a business owner calculating the estimated annual payroll

How to Calculate Estimated Annual Payroll for Workers' Comp

June 12, 2024
Mordechai Kamenetsky

Estimated annual payroll is one of the key components when purchasing a workers’ compensation policy. Your insurance premium is based on your employees’ expected earnings for the year and multiplied by your industry’s class code.

When the policy expires, you’ll go through an audit to determine if the estimate was accurate. Because your estimated annual payroll is such an important part of purchasing workers’ compensation coverage, it’s crucial to understand how it works and what you can expect.

How to find your estimated annual payroll

Determining your estimated annual payroll is surprisingly simple. You need to calculate it for each worker and then combine similar types of workers together.

Just use this formula: (hourly rate) x (hours a day they work) x (days a week they work) x (weeks a year they work) = annual salary

For example: A secretary who works Monday to Friday, 9am - 5pm and makes $18/hour.

Here’s what the calculation would look like: $18 (hourly rate) x 8 (hours a day they work) x 5 (days a week they work) x 52 (weeks a year they work) = $37,440 annual salary

You should also add any overtime, holiday pay, vacation pay, sick pay, Social Security and Medicare tax contributions, annuity plans, bonuses, incentives, profit sharing, and commissions that you know about in advance. 

Note that tips and gratuities aren’t included, nor are group insurance payments or expense reimbursements.

What happens if the estimated payroll is wrong?

Insurance companies know that your payroll estimate is unlikely to be 100% accurate. You may end up paying more or less in payroll than you originally planned. 

Therefore, every policy is audited at the end of the term to see what your true payroll numbers were.  The end-of-year audit will use your actual payroll to help determine whether you overpaid or underpaid and they will either bill you or refund the difference.

Class Codes matter, too

You’ll need more than just a lump sum estimated annual payroll here. You have to get the estimated annual payroll for each job role. So, rather than a single number that includes all your employees, you’ll create a list of reported earnings for different class codes

For instance, a secretary earning $45,000 per year would be reported as $45,000 for clerical services, while two external sales people earning $35,000 and $40,000 respectively would be reported together as $75,000. 

Pay close attention to Class Codes

One of the most common mistakes employers make when estimating their payroll is not paying close attention to their class codes. Two similar roles might be grouped under the same class code, but the reality is that they should be classified differently because of unique risk factors in each job role. 

Let’s give you an example. Suppose you have two salespeople. One works at your business location and primarily does their job over the phone. The other works out of the office, visiting clients in person at their locations. 

Both are technically salespeople, but the one who works out of the office has a much higher risk of injury. Classifying both salespeople with the outside sales code could mean overpaying. Conversely, using the classification for the in-house salesperson for both roles would mean underpaying.

Estimated payroll and how it affects your workers’ comp costs

To calculate your insurance premium, the insurance agent will multiply your estimated annual payroll by an assigned rate. That rate is set by the state rating bureau and is out of your control. 

However, your payroll is within your control. It’s critical to realize that your total employee wages are directly connected to your workers’ compensation insurance costs.

To help you control your workers’ compensation insurance costs, consider the following:

  1. Be strategic in your hiring. Types of hires will affect your costs in different ways due to the risk associated with each position/role.
  2. Understand that gaining or losing employees will have a major effect on your payroll and therefore your workers’ compensation insurance costs.
  3. Every raise and each commission paid also affects your total payroll. 

Who doesn’t have to be included in the policy?

It also pays to know which people working within your business are excluded (or can be excluded) from workers’ compensation insurance coverage. This varies from state to state, but some of the most common are sole proprietors, LLC members, partners, corporate officers, and family members working for the business. 

Ready to protect your employees with a robust workers’ compensation insurance policy? 

Get in touch with Kickstand Insurance. We can give you an instant workers’ comp quote and then help you tailor your policy to meet your unique needs.

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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