Whether you are a small, medium or large-size company, one of the most basic costs of doing business is insuring your employees against injury on the job.  Almost every business in the U.S. that has employees is required to have a workers' compensation insurance policy. 

How are workers' comp premiums calculated?

Workers' comp insurance premiums are calculated according to how employees are classified (with regards to the specific type of work they perform) and the rate assigned to each employee classification.  The premium rate itself is expressed as dollars and cents per $100 dollars of payroll for each class code.  In most states, the National Council on Compensation Insurance (NCCI) determines the classification rate and experience modification factor (MOD).

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Factors of workers' comp premiums:

  1. Employee job classifications.
  2. Company's claims experience.

Premiums for workers' compensation insurance are calculated by the formula below:

Payroll (per $100)    X     Class Code Rate     X     Experience Modifier (if applicable)     +     State Taxes & Fees     =     Premium

How your payroll affects your workers' comp rate.

The basis for an employer's workers' comp insurance premium is your payroll. For each $100 dollars of your payroll, there is a specific rate, which is determined by the classification codes of your employees. 

For better cash flow management, you can spread your premium payment out over the year instead of paying one lump sum.  Just be sure to choose a payroll provider that gives you the option of having your workers' comp premium deducted each payroll period.  This is called a 'pay as you go' program.

How employer classification affects your insurance rate.

Businesses are separated into groups according to the type of work they do. The classification system identifies which type of work presents more risk to the employees performing these tasks.  For each classification of employee, the business owner must pay a certain amount for workers' comp insurance based on every $100 dollars of payroll.

How your experience modification factor affects your premium.

Your experience modifier, typically referred to as your MOD, is a numeric representation of your company's claim experience.  MODs are based on how your business compares to others in your industry with similarly classified employees.  An average MOD is set at 1.00. Employers with fewer and less severe accidents than average have a MOD of less than 1.00.

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Disclaimer: Please note that this is not all inclusive. Our guidance is designed only to give general information on the issues actually covered. It is not intended to be a comprehensive summary of all laws which may be applicable to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your own legal advisor regarding specific application of the information to your own plan.
Editor's Note: This post was originally published in March 2010 and has been updated for freshness, accuracy, and comprehensiveness.