Calculating Workers’ Compensation
Great employers pride themselves on preparing their workers so they understand how to prevent on-the-job injuries. Some employers even display a running total of the number of days in a row without a work-related injury.
While an injury-free workplace is something all companies should strive for, accidents still happen. Because of the liability associated with accidental injuries, most companies are required to have workers’ compensation coverage.
Therefore, it is important to understand what affects the workers’ compensation premium, how the premium is calculated, and how to calculate the cost of your workers’ compensation coverage each pay period.
Pain in the you-know-what
Calculating workers’ compensation is not the most straightforward equation you are going to see where business expenses are concerned. In fact, it can be a downright pain in the rear (but try to keep in mind that keeping employees injury-free can help reduce the pain in your pocket!).
By the time you finish calculating, you might feel like you have returned to high school in the front row of that algebra class you nearly failed! However, understanding the components of your workers’ compensation premium—and a little calculation practice—will set you on a path to total workers’ comp enlightenment.
Individual state rating rules
Before calculating workers’ compensation for your company, you need to know workers’ comp rules vary for each state. For example, the state of Iowa excludes sole proprietors from workers’ comp coverage. In the state of Tennessee however, sole proprietors must pay premiums on contractors who are construction workers. You should become familiar with the rules for your state, in order to avoid any kind of penalties.
Steven Harris, Managing Partner of Journey Employer Solutions Arizona explains, “Worker’s Compensation is a required in most states. It’s a great insurance benefit for employer’s to minimize exposure as a result of workplace injuries. There are many different carriers and platforms to support workers’ comp administratively as well. Journey Payroll can get you in touch with the best experts in the industry to ensure you have the best policy in place. We also have a solution that streamlines the administration of your worker’s comp plan by adding a Pay-As-You-Go option. This may help reduce audits and eliminates under or over-payments at the end of the policy period.”
Now that you have an understanding of state laws, it’s time to dust off that calculator.
Step One: Classification codes
Once familiar with your state’s rules, you can begin assigning the values to the variables you will need for calculating workers’ compensation premiums.
The first thing you want to find out is the four-digit classification code for your employees (or codes, if employing more than one type of employee). This code is specific to the individual employer, so the nature of a business’s operations determines the workers’ compensation classification code. In other words, what are the job functions within the business?
Lists of classification codes, sorted alphabetically based on business operations, can help you efficiently locate your code. Each classification code has a corresponding base premium rate, and the base premium rate in conjunction with the tier (an additional factor determined by operations, loss history, effectiveness of safety and risk management programs, and premium size) will determine the multiplier you will use to determine your workers’ compensation rate.
Step Two: Total payroll
The second thing you will need to calculate is your total business payroll. This can be accomplished by adding up gross wages by classification code for a given pay period. (The reason you will need to compartmentalize wages by classification code is that if you have multiple classification codes, your rate will be different for each code.)
You will then divide the wages in each classification code by 100.
Step Three: E-Mod Rating
The third step in the process is injecting your experience modification rating (also called the e-mod rating) into the equation. The e-mod rating is determined by assessing your prior three years’ business claims.
If you had many workers’ comp claims during the prior three years, then your e-mod rating will be higher, and conversely, having fewer claims lowers your e-mod rating.
You will multiply the manual premium you calculated by the e-mod rating, giving you the standard premium (also called the modified premium).
Step Four: Catastrophe Cover
If you have no additional coverage, you are nearly finished with calculating workers’ compensation payment for this pay period.
However, some companies will elect supplemental coverage, and one such additional cost is catastrophe cover. Workplaces where disasters or massive-scale injuries are possible are good candidates for this type of coverage.
The cost of this coverage caps at 1% of the payroll amount.
As far as additional discounts, your company may be eligible for association and/or premium discounts, based on membership in certain safety programs and/or your premium size.
You will want to check with your insurance agent to see if you are eligible for additional discounts. This can help lower your workers’ compensation cost.
Step Five: Administrative Fee
The final piece of the equation for calculating workers’ compensation is the obligatory administrative fee. No business is exempt from this fee, which is a flat $150 for processing.
Let’s practice your workers’ compensation calculation together.
- Determine your classification codes and base premium rates. In order to keep it easy, we are going to assume you only have two classification codes (5140 for electricians, and 8810 for clerical workers), and your base premium rates for those codes are 6% and 1%, respectively.
- Factor in your total payroll for the previous pay period. To keep it simple, we will say your total payroll is $10,000, of which you are paying $7,500 to electricians, and $2,500 to clerical workers.
- Multiply the payroll amount according to classification code by the appropriate base premium rate. So, $7,500 x .06 (since the rate for electricians is 6%), and $2,500 x .01 (since the rate for clerical workers is 1%). Add the product of those two amounts together: $450 + $25 = $475, which is your manual premium.
- Multiply your manual premium times your e-mod rating. We will say that your e-mod rating is .9, so your modified premium will be $427.50.
- Multiply any discounts. For the purpose of practice, we will say that you have a 1% premium discount, so take $427.50 x .01 = $4.28.
- Add any extra coverage. Again, for the purpose of practice, we will say that you elect catastrophe cover, so that will be a flat .01% of your total payroll/100. ($100 x .01 = $1 catastrophe coverage.) $423.22 + $1= $424.22.
- Add the $150 administrative fee. $424.22 + $150 = $574.22.
Exclusions and Proper Payment
Finally, make sure you’re aware of any exclusions for workers’ compensation coverage. Excluded workers in one state might not be excluded in another, and laws are subject to change.
Additionally, even though you can use this equation to estimate your premium, a licensed workers’ compensation insurance agent will verify your actual premium. Your business practices and cash flow will determine if it is best to pay in a lump sum at the beginning of the year and reconcile at the end of the year, or if you should pay after each payroll.
You can expect an audit of your business payroll for workers’ compensation payments, so make sure everything is accurate. As Steven Harris mentioned earlier, you can also consider Journey’s pay-as-you-go workers’ comp option to reduce the stress of audits and streamline payments. Learn more about the perks of pay-as-you-go and how pairing workers’ comp with payroll improves accuracy.
In summary, workers’ compensation coverage is unavoidable. With a little attention to detail, calculating workers’ compensation doesn’t have to be as painful as the injury your employee sustained.