Workers compensation calculator: How much does workers comp insurance cost?

Workers compensation insurance, workers comp, or workman’s comp is one of the most common considerations for business owners and operators. But how much does workers comp insurance actually cost? If your business employs more than two people, you are required by law in most states to have workers compensation insurance coverage. That said, this doesn’t mean that all workers comp policies and premiums are created equal. And it certainly doesn’t mean every business will pay the same rate. There are many factors that contribute to workers compensation costs for your business specifically.

In this article, we’ll break down the cost of workers compensation insurance and dive into the different factors that affect the cost of premiums.

What is workers compensation insurance?

Workers compensation insurance is an essential business policy that provides financial support to employers if an employee experiences a work-related injury or illness. This can cover medical expenses, lost wages, rehabilitation, and, in severe cases, funeral costs for the family. 

For example, if you own a warehouse business and an employee is injured while working a forklift, your business will be required to cover their medical bills and lost wages — among other injury-related expenses. Workers compensation insurance allows you to transfer financial responsibility to an insurance company.

The requirements for workers compensation insurance vary by state. Some states, for instance, manage their workers comp through public funds and prohibit private insurance companies from providing this coverage at all. 

Workers compensation policies and premiums will also differ substantially from business to business, as policy terms and price will depend on: the company’s industry, how long the company has been in business, any information about previous incidents, prior claims, and other factors. 

How much does workers compensation insurance cost on average?

While there is a wide price range when it comes to workers compensation, small businesses tend to pay between $40 and $80 per month for workers comp insurance.

Keep in mind that there are many factors that affect the overall cost of a workers compensation policy, such as your business industry, number of employees, and claims history. Higher-risk industries or companies with more employees tend to pay higher workers comp insurance premiums than small, low-risk businesses. 

The formula for workers comp insurance cost

Before we dig into the nitty-gritty of the variables involved in calculating workers comp costs, we’ll first introduce a general formula for calculating workers comp premiums. 

Factors that affect workers compensation premiums

Unfortunately, determining the cost of workers compensation insurance is not a simple process, and businesses can pay wildly different rates for coverage, even if they’re in the same industry. Let’s take a look at some of the main factors that affect workers compensation rates.

Workers compensation class code rates

In the world of workers comp insurance, each job title has a corresponding four-digit number, known as a class code. 

Class codes have an accompanying description that provides context about the job and a corresponding class code rate. This class code rate is the amount per $100 of wages that should be paid in workers compensation insurance premiums per employee.

For example, the class code “8832” represents a chiropractor and has a class code rate of $0.14. On the other hand, a crane operator has a class code of “9534” and has a rate of $4.26.

These codes are classified and maintained by the National Council for Compensation Insurance (NCCI) or a state-sponsored classification. The NCCI is the insurance industry’s primary source for analyzing the risk profiles of various forms of employment in order to effectively underwrite workers compensation insurance.

Here are some different job titles and their corresponding workers compensation rates:

NCCI code	Job title	Workers compensation rate
8832	Chiropractor	$0.14 per $100
9534	Crane operator	$4.26 per $100
8748	Car salesman	$0.43 per $100
0106	Tree pruner	$6.52 per $100
8810	Office employee	$0.13 per $100
5551	Roofing specialist	$8.24 per $100
7370	Taxi driver	$3.65 per $100
8385	Garage employee	$2.07 per $100
5606	Project manager	$0.83 per $100
8835	Nurse	$1.53 per $100

As you can see, certain job titles have much higher rates for workers compensation insurance than others. These generally correspond to jobs with more risk of work-related injury or sickness.

Claims history

Your company’s past claims play a significant role in determining the workers compensation insurance premiums you’ll pay. Insurance providers assess the frequency and severity of past claims when calculating your rates. The more claims your company has made in the past, the more costly your insurance premiums will likely be. This is because insurers view businesses with a history of frequent or expensive claims as a higher risk. On the other hand, a clean claims record is generally a gold star when it comes to purchasing insurance and indicates less risk of future claims. 

