How much does workers' comp insurance cost?

As a business owner, you know that you need many different types of business insurance. While keeping tabs on these insurance types can be confusing, you must never forget one of the most important: worker’s compensation insurance.

So, what is workers’ comp? As an employer, you’re not only expected to take reasonable care to ensure a safe workplace for your employees—you’re required to. Unfortunately, even in the safest workplaces, accidents happen. Workers’ compensation insurance ensures that employees who suffer job-related illnesses and injuries can get medical care by covering the cost of medical expenses regardless of their personal health insurance. It also ensures wage replacement until they’re able to return to work.

Even if your business itself isn’t at fault, workers’ compensation helps your employees and provides a measure of protection for your organization. In exchange for workers’ comp benefits, employees have limited rights when it comes to seeking legal action against an employer.

Workers’ compensation insurance is state-regulated, which means that the statutes in your state determine the types of injuries that are covered, how issues are evaluated, how medical care should be delivered, and what the exact benefits are for an employee.

In this article, we’ll be discussing the cost of workers’ comp insurance for employers. Use the links below to navigate the post, or read in its entirety for a full rundown:

• Worker's comp coverage
• How is workers’ comp insurance calculated
• What factors affect the total cost of workers’ comp?
• How to manually estimate workers’ comp costs?
• Ways to save on workers’ comp
• Calculate workers comp costs with QuickBooks

• Workers’ comp costs: Frequently asked questions
• Final notes

Workers’ comp coverage

If one of your employees suffers a work-related injury or illness, workers’ comp can help cover the following:

Medical expenses

This coverage includes things like emergency room visits, prescriptions, and necessary surgeries. This means if a factory worker severely cuts their hand on a piece of equipment, workers’ comp could cover their hospital visit.  

Wage replacement

If an employee can’t come to work for a certain amount of time due to their injury or illness, workers’ comp is there to help provide those lost wages. Usually, programs provide roughly two-thirds of the worker’s gross pay.

Disability benefits

Workers’ comp can provide financial support to your employee if their work-related injury temporarily or permanently disabled them. Along with lost wages, other costs might be included, like rehabilitation and necessary equipment — e.g., crutches, wheelchairs, prosthetic devices, etc. 

Vocational rehabilitation

If an employee’s injury is severe enough that they can’t return to their previous position, this coverage helps provide resources — e.g., job training, career counseling, resume help, etc. — to secure a different job in the company or a new job elsewhere.

Death benefits

If a work-related injury or illness causes an employee's death, workers' comp provides money to their beneficiaries to cover funeral costs and other expenses. 

Is workers’ comp mandatory for businesses?

Most states require businesses to have workers’ comp — with the exception of Texas and South Dakota. However, the specific requirements depend on the state and the type of business you run. For example, some states impose workers’ comp if you have even just one employee, while others only mandate it once you reach a certain number of employees. 

If you live in Texas or South Dakota, it’s highly recommended that you get workers’ comp. Why? Employees have the right to sue you if your workplace causes their injuries or illnesses. Ultimately, you could pay medical expenses, lost wages, and legal fees out of pocket. Additionally, your business’s reputation could take a hit if word gets out that you’re not taking care of your employees.

If you’re unsure what your state requires, check with a legal expert or your state’s insurance department. 

How is workers’ comp insurance calculated?

Let’s explore workers’ comp basics. The cost of workers’ compensation depends on the business size, location, industry, and claims history. Overall, the premium for workers’ compensation insurance is based on risk. If you operate in a riskier industry that is prone to workplace injuries, such as any industry that employs laborers, your cost will be higher.

Formula and examples

The basic formula to estimate the cost of workers’ compensation for a single employee is:

(Annual employee payroll/100) x workers’ compensation insurance rate = estimated workers’ compensation cost 

Let’s take a look at some examples:

• A business with a $100,000 employee payroll and a workers’ compensation insurance rate of $1.50 would mean that a business would pay $1,500 per year in workers’ comp premiums.
• Similarly, a rate of $.50 means a business with $50,000 in payroll would pay $250 in annual workers’ compensation premiums.

The exact formula that your insurer will use to determine your company’s premium can vary based on a number of factors and insurers may calculate it differently. These formulas also depend on the workers’ comp laws in each state.

What factors affect the total cost of workers’ comp?

Workers’ compensation is based on a classification system. All employers in the same industry with the same functions will have the same classification. These classifications are assigned workers’ comp rates based on the history of occupational risk.

The factors that affect the cost of workers’ compensation include:

• Classification system

The classification system, as mentioned above, depends on the industry of the business. If your industry employs laborers, your class will likely have a higher workers’ compensation rate because of its classification code. It’s important to note that this classification is very important because misclassifying an employee who gets hurt on the job is just one of the many warning signs of fraud.

• Experience modification

The experience modification rates (EMR) is a representation of how the workers’ compensation claims experience compares to another similar business in your state. Employers start with a rate of 1. This means that they pay 100% of the rate assigned to the class code with no automatic credit or debit adjustments.

Luckily, once the small business has had coverage for a few years, they become eligible for an EMR, which means mandatory adjustments to manual rates.

There are two types of EMRs: a credit EMR, which is an experience modification factor less than 1, and a debit EMR, which is a factor greater than 1. The modification factor is applied to the premium to reduce or increase the cost of workers’ compensation coverage. These factors are based on the loss history of the business. By adjusting the premium, they adjust the rates businesses pay for their class code.

