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How is Workers Comp Calculated?
Whether you’re new to running a business or a seasoned business owner, an insurance plan is a must.
Workers’ comp is one of the most common business insurance policies, and chances are you’re already begun the process of implementing it.
But do you understand how the calculation for worker’s comp works?
Or the benefits it brings to the table?
In this article, you will get a rundown of the benefits of workers’ comp and how it is calculated.
This will give you a clear idea of how workers’ comp works and how it affects your business.
What Is Workers’ Comp And Who Needs It?
Let’s have a rundown of the basics first—what is workers’ comp? Workers’ comp is the colloquial term for workers’ compensation.
It deals strictly with the employees in your business and their compensation.
Accidents may happen at the workplace, and the purpose of the workers’ comp is to ensure that if that happens, the employee in question receives minimum medical and payment benefits.
Rules and regulations for workers’ comp vary from state-to-state, but all businesses benefit from implementing it.
If you’re a new business owner and not sure whether to get the coverage, take help.
Go through your state-specific business requirements with a business insurance specialist if required.
Common Workers Comp Benefits for the Employee
Workers’ comp policies and regulations may vary from state-to-state, but most of the workers’ comp policy benefits are universal.
These are the most common and mandatory benefits that a workers’s comp policy must include:
- Medical expenses
- Missed wages
- Ongoing care
- Funeral costs
- Repetitive injury
Workers’ compensation benefit calculations are situational but are always a percentage of the employee’s weekly wage.
For instance, a person who is totally disabled from a work-related injury receives more than a person who is only partially disabled.
A company’s workers’ comp insurance cost is not standardized.
The calculations are done based on a couple of factors, as well as the rating specified by a standardized risk classification system.
The higher your business’ risk rating, the higher the premium.
At the beginning of the calculation, a few factors are considered:
- Type of business
- Business Size
- Claim history
- Size of the payroll
- State laws
Once these three factors are determined, experience modifiers are thrown into the mix.
This, combined with the primary factors, form the basis for calculating the premium.
The formula for premium calculations is as follows: workers’ classification code rate X Experience modifier number X (Payroll/100)
The workers’ classification code rating is either determined by the NCCI (National Council on Compensation Insurance) or a state rating agency.
It determines the risk factor of the workplace and is the second most volatile factor of the calculation formula.
The most volatile factor is the experience modifier number. The standard industry risk modifier rating is one.
If your rating is below one, then you will be able to reduce the amount.
If it’s more than one, then the premium amount increases.
Lowering Your Premium
The good news is, you can significantly reduce the premium amount if your business adheres to some guidelines and implements specific measures.
Standard guidelines and actions for this purpose include:
- Basic safety measures at the workplace,
- Implementing return-to-work policies,
- Enlist in state-sponsored programs, and
- Enlist in particular business groups to get state discount
Business reviews are also very important when calculating workers’ comp benefits. The first thing to review is employee classification.
Often, clerical employees get classified as on-ground employees in heavy industries, which can result in higher compensation amounts.
The second thing to review is your payroll. Workers’ comp is calculated based on your current and projected payroll.
If your payroll projections are higher than the actual numbers, just ask your insurance company to adjust the payroll. You will also save a lot that way.
Now that you know how to calculate workers’ comp and the policy benefits, you should have a better understanding of this important insurance policy.