But how do insurance underwriters analyze your company’s risk, and how much does it affect your premiums?

Experience modification rate explained:

The Experience Modification Rate (EMR), also known as X-Mod or E-Mod, is what the insurance industry uses to compare your company’s workers compensation claims history against industry averages to predict the risk of future claims. 

EMRs typically fall in the range of 0.75-1.25. An EMR above 1.0 will increase workers compensation costs, and an EMR below 1.0 will decrease costs. New businesses typically start at 1.0 for their first three years.

Both severity and frequency of claims can contribute to an increase or decrease in EMR. Let’s say your employee, an office manager, fell in the office, requiring back surgery and five months of lost wages. Although this business does not frequently have workers’ compensation claims of this nature, the severity of this one claim would likely increase the EMR.

Payroll and number of employees

The amount your business spends on payroll is another major player in determining your workers compensation insurance costs. For each specific class code, you’ll pay a certain amount on every $100 of payroll. So this means that if you hire highly-paid employees with a relatively low class code rate, you may still pay a substantial amount in workers compensation insurance. 

But what counts as payroll for the purposes of calculating your workers comp premium? Insurers will typically underwrite policies at premiums based on projected payroll. Once the fiscal year is over, the insurer will reassess the incurred payroll expenses and either credit your account (refund premiums) or debit your account (charge you more in premiums). 

Wages, overtime, bonuses, incentive plans, holiday, and sick leave payments, will all be included in this payroll projection. However, tips, group insurance and pension plans, severance pay, and expense reimbursement will not be taken into account when calculating your workers comp premium.

For example, one employer pays $100,000 in payroll for a small automotive business with employees under the 8385 class code at a rate of $2.07 per $100. Without taking the experience modification rate into consideration, this business would pay $2,070 per year in workers compensation premiums.

Another employer owns a large tech company with highly paid employees who work in an office. While their class code rate is only $0.13 per $100, their payroll is around $2,500,000 per year. So, they pay $3,250 per year in workers compensation insurance.

Workers compensation by state

Each state has different regulations and requirements when it comes to workers compensation. That said, 49 states require companies to have workers compensation insurance, Texas being the only odd one out.

When it comes to limits, penalties, and exclusions, each state varies. Check out our complete breakdown of state-by-state workers compensation requirements for more details on this.

There are three types of states regarding workers compensation: NCCI states, independent bureau states, and monopolistic states. NCCI states use the codes and rates provided by the national council. 

Independent bureau states like California, Minnesota, and Wisconsin have established their own separate rating bureau. For example, the WCIRB, or Workers Compensation Insurance Rating Bureau of California, is the largest single-state market for workers comp.

Monopolistic states like Ohio, North Dakota, and Washington are those that have established a state fund for underwriting workers compensation insurance and prohibit private insurance coverage.

Workers compensation calculator

So, how do you calculate your estimated workers compensation insurance costs? As previously mentioned, the formula for workers compensation insurance includes the class code rate, EMR, and the business payroll as follows:

Premium = (Payroll/$100) x Class Code Rate x Experience Rate Modification

While this formula is a great way to get an estimate of your premium, it will still only give you a ballpark figure. The state in which your business operates, your precise EMR, and the diversity of your workforce’s class code rates will all come into play when calculating a precise rate.

How much will an employee receive in workers comp benefits?

When considering how much workers compensation benefits an employee will receive, it depends heavily on the state in which the employee resides. 

Most often, benefits are calculated and paid based on the average weekly wage. This is calculated by multiplying the employee’s daily wage by the number of days worked in a full year. That number is then divided by 52 weeks to get the average weekly wage.

