Workers' compensation insurance cost is the total annual premium to cover all employees under a workers' compensation policy. For small businesses, this can range from a few hundred to a few thousand dollars annually. For example, a business with a payroll around $100,000, might have an annual workers' compensation insurance cost ranging from $700 to $3,000.
That said, a number of factors influence workers' comp insurance premiums. So, how much does workers’ compensation insurance cost?
It depends. It depends on your industry, where you’re located, the size of your business, and your claims history. We'll explain.
Workers' compensation insurance, or simply workers' compensation, is a commercial insurance policy that many small businesses need to carry. Workers' comp insurance costs are the total premium for this line of insurance. This is often shown as the annual premium amount, but it might also be presented as the monthly payment. (Either way, don't confuse this with the workers' compensation rate, which we explain in more detail later.)
Unlike other small business insurance policies, workers’ compensation is regulated at the state level, so rates and coverage requirements differ from state to state. Almost universal, however, is that employers are legally required to carry workers’ compensation insurance that covers all employees on their payroll. Also, workers' compensation insurance expenses must be paid by the employer — they cannot be passed along to employees.
Depending on payroll, the average workers’ compensation policy for a small business can range from a few hundred dollars to a few thousand dollars annually. Total payroll arguably has the biggest impact on work comp prices because premiums are calculated per $100 in payroll.
That said, the state where employees work and the type of work they do can both dramatically influence what you can expect to pay. For example, here’s how rates compare between Indiana and California, and for clerical workers vs. plumbers. Both are based on $100,000 in payroll.
Coverage for the plumber is nearly 5x as much as the clerical worker in Indiana. But move that clerical employee from Indiana to California, and the premium is $500 more per year — an increase of 143%.
As this example illustrates, physically demanding jobs have higher rates than office jobs, but rates can also vary widely by state. This is because workers’ comp covers legal expenses as well as medical bills and missed wages, which raises rates in more litigious markets and states that have higher healthcare costs and higher wages.
States with higher average work comp rates include New Jersey, New York and Vermont. Indiana, Arkansas and North Dakota have some of the lowest rates overall. Illinois, North Carolina and Florida are examples of states that fall in between.
Your work comp quote will be based on four main factors:
It's important to keep in mind that many details about a business influence the premium amount. Some factors are within the employers control; some are not. Small business owners can weigh their options and make choices that are best for their company.
|In Employer's Control||Out of Employer's Control|
|Total payroll||State workers' compensation laws|
|Workplace safety practices||Classification code|
|Whether to hire employees or contractors*||Workers' compensation rate|
*Remember to follow the common law guidelines of what constitutes an employee (W-2) versus a contractor (1099). Hiring a worker as a contractor may not be sufficient, if they otherwise meet the criteria of an employee.
We'll cover each of these factors below, starting with workers' compensation rates.
When talking about how much workers' compensation insurance costs, it's usually expressed in the total annual insurance premium. After all, this is the bill the employer is legally required to pay to maintain compliance with state law. If you see prices expressed in just dollars and cents — for example, $1.25 — this is probably a workers' compensation insurance rate.
The rate is used to calculate the insurance premium, so it has a direct impact on total work comp insurance costs. The reason the rate seems suspiciously low is because it's expressed per $100 in payroll.
In other words, for a small business with a rate of $1.25 and a payroll of $60,000:
$60,000 / $100 = 600
600 x $1.25 = $750
This small business would have a baseline insurance price of $750. If payroll were $30,000, this amount would be closer to $375 annually.
To arrive at a quote for a work comp policy, it’s important to understand how workers’ compensation rates are set.
Workers’ compensation insurance is regulated at the state level, which means each state has its own workers' compensation laws. State law dictates who needs to carry workers' comp insurance, where you can buy it, and which workers must be covered by the policy.
Additionally, rates can be adjusted statewide to reflect changes in performance of the state’s workers’ compensation system as a whole. For example, lower healthcare costs and improved workplace safety could mean fewer claims, which ultimately can result in lower rates.
The economic makeup of a state also influences rates; some state economies center around high-risk industries like logging or trucking, whereas others have a lower risk of injury.
Not only that, but the state’s general attitude toward businesses and workers affects cost; in more worker-friendly states, courts are more likely to favor employees in workers' compensation disputes, thus resulting in more awarded claims and higher overall costs.
Rates are set by collecting and analyzing workers’ compensation claim data from all businesses operating within that state. Rates are set by one of the following:
The final piece of the puzzle are "base rate states." Some states (like Florida) require all insurers to use the workers’ compensation rates set by the state rating agency. Credits and debits may be applied by the insurer and adjust premiums slightly, but the cost of workers’ compensation insurance will be largely the same from one insurance company to the next.
Most states are not base rate states. In this case, the state rating bureau publishes rates to be used as a benchmark, and then insurance carriers submit their own rates to the state’s regulatory body for approval. In this system, rates and therefore workers' compensation quotes may vary widely between insurers; it becomes even more important to shop around for the best quote.
Classification codes (“class codes”) are key to determining the final cost of a work comp premium. Defined by the NCCI or the state, class codes are assigned to a business based on the type of work employees do. This code corresponds to a standardized list of industries, and it’s a way for insurance carriers to categorize companies.
