Running a small business means tracking every last penny and making sure every expense counts.
It can be challenging to set a budget for costs like workers’ comp insurance, which don’t have fixed price tags. Many factors determine how much you’ll pay, and you have to shop around to find the best premium for your business.
We want you to go into any sales call armed with estimates and a firm grip on the data you need.
Of course, you don’t have to figure it out alone.
In this article, you’ll discover how insurance companies determine premiums, how to calculate insurance costs, and how you can save time and money by partnering with a payroll provider. Let’s dig in.
How Much Does Workers’ Comp Cost
Let’s recap what workers’ compensation insurance is. Workers’ Comp is how employees who injure themselves or become sick on the job receive benefits. It’s a government-mandated program and benefits both the employer and the employee.
Employers provide insurance coverage, helping workers feel safer, and the employee waives their right to sue their employer if they accept Workers’ Comp benefits, which include partial salary repayment and coverage of medical costs.
The cost of workers’ comp insurance varies across businesses because it’s state regulated and calculated differently than other insurance.
According to insurance provider The Hartford, the average annual cost of workers’ Comp for small businesses they serve is $840.
However, there are reasons you could pay less or more, and we’ll delve into those below.
One way to save costs is to consider how you pay for insurance.
Instead of paying a large sum upfront, overpaying for coverage you don’t need, and getting drilled with additional payments at audit time, you could improve cash flow with pay-as-you-go workers’ comp insurance.
This setup is based on your actual payroll and exposure risk. Want to know more? Check out our pay-as-you-go offer today!
With traditional workers' comp insurance you pay a large lump sum upfront, overpay for coverage you don't need, and get drilled with additional payments at audit time.
How Do Insurance Companies Calculate Premiums?
Insurance companies use several factors to determine insurance premiums, including state requirements, number of employees, type of work, payroll, industry, and risk exposure.
Some states require insurance for one employee, while others, like Florida, don’t require insurance until you have a certain number of employees. Employee classification codes dictate which types of employees must be covered.
Industry and Type of Work
Some industries involve more risk. For example, construction workers are at more risk of injury than office workers.
Small business insurance companies use classification codes provided by the National Council on Compensation Insurance (NCCI) to identify the risk associated with different types of work and determine premium type and costs.
Without a code system, all companies would pay the same amount, meaning safer companies would subsidize riskier ones.
Your business can have more than one class code. For example, let’s say you’re an electrician who installs and repairs electrical apparatus and you employ clerical staff.
Your code would be 3724, your clerical staff code would be 8810. This helps give an accurate view of how risky your company is to insure.
The NCCI analyzes historical data to determine the average cost of claims in each state, so insurance agencies can evaluate the financial risk of a business’ industry.
Be sure to research or ask for advice on classification codes; hundreds of them exist!
Size of Payroll
The more employees your small business has, the higher the risk of injury and the higher your premium. For each employee class code, you pay on every $100 of payroll.
Also, factor in that workers’ Comp pays for wages when an employee cannot perform their job, so higher salaries can lead to higher losses for insurance companies, and your premium is affected.
Previous Claims History
A mod rate is a calculation determined by your industry classification, and your company’s workers’ comp claims history. If you want a low premium, you need a low mod rate.
Let’s say your company has a mod rate of 1.05 or higher. Unfortunately, you’re now a high-risk employer and have multiple serious claims against you.
A more expensive premium means you’ll be paying over the industry rate. For example, if your mod rate is 1.3, you’ll pay 30 percent more for a premium.
The Number of Claims
Businesses with a higher number of claims suffer more than a business with one claim–even if that one claim was for a more severe injury.
For example, a business with ten claims for $2,000 is considered a greater risk than a business with one claim for $20,000.
How to Estimate Insurance Costs
Here’s the calculation. Estimate costs 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
A simple example: A rate of $3.00 means that a business with $100,000 in payroll would pay $3,000 annually in work comp premiums.
Note: These figures are rough estimates and should not be utilized to accurately calculate your worker's comp estimates. More importantly, this calculator is not intended to provide tax or legal advice and does not represent ConnectPay services or solutions. Please contact your ConnectPay representative for specific requirements.
How to Save on Premiums
It’s crucial to provide accurate information to insurance providers. You’ll need to provide quarterly reports and payroll totals reports, as well as a Labor Allocation Summary report.
Pro tip: Payroll companies provide the reports you need, and more!
Payroll errors don’t just affect your premium; they also upset your employees. If you misclassify employees, you risk overpaying for workers’ comp insurance if an audit determines you’re using safer codes than you should.
You could be penalized for underreporting your risk and incur up to three years of additional premiums.
Eliminate human paperwork errors and keep accurate records. You estimate payroll when you first sign up for a workers’ comp policy, but this estimate might change when you hire new employees or raise wages, so it’s crucial to inform insurance providers of any changes.
Build a Safe Culture
Building a safe culture helps keep injuries to a minimum. It might be difficult on a construction site or in the prevailing gig economy.
However, you can still put your best foot forward by providing excellent onboarding processes and interactive training programs.
Post-training and on a daily basis, expose employees to safety procedures and prominently place posters on-site, including literature on how to prevent workplace injuries.
Lastly, promote health and well-being initiatives to lower the risk of illness.
In the event of an injury or illness, report it as soon as possible and do all you can to get your employees back to health.
You want to reduce prolonged claims by providing access to physical therapists and other health workers, showing your employees that you care about their recovery.
State-to-State Insurance Factors
While some states use NCCI classification codes, others use their own system, so you’ll have to stay updated with current requirements and regulations.
For example, some states require coverage based on the number of employees you have. Other states have rules on whether part- and full-time employees need coverage.
In Alabama, businesses with at least five employees need coverage, but most states require coverage for one employee or more.
In New Mexico, workers’ compensation isn’t necessary for all workers, such as independent contractors, real estate salespeople, or executive employees.
Caveat: Monopolistic states, including Ohio, North Dakota, Washington, and Wyoming, require businesses to purchase coverage through a state-operated fund instead of private insurance companies.
Pay-As-You-Go Workers’ Comp
When you pay your premium in one lump sum, you might end up overpaying. Most workers’ comp premiums are based on estimates.
To remedy this, consider pay-as-you-go and spread your workers’ comp premium over a year. With premiums attached directly to payroll, exact payments are calculated and sent to your provider each pay period to ensure you only pay for what you use.
Pay-as-you-go helps manage cash flow, limits audit surprises, and you’ll pay your premiums more accurately since it’s based on the payroll you run each week.
How Much Does Workers’ Comp Cost for Small Business? It Depends
Take everything above into consideration. You’ll need to know the rules and regulations in your state, classification codes, and the industry you’re a part of.
Partnering with a payroll service provider schooled in Workers’ Comp can help you avoid these challenges easily, giving you access to local, reputable Workers’ comp insurance partners that provide personalized service you won’t get with big box providers.
ConnectPay dedicates itself to small business payroll. We can help with payroll management, pay-as-you-go workers’ Comp, and tax compliance.
We also connect you with local experts, so you never have to worry about state rules and regulations tripping you up.
Explore how ConnectPay can assist with your Workers’ Comp challenges by reviewing our Workers’ Comp resources today.