For example, if an employee made $40,000 last year, working a total of 247 days, considering time off for vacation, sick leave, etc. This means the employee received $161.94 per day in gross income. Multiply this number by 260 or the number of days an employee would work in a full year (52 weeks x 5 days). Then, multiply the wages per day ($161.94) by the number of days per year that constitute full-time employment (260).

This means that the employee would be entitled to benefits of $42,104.40 per year or $809.70 per week. If the employee is totally disabled, they would typically receive 60% of this wage or $485.82 per week. 

How to lower workers compensation insurance costs

Most factors that affect your business’s workers comp premiums are out of your control, but there are still some things you can do to lower costs. In general, the best way to lower your workers compensation premiums is to focus on employee safety. After all, the less risk your employees are at getting injured or sick in the workplace, the fewer claims you’ll have. 

Employee safety training

Safety training is an afterthought for many companies, with many seeing the high cost of programs as an unnecessary expense. However, failing to invest in a solid training program costs businesses more in the long run. A recent study by the Office of Energy found that employers can save between $4 and $6 for every $1 spent on safety training.

Investing in a workplace safety training program for your business can reduce the risk of costly accidents and employee injury. In turn, this will keep your claims record clean and lower your EMR.

Maintain a safe work environment

Beyond training employees, you should also ensure that everything about your workplace, from the building itself to the equipment, procedures, and conditions, is safe. Check equipment frequently to ensure it is working properly, inspect the workspace for tidiness, give your employees breaks, and remind them to use personal protective equipment (PPE) at all times. You should also have clear guidelines for handling hazardous materials or heavy machinery.

Avoid overtime work when possible

Overtime pay is typically factored into your workers compensation payments if an employee regularly works overtime hours. So, the more overtime hours your employees work, the more you may end up paying for workers comp insurance.

Additionally, employees who work extended hours are more prone to fatigue, which increases the likelihood of mistakes and injuries. Of course, in many industries, overtime work is essential for getting the job done. Minimizing overtime hours gives you more control over your payroll expenses and creates a safer work environment, which reduces the risk of workers’ compensation claims.

Opt for a pay-as-you-go workers comp policy

One way to reduce your premiums is to opt for a pay-as-you-go policy rather than a traditional workers compensation policy. The main difference is that with a pay-as-you-go policy, you pay based on your actual payroll expenses for a specific period, while in a traditional policy, your payroll is estimated. This generally results in high premiums, especially if your payroll amount changes throughout the year.

Additionally, traditional workers comp policies typically require a hefty 25% down payment, which is not necessary with a pay-as-you-go plan.

Get employees back to work as soon as they are ready

The longer an employee is receiving workers comp benefits, the more of an effect it will have on your EMR. This is why it is important to get employees back to work as soon as they are physically well and ready to return. That said, bringing an employee back to work after an injury is a delicate process that should be handled with care.

For obvious reasons, you cannot simply throw an injured employee right back into the workforce. Instead, you should have a return-to-work policy that outlines the procedures for an employee to return to work after receiving workers compensation benefits. This may include a thorough examination from physicians to ensure the employee is ready to return to work and transitional job tasks.

Choose the right deductible

Your deductible is the amount of money your company will cover for workers compensation payments before insurance kicks in. The higher you set your deductible, the lower your premium, and vice versa. Balance the financial liability you are willing to take on with the amount you’d ideally like to pay for monthly premiums and choose your deductible accordingly.

Get help from an insurance broker

It is no secret that navigating the business insurance world is a headache-inducing task. When it comes to workers compensation insurance, there are a lot of caveats and fine print that can affect your costs. Choosing an insurance broker to guide you through this process not only makes things easier but can also save you money in the long run. 

Finding workers compensation insurance for your business

If you’re considering the best option for workers compensation insurance, simply create an account with Embroker to determine the best possible premium for your business. 

Our proprietary software can help calculate your risk profile compared to the industry average. Whether you’re a startup or an established business looking for the best rates, Embroker can help find the best workers compensation insurance quote for your business.