• Scheduled credits and debits

Most states allow insurers to apply credits and debits to small business workers’ comp coverage to adjust premiums up and down. These credits are scheduled and can be subjectively used at an underwriter’s discretion. An underwriter can offer pricing based on unique conditions within a small business, including years of experience, workplace safety training, and work environment.

• Amount of payroll paid

Each class code is assigned a base rate for every $100 of payroll. For example, a workers’ compensation rate of 1.5 equals $1.50 for every hundred dollars of payroll in the class code. Most states require that a premium discount be applied to premiums that hit a specific dollar amount. The discount affects the manual rate and is based on the theory that there are fixed costs for workers’ comp policies. Premium discounts will change if the payroll is higher or lower than the actual premium.

• Loss history of the company

Class codes with greater loss frequency and severity typically cost more. However, this can be different depending on the state in which the business operates. Loss history calculations are influenced by the number of claims, cost of medical services, and the cost of replacing lost wages.

• State credits

The two most common types of workers’ comp state credits are formal safety programs and drug programs, which are required by most states. These credits aim to reduce the frequency and/or severity of workers’ comp-related injuries and require an employer to submit a formal drug and/or safety policy to the state. These policies can give businesses additional premium credits to reduce their insurance premium.

How to manually estimate workers’ comp costs

You can calculate the basic estimate for workers’ comp costs per employee with the equation we gave you above. However, because there are other factors that affect the final cost, you’ll need to do more detailed work. If you want to get a better understanding of how much workers’ comp is going to cost, follow these steps:

Step 1: Research state regulations

Each state has different regulations for workers’ compensation. Most small businesses need coverage, but some may be exempt from workers’ compensation laws. For example, in Illinois, small businesses with at least one employee must have coverage. In Georgia, businesses with three or more employers must carry workers’ comp insurance.

You’ll need coverage for all of your full-time, part-time, and seasonal employees. You should also consider your independent contractors. Depending on your state, you may be required to carry insurance for them as well.

Step 2: Run payroll

You may want to group employees depending on what they do. The rate for workers’ comp will differ depending on the type of work your employees do and the risk for injury on the job. Next, you’ll want to run annual payroll. Your payroll can then be rounded to the nearest thousand. If you underestimate payrolls, whether accidentally or not, you will have a large audit payment due the following year, so try to be as accurate as possible.

After you run your payroll, you can look up your class code, which can help you find your rates. These rates will give you an estimate but won’t be your exact workers’ comp quote.

Step 3: Look for an agency

If you determine your rate before contacting an insurer, don’t be surprised if their rates deviate. Most states allow insurance companies to change these rates, so your estimate may be higher or lower than the one an insurance company offers you. Because of this, it’s important to do your research when looking for an agency so that you’ll ensure that you can afford your workers’ compensation insurance.

Ways to save on workers’ comp

As a business owner, you’re always looking for ways to save money, especially for necessary expenses like workers’s comp. Here are some strategies that may help you save a few extra dollars.

1. Implement safety programs

Preventing injuries in the first place is one of the best ways to save on worker’s comp, and you can start by developing a safety plan. Depending on your industry, this might include regular inspections to identify hazards, installing proper signage, and providing ongoing safety training for your employees. Ultimately, building a culture of safety can show your insurance provider that you’re committed to reducing workplace incidents, which could earn you lower premiums.

2. Promote a healthy workplace

You want your employees to be healthy, too. Consider investing in wellness incentives like gym memberships, free flu shots, and even guiltless snack options in the breakroom. A workforce full of healthy employees can help reduce the number of workers’ comp claims you have to file.

3. Classify employees correctly

Each job role comes with its own level of risk, and misclassifying workers into higher-risk categories can drive up your workers’ comp premiums. For example, if you own a factory, your clerical staff — e.g., bookkeepers or administrative assistants — shouldn’t be labeled as factory workers. To prevent these errors, regularly review your employee classifications. 

4. Review your policy regularly

Once a year, you should review your workers' comp policy with your insurance provider. After all, your business might have grown over the past 12 months, so you might need to increase your coverage to accommodate your new employees. On the flip side, your workforce may have shrunk, so you might be able to reduce your coverage limits and save on your premiums.

5. Offer return-to-work programs

The longer an employee is out of work, the higher the workers’ comp costs become for your business. To avoid these expenses, create a return-to-work program to get your employees back to work as soon as possible. This program usually involves an employee temporarily performing a less demanding job until they recover. For instance, if a warehouse worker suffers a back injury, they might work on administrative tasks or inventory management until they’re fully healed. 

6. Shop around

Shop around and compare quotes from different insurers to find the best rate for your business. If you don’t have time or need help, you may want to consider working with an insurance broker. They can help you find reputable insurers and negotiate on your behalf to secure better rates and coverage.

Calculate workers comp costs with QuickBooks

Instead of doing all that work, business owners can also choose to access workers’ comp plans within QuickBooks for a streamlined experience. With QuickBooks Payroll, you can set up payroll, learn state requirements, and get a free insurance quote. Once you fill out your free quote form, their broker, NEXT, will contact you to discuss your plan options. From there, all you have to do is pick a workers’ compensation insurance policy.

Final notes

Workers’ compensation insurance can be confusing, especially for small business owners who don’t have teams of lawyers to help dive into the legal jargon. QuickBooks Payroll software can help. Streamlined software solutions can help you calculate payroll, find the right plan, and determine workers’ compensation insurance cost for your organization.

QuickBooks can then automate your premiums right so that you always pay on time. With a pay-as-you-go plan, you can free up cash flow and hold onto your money longer.