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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:

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.

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.

Workers’ comp costs: Frequently asked questions

How much does the average small business pay for workers’ comp insurance?

Depending on the industry in which your business operates, the cost of workers’ compensation insurance can cost anywhere from $2,000 to $3,000 annually, according to CoverWallet. Unfortunately, workers’ compensation premiums can be difficult to determine because the cost depends on state requirements.

Is workers’ comp insurance more expensive for certain industries?

Yes, workers’ compensation is more expensive for industries that have a higher risk for work-related injury or illness, such as nursing and businesses that use laborers.

Do workers’ comp regulations vary by state?

Yes, workers’ compensation regulations are based on each individual state, along with the rates that employers will pay. For example, workers’ compensation regulations in California will be different from regulations in Texas, even for the same industry.

How do you buy workers’ comp insurance as a business owner?

Depending on where you live and operate, you can get workers’ compensation insurance through private insurance providers or state-funded programs. If you choose to get it through private insurers, you can go directly to an insurance company, insurance agent, or broker.

What is the most common cause of workers’ compensation?

According to Insurance Journal , the top five workers’ compensation injuries are strains and sprains, cuts or punctures, contusions, inflammation, and fractures due to material handling, slips and falls, accidents involving objects or tools, and traumas occurring over time through overuse or strain.

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.

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