How Small Business Owners Can Calculate Their Workers Compensation Premium

Small business owners face many challenges, from managing cash flow to building a strong team. But one area that can often be overlooked is workers’ compensation insurance. It’s a vital protection for employees and employers in the event of an on-the-job injury, but calculating the premium can be complex and confusing.

The expenses for workers’ compensation insurance are determined by various factors, such as the classification code that defines your business operations, your overall payroll, and additional criteria that the insurance provider might use to gauge your business’s risk (such as prior workers’ compensation claims). Moreover, since the regulation of workers’ compensation is carried out at the state level, the rates for workers’ compensation vary based on the location where your employees work.

Small business owners can explore these steps to determine the appropriate workers’ compensation premiums.

Calculating Workers Compensation for Premium Small Business Owners

1.   Add Payroll Wages for Employees

To compute workers’ compensation coverage expenses, determine each employee’s gross annual income, which is their total earnings for a year, before any deductions. This information can be obtained from your HR software or payroll firm. If you can’t determine an employee’s exact earnings, you can estimate their anticipated income using their hourly wage and projected number of hours worked. At the end of the policy year, you can adjust the final cost according to their earnings.

Ensure that you follow your state’s criteria for determining who should be included in your payroll, including full-time, part-time, and seasonal workers, and check for exemptions for owners, partners, and family members. You should also review your state’s rules for independent contractors.

2.   Identify Your Workers’ Compensation Classification Codes

Ensuring accurate classification codes is crucial when obtaining a workers’ compensation quote. These codes, consisting of four digits, are assigned to businesses based on their industry.

Grouping similar businesses allows for data collection on workplace injuries and workers’ compensation claims, which rating agencies use to assess the associated risk and assign a rate based on recent losses (i.e., claims that have been filed and paid out).

Insurers use these classification codes to determine the risk associated with each company’s chances of workplace injuries. The classification code assigned to a business is known as the “Governing Class Code.

3.   Check Your Workers’ Comp Insurance Rate

The classification codes for workers’ compensation are the same across the US, but each state has its rating agency or bureau that sets the premiums for coverage. To find out which agency sets rates in your state, consult your state’s workers’ compensation regulatory body. Once you have this information, you can contact the rating bureau for information on the premium index rate for your classification code.

4.   Estimate the Cost of Workers’ Comp Per Employee

A small business owner can get a rough estimate of the cost per employee by multiplying the rate for each class code with the employee payroll. Alternatively, you may obtain the average cost per employee by dividing the total company payroll by the number of employees.for each class code.


Small businesses have unique compensation needs that a one-size-fits-all approach cannot meet. The workers’ compensation plans vary based on the type of business and its specific code within the service industry.

Read More