How are Workers' Compensation and Payroll Connected?

man calculating payroll amounts for insurance quote
Mordechai Kamenetsky
Last Updated: 
July 18, 2022

Did you know that workers' compensation was the first social insurance program in the US? In the early 1900s, the need was evident for a program such as this. Today, workers' compensation continues to work to protect everyone involved. You may wonder how the program works with payroll and what steps you need to take to ensure proper documentation.

Workers' compensation is calculated based on payroll. It depends on the number of employees, what type of work they do and their annual gross wages. In order to calculate workers' compensation correctly, employers need to figure out how much they will pay their employees in the next 12 months. Basically, it’s a calculated guess based on future estimated payroll numbers.

What kinds of pay are included? 

  • Wages
  • Bonuses
  • Two thirds of overtime pay accumulated
  • Holiday, sick leave, and vacation pay
  • Social Security and Medicare tax payments
  • Profit-sharing or other perks
  • Prevailing wages
  • Annuity plans

Not included in "gross wages" are things like tips or other freebies, payments for group insurance or pension plans, or reimbursements for expenses.

Calculation tips

Calculation tips

Calculating how much workers' comp insurance costs with a calculator is tricky and very cumbersome, if not impossible. Instead, use an online quoting software to help you and do all the heavy calculations for you. Here’s a few tips and tricks to remember when performing your calculations.

  • It's okay to estimate your annual gross income when getting a quote for a policy.
  • Group employees who perform the same job roles and calculate the pay for each classification code separately.
  • Wages can be rounded up to the nearest $1,000.
  • Include the wages of all workers' who will be covered by the policy. This should include people who get a W-2 and any other workers the state law requires.
  • Owners, officers, members of an LLC, partners, and family members may not have to be covered, or they may opt out.
How do payroll changes impact the calculation?

How do payroll changes impact the calculation?

There are several changes that may occur in your business throughout the fiscal year. You may hire new employees, downsize a team or even change the salary structure for some employees. Another change might come from the classifications you hire. If you're moving towards automation, you’ll need more people on your data collection team and fewer in administration. All these changes can impact your payroll.

Avoid surprises with proper planning

Avoid surprises with proper planning

No business wants to be surprised at the end of the year by a higher workers' comp bill. To avoid this, plan your payroll ahead of time and make changes as needed. This can help you figure out how much your workers' comp insurance will cost and give you better coverage.

As the year goes on, check your calculations. If you hire new people, issue raises or promotes employees, update your coverage. Changing your coverage is easy with Kickstand Insurance. You can change your payroll estimates using the online portal or by talking to your agent or underwriter. Changes can be spread out over the rest of the policy term this way. This can help you avoid any surprises at the end of the policy year. And with Kickstand's services, they will be right there with you every step of the way.

Tips for handling a Workers' Compensation Audit

Tips for Handling a Workers' Compensation Audit

You may want to find out more about the workers' compensation audit now that you've figured out your payroll and are keeping an eye on any changes. Most people get nervous when they hear the word "audit," but if you use an agency like Kickstand, you'll have steady support to help you through any problems.

The purpose of the audit is to make sure that your first estimates are accurate or to adjust as necessary. The audit checks to see if the estimated premium is the right amount for what you need from your insurance.

If the estimates are different from what you really need, you are either paying too much or not enough for your insurance. In that case, your insurance company will have to change the amount you pay for insurance. Your insurance costs could go up or down if there is a change.

If your workers' compensation insurance premiums are too high, you will get your money back. This is great in theory, and it's better than what could have happened, but you could have used that money to invest in your business or pay off debts earlier in the year. If the premiums are too low, you will have to pay the money back, which is, well, not great.

The audit can take up to 30 days to complete. After the audit is done, you will get a Final Audit Statement. The Final Audit Statement tells you how much money you owe or is owed to you by your insurance company. Most of the time, adjustments are made because payroll calculations were done wrong or because an employee's type of work or class code was put in the wrong category.

Making the most of services offered

Making the most of services offered

Now that you understand how payroll and workers' compensation connect and the basics of an audit, you may be wondering how you will fit the tracking and documentation into an already busy day. Managing a business is a full-time job, much more than the 40-hour work week. When you utilize resources available to you, such as payroll management, auditing support, and documentation preparation, you will be ahead of the game. It takes a team to make sure you've checked all the boxes, and the team you choose should be trusted and reputable.

If you're handling these aspects all on your own, or if you're curious if you're getting the services matched to you, contact Kickstand Insurance for a quote. You can receive an immediate online quote providing you with an estimate of your premium costs. Then, within 48 hours, your quote will be followed up by underwriters on the Kickstand team. Once you've discussed a plan with them, you can decide to move forward, leaving the details up to them. Using a platform such as this allows you to focus on other issues on your to-do list.

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Note: The information provided in this blog is intended for general informational purposes only and is not a substitute for professional legal or insurance advice. Laws and regulations regarding workers' compensation insurance are complex and vary by state and by specific circumstances. Therefore, readers are encouraged to consult with a qualified legal or insurance professional to obtain advice with respect to any particular issue or problem they might have.

Mordechai Kamenetsky

Mordechai Kamenetsky, co-founder and lead agent of Kickstand, is recognized as an expert in workers' compensation. He is passionate about helping small businesses manage risks and lower their workers' comp costs. In his articles, he educates readers and clients on the intricacies of workers' comp insurance.

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