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The Connection Between Workers' Comp and Payroll | Pie Insurance

How payroll helps determine workers’ comp premiums, what’s included in workers’ compensation payroll calculations, and why it matters.
The Connection Between Workers' Comp and Payroll | Pie Insurance

Workers’ comp and payroll

Workers’ compensation premiums (the amount you’ll pay for workers’ compensation insurance coverage) are based on a few factors: the type of work your employees do, the state in which your business is located, your workers’ compensation claims history, and your company’s payroll calculation. Let’s set the first three factors aside for now and take a closer look at how payroll calculation is related to workers’ compensation premiums by answering some common questions.

How do insurance providers use my payroll to estimate my premium?

When insurance providers estimate your workers’ compensation costs, they generally use the formula:

Payroll (per $100) x classification code rate x experience modifier = workers’ compensation premium

Since there is no way to know exactly what your payroll will be in the future, your workers’ compensation insurer will use their formula to generate an estimated premium for the upcoming policy period based on the numbers you give them. That’s what you’ll pay during the policy period.

However, at the end of the policy, you’ll have a workers’ compensation audit. The auditor will compare the estimated payroll you provided at the beginning of the policy period to the actual payroll at the end of the policy and will also verify the type of work performed by your company as reflected by their workers’ compensation class codes.

The auditor will then determine whether you will need to make an additional payment or receive a refund. 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 policy so that you can confirm the related class codes are correct.

What is included in workers’ compensation payroll?

Workers’ compensation laws vary by state, so you should contact your state workers’ compensation board or work with an agent to find out precisely what goes into calculating payroll for your state. Many states, like West Virginia, follow the National Council on Compensation Insurance (NCCI) Remuneration Rule which includes not only payroll, but a wider range of “remuneration” or payment in exchange for work.

Here’s what NCCI considers remuneration:

  • Payroll – wages and salaries
  • Bonuses
  • Commissions and draws against commissions
  • Overtime pay
  • Holiday, vacation and sick pay
  • Employer payment into statutory insurance and/or pension plans
  • Payment for piecework, profit sharing, or other incentive plans
  • Payment, compensation, or allowance for tools used in work
  • Value of rental of apartment or house provided for an employee
  • Value of other lodging as part of pay
  • Value of meals as part of pay
  • Value of store certificates, credits, merchandise, or other money substitutes received
  • Payments for salary reduction, employee savings plans, etc.
  • Davis-Bacon pay or pay from other prevailing wage law
  • Annuity plans
  • Expense reimbursement to employees where employer records do not indicate a valid business expense
  • Payment for filming commercials excluding residuals

Here’s what’s not included in NCCI’s definition of remuneration:

  • Tips and other gratuities
  • Employer payments to group insurance or group pension plans
  • Employer payments into third party trusts for the Davis-Bacon Act or similar prevailing wage law qualified trust
  • Rewards for individual invention or discovery
  • Severance payments except for time worked
  • Payments for active military duty
  • Employee discounts on items purchased from the employer
  • Supper meal payments for late work
  • Uniform allowances
  • Perks like discounts for services, airline flights, club memberships, and use of company vehicles

Remember: it is important to report your payroll accurately because the amount directly affects your workers’ comp insurance rate. Therefore, underestimating or overestimating payroll can impact the cash flow of your business.

Learn more about workers’ compensation premiums and discover how you can get a rough estimate for your workers’ compensation insurance cost per employee here.

Remember, every situation is different and state workers’ compensation laws are subject to change, so be sure to do your research and speak with a trusted advisor.

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.