An important step for any new business is hiring your first employee. When you hire your first employee, you may be required to purchase workers’ comp insurance. This type of insurance can help protect your business from financial loss should an employee get injured on the job or suffer a work-related illness. It can help cover the costs of her medical expenses, lost wages, disability, and, in worst-case scenarios, death benefits.

But how is workers’ compensation calculated? That can be a bit confusing, so we will demystify it for you below and also cover how to calculate your workers’ compensation cost per employee.

How is workers’ compensation calculated?

Workers’ comp premiums are calculated based on the type of work your employees do, your payroll, and your claims history. Here’s the basic formula for calculating workers’ comp, followed by a closer look at each factor:

Premium= Class code rate x (Annual payroll/$100) x MOD

Class codes, rates, and payroll

States classify each industry by assigning it a class code. Then, the class codes are assigned a rate per $100 of payroll based on the level of risk they present to employees.

For example, a carpenter in North Carolina who works on residential buildings under three stories has the class code rate of $26.38 per $100 of payroll. On the other hand, a photographer based in North Carolina faces far less risk and therefore has a rate of $1.34 per $100 of payroll. The more risk your employees face in the course of business, the more expensive your workers’ comp premiums will be. Depending on your state, classification rates might be provided by a state agency or by the National Council on Compensation Insurance.

Claims experience modifier

Your insurance company won’t just consider the general risk of the work your employees are performing. It will also want to know about the risk level within your specific business. To figure that out, they will look at your experience modifier, often referred to as an experience MOD or just plain MOD. An experience MOD is a rating multiplier which is determined by comparing your claims history to what’s expected from a business like yours in size and type. Your last three completed years of claims data will be taken into account, including your claim frequency, severity, and type.

If your track record shows losses that match the expected losses for your business type, your rating will be a 1.0 and won’t impact your premium calculation. However, if your losses exceed the expectation, your rating will exceed 1.0 and increase your premium. On the other hand, if your losses are less than expected, your rating will drop below 1.0 and decrease your premium.

Now that you know the factors that go into workers’ compensation calculations, you can try out the equation to calculate your own premium.

Examples of how to calculate workers’ compensation

Let’s take a look at a few examples.

Say you’re a construction company owner in North Carolina with $500k in annual payroll and a MOD of 1.0. Your rate based on your class code is $26.38, so your premium would be calculated as follows:

$26.38 X ($500,000/100) X 1 = $131,900 per year

On the other hand, if you’re a photographer in North Carolina with a $100k annual salary and a MOD of 1.2., your rate based on your class code would be $1.34, and your premium would be as follows:

$1.34 X ($100,000/100) X 1.2 = $1,608 per year

If you’re wondering how to calculate workers’ compensation cost per employee, you would simply divide your total annual premium by the number of employees on your payroll.

On the other hand, if you want to calculate the premium for a specific individual employee, you would apply the same equation to your employee’s individual salary wage and class code.

For example, if your construction company’s employee earns $50,000 per year, the calculation would work as follows:

$26.38 X ($50,000/100) X 1.0 = $13,190 per year

In most cases, you can pay for your workers’ comp premium all at once, or you can split it up into monthly payments.

Oh, and there is one exception. The state of Washington is the only state that offers a premium rate per hour worked versus an annual premium based on payroll. It has its own unique formula for calculating premiums.

Details on calculating workers’ comp

You may be wondering whether to calculate workers’ comp on annual or gross wages. When calculating your annual payroll amount, be sure to base it on the gross wages of your employees.

Insurance companies will use your payroll total before taxes are deducted to determine your premiums. You may also wonder how to consider overtime pay. Overtime is part of an employee’s earnings, so it will be included in the total payroll amount used to calculate workers’ comp premiums.

Therefore, the more overtime your employees work, the higher your premiums will be. Since overtime pay is usually higher than standard pay, it usually entails higher workers’ comp premiums.

How to keep your workers’ comp premium low

While part of your workers’ compensation premium is out of your control, there are ways you can help to control your costs, including:

  • Implement an employee safety training program to avoid accidents and injuries to keep your MOD low.
  • 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 it, you may add to your policy cost.

Get the coverage you need for peace of mind

Now that you know how workers’ comp is calculated, you can figure out how much you will need to pay. You’ll simply divide your annual payroll by 100, multiply it by your class code rate, and multiply it again by your MOD.

While you may not have much control over your state’s class code rates, you can help to lower your costs by establishing a culture of workplace safety within your business. Further, being careful to avoid any errors with payroll and employee classifications can prevent overpaying.

We all know those curveballs do come at one point or another. Workers’ comp combined with general liability insurance and professional liability insurance can help to ensure your business is ready for whatever may come your way. While we’re here, leave your email address and we’ll let you know when workers’ compensation coverage via Thimble is available.


  1. North Carolina Rate Bureau. Class Code Lookup.
  2. Washington State Department of Labor and Industries. Calculating Premium Rates.
  3. WCIRB. Payroll or Remuneration.