As an employer, it’s your responsibility to ensure that your workers receive compensation for any work-related injury or illnesses. Workers’ compensation is mandatory in most states if you have a certain number of employees. However, even if it isn’t compulsory, it’s a good idea to get workers’ compensation to ensure a consistent and robust workforce. Understanding how workers’ compensation works can be a tad challenging for small business owners. That’s because most small business employees don’t have the resources to hire accountants to calculate workers’ compensation. However, calculating workers’ compensation insurance isn’t rocket science.
All you need are a few business documents and a calculator, of course. If you get the formula right, you can calculate workers’ compensation insurance in no more than a few hours.
Workers’ compensation is crucial for your small business protection. In this piece, we’ll be discussing how you can calculate your workers’ compensation insurance without using a workers’ compensation calculator.
It All Starts With the Class Code
The first thing your insurance provider checks when calculating your workers’ compensation is your class code or classification code. These are four-character codes that insurance companies use to classify various work categories. These categories primarily depend on the type of work your employees do.
For instance, if your line of business is construction, you’ll have a specific class code. If you own a restaurant, your class code will be different. These class codes help insurers estimate workers’ comp rates for various types of businesses.
The insurer will have a base rate for each category of work. Business classes with higher turnovers attract higher base rates.
Enter the Taxable Payroll
Once the insurance provider has the base rate, the next step is to obtain the taxable payroll. The taxable payroll is the amount of payroll that attracts taxation. The base rate is typically some dollar amount per taxable payroll.
For instance, you can have a base rate of about $4 per $100 of taxable payroll. The insurance company will typically project your taxable payroll from previous tax records. The insurer then divides the taxable payroll with the base rate.
Taking the said base rate and a taxable payroll of about $100,000, you then divide the taxable payroll with the base rate. That means 100,000 divides by 100, which equals 1000. Multiply the figure by the base rate to get the manual premium.
In our case, the manual premium equals 4 by 1000, which is $4,000. Please note that this isn’t the final premium amount.
After finding the manual premium, the insurer has to factor in the schedule rating in the calculation. The schedule rating modifies the manual premium to reflect specific business characters. This schedule rating can either revise the premium upwards or downwards, depending on your business.
Some companies qualify for an experience modification rate. If your company does, this insurer will factor it in the modification factor. The schedule rating also factors in your debits and credits to come up with the final figure.
Lastly, your insurer will add up other expenses to get the final insurance premium. These expenses may include service fees and other costs that the law stipulates. A few examples of these expenses include:
- Expense constant
- Subsequent injury fund
- Fraud surcharge
These expenses vary with the insurance provider, state, and your specific business. The extra expenses are added up to the figure to get your final workers’ compensation insurance premium.
Factors that Affect Your Workers’ Compensation Rate
There are plenty of factors that affect your workers’ compensation rate. Here are a few that you should keep in mind when calculating your workers’ compensation insurance.
Your Business Location
The business location is a crucial factor in determining how much you’ll have to pay for workers’ compensation insurance. That’s because some regions experience more lawsuits than others. Keep in mind your insurer has to stand in for you in case of a lawsuit.
For instance, you’re more likely to be sued in Los Angeles than in Providence. A business located in LA will pay more for workers’ comp than a Rhode Island business.
The Size of Your Payroll
Businesses with larger payrolls attract more premiums than businesses with smaller ones. The size of your payroll is the most critical factor in determining your workers’ comp premium. Think about it; the more employees you have, the more the likelihood of a workplace injury.
Also, if your employees make a lot of money, the insurance provider has to shell out a lot of money for compensation. Large businesses have to pay through the nose for workers’ compensation. If your business entails many high-risk activities, the higher your workers’ comp will be.
The Company’s Safety Record
The careful and conscientious employer is likely to pay a lower premium than a less careful one. Your insurance provider takes note of previous incidents and factors them into the insurance premium. A poor safety record may attract a larger premium.
For large businesses, the safety records are quantified into something known as the experience modification rate or ER. The EMR is a measure of how safe our business is to its workers. It takes into account the number of injury incidences the business has had in the past.
The average EMR is 1.0. If your business’s EMR increases above this figure, you’re likely to pay more workers’ comp premiums.
What Jobs Your Employees Do?
Some jobs are downright riskier than others. For instance, you can’t compare someone working in the mines with an office clerk. If your business has riskier jobs, the more workers’ comp you’ll have to pay.
In fact, the type of work your employees do is what primarily determines the class code.
Calculating Workers’ Compensation Insurance Is a Breeze
The above should suffice in helping you calculate workers’ comp premiums for your small business. Calculating workers’ compensation insurance isn’t too complicated if you follow the steps to the letter. You might not get an accurate figure, but the rough estimate will aid you in your financial organization.
Your workers’ comp is only as good as the insurer you settle for. For affordable and comprehensive workers’ comp, request a quote today, and we’ll sort you out.