Paying the requisite premiums for workers’ comp insurance upfront can put a serious strain on a business’s cash flow. What’s more, these premiums are traditionally based on payroll estimates, which means year-end audits could end up revealing a large variance. The potential answer to these financial headaches is pay-as-you-go workers’ comp premium payment solutions.

Table of Contents

What is a pay-as-you-go workers' comp payment solution?

A pay-as-you-go workers’ comp solution is a premium payment plan that often allows employers to pay their workers’ comp premiums based on actual payroll figures, not estimates. It is not insurance coverage in itself, nor does it replace an employer’s existing policy. Businesses that use pay-as-you-go must still purchase workers’ comp that meets all state requirements.

How does a pay-as-you-go workers’ comp payment solution work?

Instead of paying a lump sum at the beginning of their coverage period, employers enrolled in pay-as-you-go workers’ comp solutions pay their premiums incrementally during each payroll cycle. They usually have the option of reporting the payroll data to their insurer themselves or integrating workers’ comp with their payroll service and automating the payments.

How is a pay-as-you-go solution different from a traditional workers’ comp premium payment program?

A pay-as-you-go solution doesn’t make worker’s comp cheaper, but it does often result in more accurate premium payments, which may lead to more favorable audits. For example, employers who are on a traditional payment plan and incorrectly estimate their premiums could end up owing money to the insurer at the end of the coverage period or be owed money that their business could have used during the year.

What are the benefits of a pay-as-you-go workers’ comp payment solution?

Pay-as-you-go solutions can help simplify workers’ comp administration and possibly free up capital. It does so by allowing employers to:

  • Reduce or even eliminate up-front payments
    A traditional workers’ comp premium payment program could require anywhere from 25 to 100% of the total premium to be paid at the start of coverage, but with a pay-as-you-go solution, employers may be able to spread their payments out over the course of the year.
  • Make premium payments based on actual payroll numbers and carrier rates
    Paying workers’ comp premiums using real-time payroll data instead of relying on an annual estimate usually means businesses are less likely to experience cash flow shortages as a result of over or underpayments.
  • Automate payments and reduce risk
    When payroll is integrated with workers’ comp, the monthly premiums are automatically deducted, saving time, easing administrative burdens and reducing the chance of missed or late payments and policy cancellations.

How does a business find a pay-as-you-go payment solution for workers’ comp?

Pay-as-you-go premium payment programs are increasing in popularity and businesses that want to take advantage of them generally can do so in one of two ways:

  1. Work with a payroll service provider that integrates payroll with workers’ comp and is capable of automating the payments
  2. Purchase workers’ comp directly from an insurance carrier that accommodates pay-as-you-go billing schedules

However, not every payroll provider or insurance company offers a pay-as-you-go solution and it may not be an acceptable method of payment in monopolistic states where workers’ comp can only be purchased through government agencies.

Frequently asked questions about pay-as-you-go workers’ comp payment solutions

Can an individual get workers’ comp insurance?

Those who are sole proprietors and have no employees can purchase workers’ comp, though it’s not necessary in some states. Others may require it, depending on the nature of the work. Businesses that work with independent contractors also might ask that such individuals have their own workers’ comp insurance in case of an on-the-job accident.

Is workers’ comp insurance a payroll expense or just an insurance expense?

Although workers’ comp premiums are calculated based on payroll data, they are generally considered an insurance expense. Payroll expenses typically consist of wages paid to employees, Federal Insurance Contribution Act (FICA) taxes, unemployment taxes and benefits contributions.

Do I need workers’ comp insurance for my subcontractors?

Subcontractors working for another business need to be covered, either through their own workers’ comp insurance or that of the business paying for their services. Business owners commonly require that all subcontractors or independent contractors provide proof of coverage before starting work.

Does ADP offer workers’ comp insurance?

Automatic Data Processing Insurance Agency, Inc. (ADPIA®), an affiliate of ADP®, has relationships with A-rated insurance carriers nationwide and can help clients find the workers’ comp and business insurance that’s right for them. ADP also offers a Pay-by-Pay® Premium Payment Program, which allows clients to pay their workers’ comp premiums each payroll cycle using real-time payroll data and carrier rates, thereby potentially avoiding a large up-front deposit1 and improving cash flow.

This guide is intended to be used as a starting point in analyzing an employer’s workers’ comp obligations and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services. Please consult your personal tax or legal advisor should you have specific questions related to your circumstance.

1 While premium deposits may be eliminated with most carriers, mandatory state assessment fees may be required in some states.