How is Workers’ Compensation Calculated?

When running a business, regardless of size, acquiring workers' compensation insurance is one of the first steps to protect the company's costs. Most businesses with employees (and even some without) are required to carry some sort of workers' compensation policy. We've covered the importance of workers' compensation insurance as well as the different injuries it covers. However, determining the cost for workers' comp can be difficult. What does workers' compensation insurance cost?

Factors of Workers' Compensation

When calculating workers' compensation, employers and insurance agents must determine numerous factors before deciding on coverage. Typically they consider the following factors:

  • Classification of employees based on job duties
  • Classification of independent contractors who are not self-insured
  • Total payroll for each classification
  • Classification of the business or industry
  • The state where coverage is issued
  • Previous loss or claims experience
  • Adjustments, e.g., possible credits for work safety programs

How to Calculate the Cost

1. Classifying the Business Risk

The insurance company's first step is to identify the classification code based on the risk of injury in the employee's sector. The more hazardous the industry is, the higher the premiums typically are.

Employees often receive the same classification code because it assumes that they fill in for each other in times of need, so everyone shares the same level of risk. However, there are exceptions; take a construction company, for example. If they have an employee who works on an active construction site and is injured, the worker will be assigned a different code than someone who works strictly in an office setting, who may receive a less expensive code.

2. Estimate Annual Payroll

Insurance companies will then multiply the rate that responds to the injured employee's risk classification code by the expected payroll in increments of $100 in the coming year. The calculation that insurance agents use looks something like this:

Carrier Rate x Payroll (per $100) = Premium

Since there are so many factors that are taken into consideration when calculating this, estimations are challenging to make. For this reason, Insurance and government agencies sometimes audit companies when their policy ends.

3. Conduct Year-End Audits

After a company's insurance policy expires, within 30-60 days, agents will audit an employer's payroll, comparing the estimate from the beginning of the term to the actual payroll numbers. Insurance companies often offer a refund if the payroll amount is lower than the estimated amount. However, employers will typically have to pay the difference if the payroll amounts to more than the estimate.

How Can You Reduce Costs?

Miscalculating insurance coverage can result in severe financial costs for you and the company. Both overpaying and underpaying for a policy result in your company losing money (even if temporary) immediately or when the bills are due. Here's how to work to reduce those costs:

1. Check Insurance Premiums Constantly

Premiums can be set incorrectly for several reasons. They can include:

  • Changes in payroll, like new hires or departures
  • Significant, unexplained changes in premium bills
  • Improper charges for subcontractors who have their own coverage

2. Review Job Classifications

Your employees must know what is expected of them and the daily duties they should and should not be performing/responsible for. Common misclassifications can include:

  • Clerical employees working in hazardous environments
  • Employees that fill in for other roles
  • Seasonal hires listed as permanent employees
  • Full-time employees who have switched to part-time
  • Employees misclassified as freelancers or independent contractors

3. Pay Close Attention to Payroll

These calculations will reflect the workers' compensation premiums and the year-end audit. Employers must pay special attention during these reviews to ensure that all the data is being correctly accounted for, inputted, and processed.

4. Get A Quote Beforehand

Good preparation and making sure you know what your premiums might look like beforehand can help you save a lot as well. If you're aware that premiums might be high and that there is a chance that you may use the coverage, imploring ways to reduce costs and budget in other areas of your business could assist you when the time comes.

Workers' compensation insurance is a crucial step for businesses of all sizes to protect themselves from the costs associated with workplace injuries. Calculating workers' compensation costs involves considering factors such as employee classifications, independent contractors, total payroll, industry risk, state requirements, and previous claims experience.

Due to the complexity of these claim calculations, estimations can be challenging, leading to audits by insurance and government agencies to ensure accuracy. To reduce costs, businesses should regularly check insurance premiums for errors, review job classifications to avoid misclassifications, pay close attention to payroll data during audits, and obtain quotes beforehand for better financial planning. By actively managing workers' compensation insurance, businesses can mitigate financial risks and ensure adequate employee coverage. End your search online right now, talk to an Aegis insurance agent or get a free quote today.




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