- Seasonal workers: Temporary workers still need to be covered, and the policy should be left in effect for the entire year. Add up seasonal wages; for example, a server earning $1,000 per month for a 3-month summer shift would equal $3,000 in annual payroll.
- Family members: Check your state’s work comp requirements. If they need to be covered, their wages should be calculated like any other employee.
- Hourly workers: Hourly and salary workers are treated the same under work comp laws. The hourly worker’s payroll just may be more difficult to estimate.
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.
If you’re unable to calculate the exact payroll for the year (for example, if a worker is paid hourly), estimate projected payroll. Actuals are reported when the business is audited at the end of the policy year. Depending on the differences between estimates and actuals, your account will be credited or debited accordingly.
Tip: If you grossly underestimate payrolls, you’ll have a large audit premium payment due in addition to your normal invoices for the following year. Aim to be as accurate as possible, otherwise, you could wind up with a hefty end-of-year bill (and a hit to your cash flow). And no one wants that.
4. Look Up Your Rate(s)
The last piece of information you need to estimate your cost for a workers’ comp policy is your state’s workers’ compensation insurance rates.
Workers’ compensation cost is based on the rate set by your state’s rating agency or bureau. Check your state to find out what ruling body sets workers’ compensation rates.
How Rates are Set
This is where class codes come into play. Rating bureaus collect data from every business in your state, analyzing data from work comp claims and looking at class codes to determine a baseline cost of workers’ compensation insurance for all businesses operating within the state.
The workers’ compensation rate is represented as the cost per $100 in payroll. For example: A rate of $1.32 means that a business with $100,000 in payroll would pay $1,320 annually in work comp premiums, or just $110 per month.
Base Rate States
Some states require the insurer to use the workers’ compensation rates set by the state rating agency. These are called base rate states.
But in most states, insurance companies are allowed to deviate and instead use the state’s advised rates as a benchmark, meaning costs could vary from one insurer to the next. In these cases, each carrier will have its own models for evaluating risk and calculating premium cost.
For businesses having a hard time obtaining coverage, some states provide a state fund which competes with the private market. Additionally, some states offer an assigned risk pool for higher-risk businesses or businesses that have had multiple work comp claims.
For the most accurate rate and best price, use an independent agency that can shop around and present you with the most competitive quote.
6. Calculate Estimated Workers’ Compensation Cost Per Employee
Now for a little math (we recommend using a calculator).
Let’s take an Indiana plumbing business that has two plumbers employed; a master plumber who makes $80,000 per year, and an apprentice that makes $50,00 per year. It also has one office manager, who handles clerical tasks and is paid $40,000 per year.
As we mentioned earlier, this payroll is their estimated gross annual earnings, rounded to the nearest thousand.
By grouping employees by class code, we know that we need to find the sum of our plumbing payroll:
$80,000 + $50,000 = $130,000 in plumbing payroll
We look up rates in Indiana, and they are $1.68 and $0.35, respectively.
|Role||Class Code||Rate (per $100)|
Rates are expressed per $100 in payroll, so we divide our $130,000 plumber payroll and $40,000 clerical payroll by $100:
$130,000 / 100 = 1,300 in plumbing payroll
$40,000 / 100 = 400 in clerical payroll
Then, multiply by the rate for that class code:
1,300 x $1.68 = $2,184
400 * $0.35= $140
Tip: Google “calculator,” if you don’t have one handy.
Lastly, add up the cost per class code:
$2,184 + $140 = $2,324
Based on these 2018 rates in Indiana, this plumbing business with $170,000 in payroll could expect to pay approximately $2,324 in annual workers’ compensation cost - or, less than $200 per month.
Estimated Workers’ Compensation Quote
|Role (Class Code)||Payroll||Payroll / $100||Rate (per $100)*||Premium|
|Plumber (5183)||$80,000 + $50,000||1,300||$1.68||$2,184|
*Example of annual workers' compensation insurance policy cost based on 2018 Indiana rates.
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.
To learn more: How to Calculate Workers’ Compensation Cost Per Employee
Your Workers’ Compensation Cost: Other Factors at Play
Your payroll and rate will give you a good estimate of workers’ compensation costs, but your final premium may look a little different.
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 carrier may take other factors into consideration when calculating a quote to best reflect your business.
Factors That Influence Your Premium
- Loss history, or past workers’ compensation claims filed.
- Premium discount factor for companies with larger premiums (usually 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 training that may qualify your business for savings.
You Might Also Like: 12 Ways to Save Money on Small Business Insurance
Get Your Workers’ Compensation Price
Find out what your business’s workers’ compensation cost should be. WorkCompOne is an independent agency, and can shop around to get your business the best price.
Get a workers’ compensation quote in 5 simple steps.
Editor's note: This post was updated in 2021 to be more current and comprehensive. It was originally published in 2019.