Every employer who buys an employers’ compensation insurance policy has to calculate compensation per employee. The calculation depends on several factors such as the payroll, classification codes, an experience modification factor, whether the employee works full-time or part-time, etc.
There are two different formulas. One requires using the experience modification factor when employees perform their duties in risky environments. The other formula requires just the payroll divided by 100 and multiplied according to the classification rate.
Many things should be considered, so keep reading this article to figure out what a worker’s comp premium is and how to calculate workers’ compensation cost per employee.
Cost of Workers’ Comp
The cost of compensation depends on where your business is located (what state) and on some other factors:
- Company’s annual total payroll.
- Type of industry.
- Type of work performed by employees.
- The claims history (experience modification factor).
Typically, physical work results in higher compensation rates. Companies with a bad history of frequent incidents pay more because their experience modification factor is higher. Workers’ comp rates vary per company as conditions improve or worsen.
With that said, it’s possible to improve working conditions to decrease the compensation workers are supposed to get in case of an accident. It’s a great idea to invest in since workers don’t get injured, and the business can buy insurance for a lower price.
How Much do Small Businesses Pay for Workers’ Comp
It’s worth mentioning that businesses can pay annually or monthly for workers’ comp insurance. Annual payment is a better option since insurance companies often offer discounts.
Considering the above-mentioned information about factors affecting the price of an insurance policy, small businesses pay between $400 and $800 per year. If the company improves workplace conditions and fewer to no claims occur every year, the price may be lower.
How to Save on Workers’ Comp and is it Possible?
Note, you can’t reduce the cost of compensation in case of an injury. But you have several options to use to reduce the cost you pay monthly or annually for the insurance. Here are some useful tips to reduce costs by improving safety and working conditions:
- Provide employees with the right safety gear to minimize potential risks.
- Conduct employee training. Include instructions on how to safely perform specific jobs, how to handle dangerous equipment or hazardous materials, etc.
- Make sure to identify all potential hazards by placing signs and labels to alert workers.
- Avoid any clutter. Make sure to instruct workers to properly store equipment so it won’t clutter. Clean working areas of power cords or boxes to reduce the risk of tripping over and injuring oneself or others.
As mentioned, yearly insurances may come with discounts, so consider this option.
Instructions on How to Calculate Workers Compensation Cost Per Employee
The sum a business has to pay for workers’ comp insurance depends on a specific rate for every $100 of a company’s payroll. The compensation also depends on such factors as:
- type of work performed by employees, or classification rate;
- the business’s experience modifier — the company’s claims history;
- payroll per every $100.
The classification rate may vary by state. In Texas, it’s $0.55 per each $100 of payroll, but in Alaska, it’s $2.25. But these numbers are too simple, especially when you see the formula. These rates include all types of jobs without considering whether the work is high-risk or low-risk.
The formula to calculate workers’ compensation is as follows:
Compensation = (Payroll / 100) x Classification rate x Experience modification factor
Some states set different workers’ premium rates based on the information from the National Council on Compensation Insurance (NCCI). It’s an insurance data collection and rating agency that provides coverage of information on employees’ premiums.
The agency collects data from millions of policies and claims to analyze trends and publish recommendations that businesses and insurance providers use to determine premiums. This agency also has useful data on how to calculate workers’ compensation cost per employee in most states.
Calculation Example
So, how to calculate workers compensation cost per employee. Most factors from the formula are clear. It’s clear where to find the compensation rate and how to calculate the payroll. But what about the experience modification factor?
An experience modification factor is a company’s safety record. Employees work every business day and perform a specific type of work. It may or may not carry a risk to workers’ health. The better are safety measures at the workplace, and the lower is the risk of injury. But if the company provides fewer safety measures, the risk can be high.
The experience modification factor is based on the company’s injuries record. If the company had a lot of claims throughout history, then the modification is higher. If the company had fewer claims, then the modification factor is lower.
Based on this data, here is a simple example of calculating a premium for an employee.
As an example, a small company, Carpenter Manufacturing has five carpenters working full time and one office manager working part-time. Three carpenters make about $50,000 annually, and two carpenters make $57,000 annually. The office manager makes $20,000 annually. The total payroll is $284,000 annually.
The employer has to calculate premiums separately for each worker and divide by 100. Then each number has to be multiplied by the rate for each class code. For carpenters, it’s 5403, and the rate is 8.09. The office worker’s class code is 8810, and the rate is $0.35. The experience modification factor of Carpenter Manufacturing is 0.9
So, the calculation looks as follows:
- Carpenter 1. (50,000 / 100) x 8.09 x 0.9 = $3640.5
- Carpenter 2. (50,000 / 100) x 8.09 x 0.9 = $3640.5
- Carpenter 3. (50,000 / 100) x 8.09 x 0.9 = $3640.5
- Carpenter 4. (57,000 / 100) x 8.09 x 0.9 = $4150.17
- Carpenter 5. (57,000 / 100) x 8.09 x 0.9 = $4150.17
- Office Manager. (20,000 / 100) x 0.35 = $70
- Total compensation per year = $19,291.84
Note, when calculating the office manager’s compensation, the experience modification factor isn’t applied. That’s because clerical employees are compared only to other clerical employees since they don’t work in the same working conditions.
