Figuring out how to calculate your workers’ comp cost per employee means connecting with an insurance provider to determine your annual premium. Once you have a policy, your insurer will perform an audit to ensure you are paying the correct amount based on how many employees you have and what activities they perform.
In general, workers’ compensation insurance premiums are based on the risk of experiencing claims costs combined with the value of what is being insured. In this case, risk is considered the potential cost of future workplace injuries (which is based on the costs of past claims).
Here’s a basic formula to estimate the workers’ comp cost for an employee:
The exact formulas that insurers use to determine the workers’ compensation premium have many moving parts, and how they calculate their premiums can be slightly different from one another. What’s more, these formulas depend on the workers’ compensation laws in each state.
Also, keep in mind that when getting quotes from an insurance provider for workers’ comp cost per employee, there will be an annual premium option and monthly payment option.
In order to determine the best payment plan for your business, you will need to take into account any changes that might occur in your payroll throughout the year, such as a change in the number of employees, your business classification code, and your workers’ compensation rate.
Learn more about how much workers’ compensation costs.
If you’d like to get a general idea of what your workers’ comp cost per employee might be, here’s an overview of the steps you can take to form an estimate on your own.
How to calculate workers’ compensation cost for an employee in three easy steps
1. Determine the class code of your employee.
Class codes are assigned based on the industry of your business. Depending on your state, workers’ compensation class codes are either set by your state workers’ comp agency or by the National Council on Compensation Insurance.
Class codes are based on work duties and risk levels associated with that type of work. Data from each class code gets assessed to determine a rate based on workplace injuries and workers’ compensation claims.
To determine your classification code, consider what products or services you sell, what types of tasks your employees perform, and if there are contractors or subcontractors that also need coverage.
2. Find out the premium rate for the employee’s class code.
You can ask different workers’ compensation insurance providers for their rates by class code. The rate will be given in dollars and cents for each $100 of payroll for each class code.
In most states, insurers are allowed to charge at their own discretion against the advised rates published by the state’s rating agency.
To ensure that you find the best price for your business, it’s recommended that you request quotes from a variety of workers’ compensation insurance providers. Alternatively, you can use an independent agency or broker who can evaluate the options and present you with the most competitive rates available to your type of business.
3. Determine your annual payroll for each employee and then do some basic math.
Calculating your workers’ comp cost per employee involves understanding your payroll numbers. Take into consideration all your employees who are full-time, part-time, temporary, or seasonal. If you’re unable to calculate the gross payroll for each employee, you can estimate the projected payroll.
Once you come to the end of your year policy, your final workers’ comp rate can be adjusted to account for initial over- or under-estimated payroll projections.
Once you have the estimated annual payroll for the employee, divide that number by 100. You then multiply that number by the premium rate for the class code to find the total cost of workers’ compensation insurance for that employee.
Compare your calculations against workers’ comp insurers
Remember, the steps we just went through for how to calculate workers’ comp cost per employee will give you a very rough estimate. Other factors—such as the number of employees, location, and experience modification—can influence how much workers’ compensation costs.
Sounds complicated? Consider skipping the math and heading directly to a trusted insurance provider with skilled experts who can make workers’ compensation insurance easy. Learn more about how workers’ compensation insurance can protect your small business.
Sound complicated? Consider skipping the math and heading directly to a trusted insurance provider with skilled experts who can make workers’ compensation insurance easy. Learn more about how workers’ compensation insurance can protect your small small business.
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 or check your current rate in 3 minutes.