If you’re a small business owner shopping around for insurance options, the most important question at the top of mind is probably, “How much does workers’ comp cost?” 

 

Workers’ compensation insurance rates have a wide range, from $0.57 in Texas to $2.32 in Alaska per $100 of covered payroll. These amounts are the average employer cost for workers’ compensation, according to 2018 NASI data.

 

So, how much does workers’ comp cost for a small business? It depends on a number of factors, including location, type of work, payroll, and claims history. This article explains how each of those factors impacts your workers compensation insurance rate.

 

What does workers’ comp costs depend on?

 

There are four main factors that insurers consider when estimating your premium and workers’ comp insurance rate. This includes:

  1. Location
  2. Type of work
  3. Payroll
  4. Claims history

1. Location

 

Workers’ compensation is regulated at the state level, so the location of your business affects your workers’ comp costs. Every state has its own workers’ compensation laws, which are contained in statutes, and these statues vary from state to state. Your workers’ comp insurance rates will depend partly on the requirements of the state where the work is performed. 

 

To help protect employees and businesses, most states have laws in place mandating that every business have some form of workers’ compensation insurance to cover employees who become injured on the job. 

 

Since state laws regulate workers’ comp costs, be sure to research the laws specific to your state to find the requirements for your business. Contact a Pie Insurance agent if you have any questions.

 

Visit Pie’s national coverage map in order to find out more about your state’s workers’ comp requirements.

 

2. Type of work

 

The type of work your employees do determines your classification code or “class code.” These class codes are sometimes defined by the National Council on Compensation Insurance (NCCI), an independent organization that conducts research on U.S. businesses. NCCI uses these 4-digit codes to categorize the types of work each of your employees performs. 

 

For more information, you can easily look up basic descriptions of your workers’ comp class codes online, but to confirm that you are using the correct code, it’s best to speak with a workers’ comp insurer. 

 

To help you interpret the terminology used in your state’s workers’ compensation laws and your company’s workers’ comp policy, refer to our workers’ compensation glossary. We’ve defined the most commonly used workers’ comp and insurance terms to help you navigate the insurance industry’s lingo. 

How your workers’ comp rate uses class codes

 

Because workers’ compensation class codes are used to describe particular types of jobs, workers’ comp insurance rate providers use them to estimate any associated risks to those respective jobs. As such, workers’ compensation class codes are an important factor in determining workers’ compensation rates. Riskier jobs carry higher premiums.

 

For example, an aircraft mechanic has a greater risk of on-the-job injury than an accountant. So the class code for the aircraft mechanic would be associated with a higher workers’ comp insurance rate. 

 

When determining your worker’s comp rate, the insurer will use the corresponding class code to determine a base rate for that particular type of work. Then, the insurer will adjust your rate depending on whether your company has a greater or lesser risk than the industry average.

 

3. Size of payroll

 

Your workers’ comp cost also depends on the size of your workforce, and more specifically, your annual payroll. It is important to report your payroll accurately because the declared amount directly affects your workers’ comp insurance rate. Therefore, underestimating or overestimating payroll can impact the cash flow of your business. 

 

Typically, the insurer responsible for providing your workers’ comp rate asks for an estimate of your payroll for the coming year. They then use that number to calculate your estimated premium.

 

What is a workers’ comp audit?

 

A workers’ comp audit (formerly known as workman’s comp audit) compares the estimated payroll provided by the business owner at the beginning of the policy period to the actual payroll at the end of the policy year and verifies the type of work performed by the company. 

 

The audit determines how much, if at all, the premium needs to be adjusted, depending on whether the actual amount is less or more than the estimate. 

 

To avoid surprises at the end of the year, make sure to review your company’s job descriptions with your insurer when you buy your worker’s comp policy so that you can confirm the related class codes are correct.

 

What does payroll include for workers’ comp insurance?

 

Payroll includes categories such as wages, salaries, bonuses, and overtime but typically excludes categories like tips, gratuities, employee savings plans, and employee discounts. Consult NCCI for a comprehensive list of the factors that are included in payroll for workers’ comp. 

 

When you shop for workers’ comp insurance for your small business, use an average of your monthly payroll for your estimate.

 

Determining your actual payroll for the year is a fundamental part of calculating accurate workers’ comp premiums and finding the right coverage. Keep an eye on your projected payroll during the year. If you hire new employees, give raises or promote employees, make sure you evaluate if your coverage needs to be updated. Calculating workers’ compensation cost per employee can be estimated quite easily.

Are you overpaying for workers' comp?

4. Claims history

 

Workers’ comp insurers also consider your history of claims. They use what is called an “experience modification factor” or “experience mod” when determining your workers’ comp insurance rate. This factor must be included (by law) in defining your rate. Because it factors in your claims history, it is a reflection of your workplace safety compared to other similar businesses.

 

An experience mod of 1.0 is considered the industry average. An experience mod of more than 1.0 is called a debit mod (in which your losses are greater than the average) and you will pay more for insurance. If your experience mod is less than 1.0, this is called a credit mod (in which your losses are less than the average) and you will have a discounted premium.

 

If you are starting a new business, you will not have a workers’ comp claim history. So you will not yet have an experience mod that can be factored into your calculation. Instead, you may pay more for workers’ comp insurance until your new business has established a track record.

 

By promoting and practicing workplace safety, you can influence your experience mod and your rates considerably. The fewer claims you have, the better your experience mod and the greater chance that you will qualify for a lower premium.

 

Cut your workers’ comp costs

 

If you’re a small business owner, you can lower your workers’ comp insurance cost by up to 30% by purchasing your insurance from a company that specializes in insuring only small businesses.

 

At Pie Insurance, we’ve made getting workers’ comp insurance as easy as pie. We know small business owners are busy, so we offer the convenience of an easy online experience. In fact, you can get a quote for workers’ comp coverage in three minutes. 


Thanks for reading! Please note that this content is intended for educational purposes only. As laws change regularly, you should refer to your state legislation and/or an advisor for specific legal counsel. If you’re a small business owner, learn more about workers’ compensation insurance or check your current rate in 3 minutes.

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