How Much Does Workers’ Compensation Insurance Coverage Cost For Your Business?

Workers’ compensation (workers’ comp) is a type of insurance provided by an employer when an employee gets hurt or sick on the job. The federal government provides programs for different types of employees, which employers pay into and provide for their workers. This benefit is part of employment law in most states, meaning employees have a right to this insurance; if an employer does not provide workers’ comp, the employee could sue. Workers’ comp covers a variety of benefits including:

  • Medical expenses;
  • Lost wages;
  • Long and short term disability benefits;
  • Rehabilitation costs;
  • Death-related costs. 

Since workers’ compensation helps employees who can’t work for a certain amount of time, it’s important to invest in this benefit for your employees. Not only does the insurance protect the workers, but it also protects your business from legal trouble. The cost of workers’ comp is determined by several factors like:

  • Location;
  • The type of work;
  • The number of employees;
  • Your claims history. 

It’s also important to note that while your business could deduct workers’ comp insurance for taxes, your employees do not pay taxes on workers’ compensation insurance — unless they also receive any type of supplemental security income (SSI). Nevertheless, each state has its own workers’ compensation requirements. 

Workers’ Compensation Class Codes

Class codes help define the type of job an employee has. The National Council for Compensation Insurance (NCCI) determines each four-digit number, which tells insurance companies:

  • The job title;
  • The job risk;
  • The rate of the insurance premium.

The class code rate depends on the overall risk of the job. For instance, a contractor supervisor will have a higher rate than an office manager because there are more chances for contractors to get hurt on the job. So, having more high-risk employees could increase your insurance premiums. 

No matter the job type, there are many reasons people claim workers’ comp. The most common reasons include:

Employers should be aware of all risks and ensure these risks are covered by workers’ comp. 

Workers’ Compensation Cost By Location

Each state maintains its own workers’ comp laws which impact the costs. The states are divided into three types:

  • NCCI states: As previously mentioned, these states use class codes to determine rates. 34 states use the NCCI class codes and organization. 
  • Independent bureau states: These states established their rating bureau. They permit private insurers to sell workers’ comp insurance. 11 states and the District of Columbia make up this division.
  • Monopolistic states: These states establish funds for underwriting workers’ comp and deter from private insurance coverage. Employers must buy insurance from a state-controlled fund. Four states are considered monopolistic. 

Each type of state can have different insurance rates. Additionally, each state has different employee requirements. For instance, some states require employers to purchase workers’ comp for as little as one worker; some states require three to five employees for workers’ comp. Lastly, some states exempt certain employers from getting workers’ comp; New Mexico does not require real estate agents or ranchers to have coverage. By knowing your state’s requirements and regulations for workers’ comp, you are one step closer to estimating your premium. 

Costs by Size of Payroll

The size of your payroll can affect the cost of workers’ comp. Insurers determine the estimated premium based on your payroll for the upcoming year. Payroll includes many things such as:

  • Wages;
  • Salaries;
  • Bonuses;
  • Overtime;
  • Tips and gratuities;
  • Benefits;
  • Paid time off;
  • Sick pay. 

Since payroll includes different monetary aspects, it’s important to accurately estimate your payroll. 

To find how much workers’ comp costs per employee, you must divide the payroll total by 100, then multiply that by the workers’ compensation rate. For example:

  • (Annual employee payroll/100) x workers’ compensation rate = workers’ compensation cost. 

By determining the cost per employee, you can plan and budget for workers’ compensation costs. 

Workers’ Comp Audit

After the fiscal year, insurers assess the payroll expenses to determine if changes need to be made to the rate. This is called a workers’ comp audit. The workers’ compensation rate is determined by multiplying a rate by your payroll. At the beginning of your policy, you pay a premium based on the projected payroll for the following year. During that year, there may be changes to your payroll that can lead to a change in your premium rate. These changes could include adding or subtracting an employee, or adding benefits. 

Employers must provide accurate data for insurers. Supplying false data could subject you to insurance fraud prosecution. Actions that are considered fraudulent include:

  • Underreporting payroll;
  • Providing false job descriptions;
  • Supplying false tax returns;
  • Falsifying certificates of insurance;
  • Hiding contractor hirings. 

Impacts of Your Claims History

Insurers consider your claims history to determine a workers’ comp premium. This is also called an experience modification rate (EMR) and is a reflection of workplace safety compared to other businesses. Insurers use this number to understand future business risks and the cost of past insurance claims. EMR uses a scale:

  • 1.0 EMR is an industry average and means you don’t have to pay more or less; 
  • Less than 1.0 is called credit and mean you will get a discount;
  • More than 1.0 is called a debit and means you will pay more. 

Your EMR can greatly affect your rate. The lower the EMR, the lower your insurance premiums. However, you can lower your EMR by promoting workplace safety. Creating an effective safety program can help prevent injuries and sickness as well as help management deal with claims. 

Workers’ Compensation Formula

To determine an estimate of a workers’ comp premium, employers must multiply the class code rate by every $100 covered in payroll and the EMR. For example:

  •  Premium = (payroll/$100) x class code rate x EMR

Say a company has $100,000 in payroll, a class code rate of $0.50, and an EMR of 1. Using the formula above, the equation would look like this:

  • Premium = ($100,000/$100) x $0.50 x 1.0

The premium would equal about $500. It’s important to note that this is only an estimate. Since each state has different laws and regulations, and the EMR your business will be assigned is unknown, you cannot know your exact premium without talking to an insurance company. 

Additionally, benefits are based on an employee’s average weekly wage. On average, an employee works 260 days a year, leaving time for vacation or sick leave. If an employee makes $50,000 a year, then they would make a daily wage of $192.31. By multiplying this by five days a week, you get a weekly wage of $961.55. Employees typically receive benefits of 60% of their weekly wage on workers’ compensation, which would be $576.93 per week. 

Determining your workers’ comp premium requires looking into the many safety aspects of your business. Also, by knowing the different factors that affect your premium, you can estimate the cost to plan and budget for it. 

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