Workmans Comp: A Guide to Calculating Premiums

Studies show that the US records 47.2 million workplace injuries and illnesses annually.  The cost for these injuries in 2017 was $164.6 billion. Such huge costs can negatively impact your business if you do not have a workers’ compensation insurance policy. 

You must carry Workers’ Compensation Insurance if your business has two or more employees. However, calculating premiums sometimes becomes a challenge. Luckily, this guide will help you eliminate the guesswork and arrive at the correct figure in easy steps.  

Calculating Premiums for Workers’ Compensation Insurance: The Formula 

The workers’ compensation insurance premium formula is based on the business industry, the type of work undertaken by each employee, company payroll, and claims history. Medicare tax is a federal payroll tax that pays for a portion of Medicare.The Medicare tax was established in 1966 to solve a health care problem: For many seniors, income declines and health care needs increase after retirement. But before Medicare, the cost of insurance got too high to manage, and some retirees’ policies were canceled due to their age.

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Workers’ compensation premium= Employee classification rate x  Employer payroll (per $100) x Experience mod rate. 

Employee Classification Rate

Calculating premiums for workers’ compensation insurance are calculated based on how employees are classified. Note: Employees are classified by the type of work they do. The classification process looks at which type of work poses more risks to employees as they undertake their duties. 

 Each employee category is assigned a rate based on the classification code and associated risk, and the rate is expressed as dollars per $100 payroll for each class code. For example, employees classified as 5006 have a workers’ compensation rate of $11 per $100. Meaning for every $100 on the payroll of staff with a 5006 class code, the employer is charged $11 for workers’ compensation insurance.   

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Experience Mod Rate

Experience mod rate considers the employee history of a claim by comparing your business to others in your industry under similar employee classification. Several factors, including the type of business and severity levels, age, number, and frequency of claims, affect the mod rate. 

The average experience mod rate starts at 1.0. A business experiencing less than the average severe accidents is assigned a less than 1.0 experience mod rate. Higher than-average accidents also attract a higher than 1.0 mod rate. 

For instance, a 1.20 mod rate means a premium assessment of 10% debit, while a mod of 0.90 is assessed as a 10% credit. In other words, a dangerous job has higher injury potential rates compared to safer jobs and hence attracts higher premiums. 

You do not have a claim history when calculating claims for your new business.  Unfortunately, you will likely pay a higher workers’ compensation insurance rate until you have an experience mod. 

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Employee Payroll

Workers’ compensation insurance premiums are based on the employer’s payroll. The employer pays a compensation rate for every $100 on their payroll based on the classification codes of their employees.

 Most employers prefer the pay-as-you-go workers’ compensation plan when making premium payments for streamlined cash flow management.  This means compensation premiums are deducted each payroll period instead of making one large payment. If, for instance, they lose employees, the payroll changes, and so are the insurance premiums. 

Conclusion

Investing in the right employee coverage is critical for any business. When calculating the workers’ compensation premium, remember that your industry and risk factors associated with the type of work your employees undertake and the payroll impact workers’ compensation costs. 

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