It’s important to note that some businesses have only one class code, whereas others may have several. A carpentry business, for instance, may have a governing class code of 5403 as well as class codes for clerical and sales employees.
NCCI also collects extensive injury and claims data, and provides advisory rates to insurance carriers that reflect the relative risk of a workplace injury. Each carrier has its own models for evaluating risk and calculating premium amount, but generally speaking, some class codes may be more difficult or more expensive to cover if your industry is considered high-risk. For example, trade contractors will pay more for coverage than office workers.
To find out your class code, it’s best to work with an insurance agent that specializes in work comp. They can help you most accurately classify your business, modify your class code as needed, and avoid paying the wrong rate for the wrong classification.
You can also use WorkCompOne’s online quoting tool to find your classification code through a keyword search.
Because workers’ compensation is governed at the state level, requirements, rates and carriers will vary depending on your location.
Some states, for instance Georgia, have a private market for workers' compensation insurance. This means that employers can purchase a policy from any licensed insurance from the state. With more options, small business owners can shop around for the most competitive quote.
In most states, the workers' compensation insurance market is a hybrid of the two: Businesses can purchase insurance from a private insurer or through the state fund, which competes with the private market. This creates the most opportunity and leaves the state fund as a fallback for hard-to-insure businesses. Examples of this system are in California
Keep in mind that both your insurance agent and carrier must be licensed in your state, and your business must comply with the states where your employees work—not necessarily where the business was founded or is based. Be sure to refer to your state’s resources, or talk to an insurance agent about securing policies that comply with each state.
Another factor that goes into workers’ compensation cost is the size of your workforce. Most states treat part-time and full-time workers the same when counting the number of employees a business has — which generally determines whether the business is required to carry workers' compensation insurance.
Workers' compensation costs are actually not determined by number of employees, but on total payroll. Total gross wages are multiplied by the workers' comp rate (or rates) to calculate the insurance premium.
When calculating total payroll, remember:
Use an average of your payroll throughout the year. Even if this fluctuates, you can typically contact your insurance agent to increase or decrease payroll, and in doing so adjust your premium amount and level of coverage. Under-reporting wages can result in unexpected expenses when your business is audited. You’ll be required to make up the difference in premium.
Lastly, an experience modification factor (“Experience Mod”) is a credit or debit applied to the premium to factor in a company's past history of claims. After three years in business, companies are assigned an experience modifier.
The experience modifier is based around a scale of 1.0. An experience mod under 1.0 represents a safe workplace (fewer claims) and over 1.0, a risky workplace (more claims). A percentage discount (or additional expense) is then applied to the insurance premium based on the experience modifer. And it is mandatory for insurance companies to include.
Similar to classification code, an experience mod is determined by an independent rating bureau (NCCI in most states) and based on actuarial data.
But an experience modifier reflects the company’s workplace safety relative to others in the same class code. While your class code groups your company with similar businesses (in effect tying their claims to yours), an Experience Mod allows businesses to demonstrate above-average workplace safety—and reap the benefits. Beyond this, individual underwriters may choose to apply their own credits or debits to a quote.
A new business with no history or prior coverage won’t yet have an experience mod, and this can lead to higher premiums. With no prior history to evaluate, work comp costs may be higher during the first three years in business, but these can decrease when the experience mod is applied.
Companies with a history of claims can expect to pay more and should consider implementing safety programs to avoid future claims and bring down premiums. Few or no claims, on the other hand, demonstrate a safe workplace, and can reduce the annual premium. And safety pays off: A company's claims record can commonly influence premiums 10% to 25% in either direction.
Tip: Review your Experience Mod annually with your insurance agent to see if you qualify for a reduced premium.
Workers' comp quotes are often shown as the full annual cost, but they aren't necessarily paid up-front. Different payment methods can be selected to pay the premium monthly or quarterly.
As we mentioned earlier, work comp premiums might fluctuate with total employee payroll. That's ok; policyholders are audited at the end of each policy year (when the policy would expire, or renew). At this time, the insurance company will reassess wages, classification codes, etc. and make any adjustments — issuing credits or debits as needed. Some insurers offer "pay-as-you-go" insurance, which is calculated based on payroll practically in real time.
We’ve already outlined the varying factors that impact the average cost of a workers’ comp insurance policy, but to estimate what policy quotes might look like for your business specifically, you’ll need to take a close look at the numbers. This includes gathering salary information for each employee, knowing your class code(s), and determining cost per employee.
To put it into a formula: Estimate your workers’ compensation cost by dividing total payroll by 100, then multiplying that number by your workers’ compensation insurance rate:
(Annual Employee Payroll / 100) x Workers’ Compensation Insurance Rate = Estimated Workers’ Compensation Cost
For example: A rate of $3.00 means that a business with $100,000 in payroll would pay $3,000 annually in work comp premiums.
To estimate your workers’ compensation cost, start with these general steps:
When evaluating your quote, you might look for discounts, such as:
It's particularly important in higher rate states like California to conduct due diligence and get the right coverage at the best price.
Workers’ compensation insurance protects your business legally and financially. By working with an experienced insurance agent, you can get the coverage you need at a fair, affordable price.
Ready to get started? Get a free quote from WorkCompOne in less than 10 minutes.