# Workers' Compensation Premium Calculations: A Primer

Some small business owners may have a difficult time understanding how workers' compensation premiums are calculated. This should come as no surprise, however, as the process is complex since workers' compensation premiums vary for many reasons. What's more, inaccurate calculations may lead to surprise bills down the line. To help shed light on some of the particulars involved with workers' compensation insurance, we've interviewed Ken Snyder, Sales Learning Consultant at Automatic Data Processing Insurance Agency, Inc. (ADPIA).

Before calculating your premium, the insurance company classifies the business based on the risk of injury within the industry. The company then uses this classification code to estimate your premium. More potentially hazardous industries, such as construction, will end up with higher rates than those that have lesser risk, such as retail. Your employees will be classified based on this categorization.

"For many businesses, every employee has the same classification code," says Snyder. "The logic is that employees might have to fill in for other roles at some point, so they all share the same risks." If, for example, you run a restaurant, your bartenders and servers would have the same code.

However, there are some exceptions to this rule. For example, clerical workers who only do clerical work could receive a less expensive code and lower rate than other employees within your company.

Annual Payroll Estimate

The insurance company sets your initial workers' compensation premiums by applying the class code rate to your expected payroll (per \$100) for the upcoming year. The policy premium is calculated on estimated payroll for the upcoming year, which is difficult to calculate with any degree of certainty.

Once the insurance company calculates the premium, the insured business is required to make its initial payment.

"Likely, if your annual estimated premium is less than \$1,000, you'll have to pay for the entire year all at once," Snyder explains. "If your premium is more than \$1,000, the insurance company may offer an installment plan. With installment plans, in order to remain ahead of the collection curve, the insurance company will usually collect a deposit premium representing 20 percent or more of the total estimate premium."

End-of-Year Audit