As a small business owner, you may be legally required to take out a workers’ compensation policy to cover your employees. And even if you’re exempt from your state’s requirements, you may choose to cover employees and independent contractors anyway, especially to protect your own business.
If you’re looking for a workers’ compensation policy, you’re probably wondering how your premium will be calculated. This is your guide to answering the question of “how is workers’ compensation calculated” and understanding the math behind workers’ comp so you can find the best policy and at a reasonable rate.
Workers’ compensation: quick overview
Before diving into quotients and decimals, let’s get on the same page about workers’ comp. Workers’ compensation insurance protects against liability if an employee or independent contractor becomes ill or is injured on the job. This kind of policy can provide employees with the resources they need to recover from a work-related health issue. Likewise, it protects your business from financial liability if an event like this occurs.
Depending on the specifics of your policy, workers’ compensation can help to cover all of the following:
- Accidents and injuries (including repetitive stress injuries)
- Disability and lost wages when an injury or illness makes it impossible to work
Across 49 states (save for Texas), most small businesses are legally required to hold workers’ compensation insurance if they have a single employee. However, check with the National Federation of Independent Businesses to understand your state’s laws.
How is workers’ compensation calculated?
So you’re ready to buy workers’ compensation insurance. How much will it cost? It usually depends on three factors:
- Your classification rate – Your state assigns workers (in similar roles) a classification and according rate based on the level of risk they usually encounter.1 For example, a contractor encounters more day-to-day hazards than a web developer. Depending on your state, this rate might be calculated by a state agency, or by the National Council on Compensation Insurance.
- Your payroll – Your total premium rate is calculated based on your annual payroll.
- Your experience modifier – Your experience modifier is a number representing your small business’ history with workers’ compensation claims (as compared to similar companies). If your insurer has experienced losses related to workers’ comp claims filed against your business, this affects your modifier. An average modifier is 1. If you have above-average losses, your modifier will be higher. If they are below-average, it will be lower.
Now that you know the factors that go into workers’ compensation calculations, you can review the equation used to calculate your premium:2
Classification rate X (Payroll/100) X Experience modifier = Premium
Not one for math? Let’s take a look at a few examples so you can better understand this equation.
Say you’re a landscaping company in North Carolina. Your rate based on classification is $7.73, and you have an annual payroll of 20K.3 You also have an average claims history, so your modifier is 1.00. In this case, your rate would be calculated as follows:
7.73 X (35,000/100) X 1 = $1,546
On the other hand, say you’re a yoga studio in Massachusetts. Your rate based on your classification is $0.534, and you have an annual payroll of 30K. However, you’ve had a claim filed recently, so your modifier is 1.2. Your rate would be calculated as follows:
0.53 X (35,000/100) X 1.2 = $222.60
If you’re wondering how to calculate workers’ compensation cost per employee, you can apply the same equation to their individual salary wage and classification.
How to keep your premium down
As you can see, much of the cost of your workers’ compensation is out of your control. However, taking safety precautions can help you keep your experience modifier low. In addition, be sure to review your policy when signing up to avoid common errors.
It’s recommended that you take the following steps:
- Implement an employee safety training program to avoid accidents and injuries.
- Check to see if there are state-sponsored risk reduction programs that can lower your premium.
- Make sure your employees are properly classified. If you run a debris removal company, for example, make sure your office assistant isn’t classified as a debris removal professional.
- Accurately report your payroll. If you overestimate your payroll, you may add to your policy cost.
Get protected with business insurance
As a small business owner, you know that employees’ illness and injury can lead to costly medical expenses and even legal fees (if a case goes to court). Should you fail to provide adequate protection to an employee—or in some cases to an independent contractor—you could face a hefty fine. Even if you’re not required to provide a workers’ compensation benefit, it can enable you and your employees to do your jobs with the confidence that comes from the knowledge you’re protected from risk.
Likewise, it’s important to protect yourself as the employer from other risks that can affect your ability to continue operation. For small businesses, essential policies include:
- General liability insurance provides coverage against client and third-party claims of property damage, bodily injury, personal injury, and advertising injury. Just as your crew could face injury on the job, so could the clients and people they interact with.
- Professional liability insurance provides coverage against client and third-party claims of errors, mistakes, and negligence related to your work.
- Workers’ compensation to provide coverage in the case your employees and independent contractors suffer illness or injury.
With a professional liability, general liability, and workers’ compensation policy, cover your liability from all angles. Let your insurance carrier cover your risk so you can focus on what matters—leading your business forward.
Here at Thimble, our goal is to support small businesses like yours. That’s why we make it easy to get and understand insurance. Our general liability insurance and professional liability insurance policies for 120+ professions are fast and flexible—get covered by the hour, day, or month and protect your business against client and third party claims of:
- Bodily injury
- Property damage
- Personal injury
- Advertising injury
You can get covered in less than 60 seconds. Just enter a few details and select your desired policy term and limits, and you’ll receive an instant quote without making a single phone call. Purchase with a click and receive your Certificate of Insurance right away.
Your insurance policy has a premium, but knowing you’ve created a safe workplace is priceless.