Getting workers’ compensation insurance is a necessity for every business. It inspires confidence that your employees and business are protected when work-related accidents and injuries occur. This way, your business can continue to thrive because a third party is taking care of insurance, so you don’t have to.
Many state laws require employers to take worker’s compensation insurance the moment they hire one employee. However, knowing what premiums to pay for your insurance is important. The cost of insurance depends on several factors.
Here’s a simple guide to calculating premiums for your workers’ comp insurance.
Table of Contents
1. Employee Classification
The first step in calculating premiums is your employee classification. Here, you consider the specific work they perform in your company. Businesses classify work according to its degree of risk. This way, an employee whose work is riskier than another in the same business gets higher premiums. From this classification, a specific rate is assigned for every $100 of payroll.
2. Rate per Classification
Another factor to consider is the rate assigned to each classification. However, in most states, the National Council on Compensation Insurance determines the classification rate. The NCCI has over 700 class codes for different types of jobs. For example, tree trimming and accounting have different codes, with each code assigned a specific rate depending on its degree of risk. The riskier the job type, the higher the class code rate. In our example, a tree trimmer is exposed to more risk than an accountant, meaning it will cost less to insure the latter than the former.
3. Your Payroll
Your payroll plays a significant part in calculating premiums as it is the basis for the insurance premium. For every $100 on your payroll, a specific rate is assigned based on the average weekly employee wages. This rate is, however, determined by the employee classification codes and may vary between states, meaning your location impacts your insurance premium.
4. Your Experience Modification
Your experience modifier (MOD) is a numeric presentation of your company’s claim experience. It is based on your company’s performance against other industry competitors with similar employee classification and shows the insurer the frequency with which you make workers’ compensation policy claims. The average experience modifier is set at 1.0. This means a business with less severe accidents or fewer injury occurrences has a MOD of less than 1.0. On the other hand, a company with riskier types of work will have a MOD of above 1.0. However, new businesses should start with a MOD of 1.0 since they have no claims history.
Given the above factors, the formula for calculating premiums is, therefore: payroll (per $100) X class code rate X experience modifier, where applicable + state taxes and fees, i.e., premium= { (payroll/100)* (MOD)* (class code rate)} + (state taxes and fees).
Conclusion
Businesses should spread their insurance premium payments over the year instead of paying as a lump sum to better manage their cash flow. If you choose this option, ensure you choose an insurance provider with a pay-as-you-go program to ensure your insurance premium is deducted every payroll period. Then follow this formula to calculate your premiums.