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Whether you run a small business with only a few employees or a big business where you have also hired independent contractors, worker’s compensation insurance is mandatory. Unless you are qualified as self-insured, you are obligated by law to calculate worker’s compensation insurance cost. 

This is a necessary coverage calculated in your budget, but here you will learn how you can lower it to your advantage. Let’s start from the beginning.

What Is Worker’s Compensation Insurance?

When you are running a business and have hired employees, you must pay, by state law, a number of dollars to that employee. You make this payment to insurance companies, which make sure that your employee gets compensated if that employee suffers from some damage at work.

Different insurance companies offer different plans, but the calculation for your worker’s compensation boils down to the same formula.

How To Calculate Worker’s Compensation?

Let’s do some easy math. The formula for calculating worker’s compensation cost for each employee is:

(Yearly Payroll / 100) x Worker’s Compensation Insurance Rate

Now let’s break this down to make everything much simpler for you. Let’s start with the yearly payroll. 

How To Add Up The Yearly Payroll?

You can talk to your economist or do this by yourself, but adding everything up for every employee is pretty simple. You simply calculate the monthly salary of an employee and multiply it by 12 months. 

Some calculations are more challenging than others when it comes to employees that get paid hourly and don’t work the same amount of hours every day. In this case, you can estimate a projected yearly payroll for that employee. 

When it comes to independent contractors, you should check with your lawyer to see the state’s regulations and if you are liable for worker’s comp in this case. You can also take the IRS 20 Factor Test to determine whether you are an independent contractor or not.

What Is Worker’s Compensation Insurance Rate?

A worker’s compensation rate is an indicator that reflects occupational risk or the odds that the worker will get hurt while doing the job. Some jobs have a higher risk factor than others. An electrician has a higher risk while doing his job than a web designer. 

Following this type of reasoning, you must understand that the worker’s compensation rate is higher for job positions that require more risk.

How Is Worker’s Compensation Rate Calculated?

Worker’s compensation insurance cost is regulated by each state’s laws, which means that the rates are different for the state where the employee currently works. Here comes into play another factor, which is work classification. A rating bureau determines work classification. Jobs with similar risk factors have the same rate.

To calculate the worker’s comp rate, you will need the classification code, a four-digit number assigned to your business based on the industry you are working in. You can find the classification code with a simple internet search.

Many online services allow you to know the classification code with the industry’s main keywords that you are working in and other business data, e.g., the state’s location, type of business, the industry’s niche, etc. 

To get your worker’s comp right, you can contact your state’s rating bureau and give them the classification code. The worker’s comp rate represents the cost per $100 of the payroll in one year, e.g., A rate of $1.70 for a position that would pay $100,000 a year would mean that you would pay $1700 a year of work comp premium. This is just an estimate. 

How Are Work Comp Rates Determined?

The rating bureau will calculate the exact rate based on a loss few factors that are specific. This data will show details such as: 

  • Cost per claim paid
  • Days of not working from injured workers
  • Total healthcare costs for worker’s comp claims
  • Number and types of claims filed.

Rates are usually specific to the classification code, but they may vary on the details above. For example, lower healthcare costs or a low number of claims would mean improved safety for your workplace, thus a lower rate.

Calculating Worker’s Compensation Insurance Premium

Worker’s Compensation insurance calculator

Photo by Kelly Sikkema on Unsplash

Now that we are all on the same page let’s take an example. Through this example, we will start calculating the worker’s compensation insurance cost premium to see it in practice.

For instance, if you own a grocery store and you have three employees: a storekeeper, a cleaning lady, and a shelving girl. You pay the storekeeper a total of $40,000 a year, the cleaning lady $43,000 a year, and the shelving girl $15,000 since she only works part-time. 

At first, you add up the total payroll, which in this case would be $98,000. Then you take each employee’s yearly wage and divide it by 100 since the rate represents the cost per $100.

  • Storekeeper $40,000 / 100 = $400
  • Cleaning lady $43,000 / 100 = $430
  • Shelving girl $15,000 / 100 = $150

Then you would multiply the result of each employee with their specified rate, which you would get from the bureau based on the classification code for their work position. Let’s just take an example with made-up rates.

  • Storekeeper $400 x rate of $1.51 = $604
  • Cleaning lady $430 x rate of $1.44 = $619
  • Shelving girl $150 x rate of $1.48 = $151

           Total: $1374

Add all that up, and you get the total of the worker’s compensation insurance you would have to pay for all of your employees. 


Always remember what we said earlier. The worker’s compensation insurance cost will vary and not be the same for you since the rate you will be using will vary on the rating bureau’s loss factors. Now you know how to make the calculations yourself without the need to spend more money or time. 

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