PayGo for accurate payroll reporting can prevent unplanned costs
When it comes to Workers’ Compensation costs, proper payroll reporting can have a big impact on year-end audits and whether or not a business will incur additional costs. Below is an overview of how it works:
Calculating Workers’ Compensation Premiums
Workers’ Compensation insurance premiums are calculated based on a type of business. The insurance company assigns a Workers’ Compensation classification code (class code) for each job. Different class codes have different costs associated with them and costs are estimated as part of an equation to calculate Workers’ Compensation premiums. Read on to find out more about the factors involved.
PART I Workers’ Compensation Class Codes and Rates
Insurance companies classify business risk by a Workers’ Compensation class code based on the type of operation and nature of workplace risk. A Workers’ Compensation rate for each class code is assigned by a rating bureau and calculated for each code based on $100 of payroll. Rates can differ depending upon the state.
A class code for a Retail Store worker maybe $0.44, whereas a class code for a higher-risk job such as a Window Installer could be $6.12.
Notice the higher-risk job is assigned a higher Workers’ Compensation rate.
PART II Payroll Reporting
The total amount of payroll is part of the equation to calculate the amount of the Workers’ Compensation policy. The Equation to Calculate Workers’ Compensation Policy Cost is: Class Code Rate x Total Payroll amount / 100. Using the example above, the equation would look like this:
- Retail Store WorkerIf the Class Code Rate is $0.44 per $100 and the total Payroll amount is $195,000, the equation and cost would be:Step 1: $0.44 x 195,000 = $85,800Step 2: $85,800 / 100 = $858
- Window InstallerIf the Class Code Rate is $6.12 per $100 and the total Payroll amount is $850,000, the equation and cost would be:Step 1: $6.12 x 850,000 = $5,202,000Step 2: $5,202,000 / 100 = $52,020
PART III – Maximizing Safety and Minimizing Claims
There is one more factor that is used to calculate the cost of a Workers’ Compensation policy. It’s based on the number and amount of Workers’ Compensation claims a business has paid to cover the cost of injured workers’ medical expenses and/or time away from work. This factor is called the experience modification factor (e-mod) and can add to or reduce the premium amount.
A neutral e-mod means the numbers illustrated above ($858 or $52,020) would remain unchanged.
However, if the Retail Store had low or no claims each year over the course of a few years, then the insurance company might reward them with a lower premium amount.
Whereas, if an insurance company had to pay a lot or large amounts of claims, say for the Window Installer that had a lot of accidents or injuries, then the Window Installer could be penalized and have to pay more for their policy.
Having a strong culture around safety and minimizing claims can have a positive impact on cost and the bottom line.
Part IV – PMC PayGo for Payroll Accuracy
Each year, an audit is done to ensure the proper amount of payroll has been reported and that the amount of premium charged is accurate. One of the best ways to avoid paying more than expected for Workers’ Compensation is to use an online reporting tool such as PMC PayGo to ensure payroll projections are accurate and changes can be made as employee headcount fluctuates
Learn More About Workers’ Compensation with PMC Insurance Group
PMC offers many services to help businesses manage costs related to Workers’ Compensation. Whether it’s managing risks, reducing claims, and/or ensuring accurate payroll reporting our experts and specialists are ready to assist. For more information contact us!