Whether you’re starting a small business or expanding the size of your crew, you’re probably thinking about workers’ comp insurance. You know you need it, but how much can you expect it to cost?

Honestly, there’s no straight answer. The cost of workers’ compensation insurance varies from industry to industry, and depends on all sorts of factors, from the size of your crew to your industry and location.

Read on as we break it all down, and share some smart tips for saving on workers’ comp insurance.

Five factors that affect workers’ comp costs

Workers’ comp insurance provides benefits to employees if they get sick or injured on the job. In order to calculate the cost of these benefits, and your estimated premiums, insurers consider a variety of factors, including:

  1. How many employees you have
  2. The state where your business is located
  3. The type of work you do
  4. The average level of risk for your industry
  5. Your claims history

1. Number of employees

Understandably, the cost of workers’ comp insurance depends on the size of your staff. More accurately, it depends on the size of your annual payroll. When an employee submits a workers’ comp claim, the benefits they receive will be based on a percentage of their average weekly wage.

It’s important that you provide accurate estimates of your annual payroll. In fact, it’s so important that your insurer will ask you for an updated estimate every year. Insurers typically perform a workers’ comp audit at the end of each policy period, where the payroll estimate you provided is compared to the actual payroll for the policy term. From this comparison either an additional or return premium is calculated.

You’ll want to estimate your total annual projected payroll accurately at the beginning of the year. Give some thought to whether you plan to expand your business, are expecting to win that new bid, and as a result hire new employees. Include wages, salaries, bonuses, and overtime pay in your estimate. You can also update your coverage as salaries, promotions, and new hires occur.

2. State where your business is located

Nearly every state requires a business with a certain number of employees (including you, the business owner) to carry workers’ comp insurance. The specific requirements for each state, however, can vary significantly.

To learn more about the specific requirements for your state, you’ll need to dig into the state laws, or consult an attorney. Suffice it to say that the state where your business is located will partially affect your premiums.

3. The type of work you do

Based on the type of work your employees perform, insurers will assign you a class code. Class codes are 4-digit codes that categorize different types of work based on their inherent level of risk.

These 700+ class codes are set by the National Council on Compensation Insurance (NCCI), as well as some state agencies. Because class codes affect the cost of your workers’ compensation insurance, it’s worth checking with your insurer that they are using the right ones.

4. Level of risk

Class codes indicate not only the type of work your employees perform, but also the level of risk your work carries. As you might expect, riskier occupations, and the class codes they correspond to, tend to have higher premiums.

For example, an independent contractor has a higher risk of getting injured while on the job than a freelance web designer, so the class code for independent contractors will have a higher workers’ comp insurance rate.

It’s worth noting that your insurer will use your class code as a starting point when assessing your risk. If your business carries a higher or lower level of risk than the industry average, your insurer will adjust your rate accordingly.

5. Claims history

Finally, insurers look at your claims’ history to determine your workers’ comp rates. They do this through something called an “experience modification factor,” which you may see shortened to simply “experience mod” in your policy. Insurers are required by law to include your claims history when calculating your workers’ comp insurance costs.

Here’s how experience mods work. The industry standard is 1.0. Higher experience mods are called debit mods. These indicate an employer who has higher than average losses. As you might expect, debit mods carry higher premiums.

On the opposite end of the spectrum are credit mods, which describe experience mods of less than 1.0, indicating that the employer has fewer losses than average. These employers enjoy a discount on their premiums.

As a new business, you’ll be starting out with no claims history. To protect their level of risk, insurers may play it on the safe side and charge you a higher premium until you build up a claims history that warrants lowering it.

How workers’ comp insurance costs are calculated

So those are the factors that go into workers’ comp. Now, how exactly are workers’ comp insurance premiums calculated? It will vary on the factors we outlined above, your state’s specific requirements, and your insurer, but here’s a formula you can use as to calculate a rough estimate:

(class code) x (experience mod) = rate
(rate) x (payroll/$100) = premium

How to save on workers’ comp

Are there things you can do as an employer to lower your workers’ comp premiums? Absolutely. Start with these three tips.

1. Focus on workplace safety.

The safer your workplace is, the lower your risk of workplace injuries and illness. Create safety policies and procedures for your employees to follow, and ensure they receive adequate training. Regularly perform safety checks.

Also, keep an eye out for opportunities to make your workplace safer, whether that’s investing in an updated piece of machinery or ordering ergonomic chairs for the office. Both your experience mod and your claims history will benefit as a result!

2. Evaluate your payroll.

Depending on your state, your business may qualify for a workers’ comp exemption. For example, members of an LLC or partnership can choose not to elect coverage in some states. Similarly, employees in certain industries may qualify for an exemption, including agricultural and household workers, church employees, members of sports teams, and real estate agents and brokers.

3. Ask for discounts.

Instituting workplace safety programs may qualify you for a discount on your premium in certain states. Ask your insurer what options are available, and what’s required of you to qualify. If you’re part of a trade association, it’s possible they have negotiated a discount on workers’ comp premiums. It never hurts to ask!

Calculating the cost of workers’ comp insurance

To recap, insurers look at five main factors to calculate the cost of your workers’ comp insurance premiums. These include:

  1. How many employees you have
  2. The state where your business is located
  3. The type of work you do
  4. The average level of risk for your industry
  5. Your claims history

Remember: you may be able to lower your costs by implementing workplace safety measures, accurately reviewing your payroll, and taking advantage of discounts when they’re available.