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Finance Forward Blog

Workers’ Compensation Payroll Calculations

Workers' Compensation Payroll

For small business owners, navigating through the responsibilities of running a business includes effectively managing workers' compensation insurance. This coverage isn't just a legal necessity across many states; it's a strategic asset in your financial management toolkit. Precise calculation of your workers' compensation premiums is crucial. It not only protects your business from potential financial disruptions but also ensures that your workforce is covered in case of work-related injuries or diseases.

Understanding Workers' Compensation Insurance

Workers' compensation insurance serves a dual purpose. It offers financial help for medical bills and compensates for wages lost due to work-related injuries or illnesses. This coverage is essential, as it provides immediate relief to employees without the complexity of fault determination, thus preventing costly legal disputes and fostering a supportive workplace environment.

Calculating Workers' Compensation Premiums

Calculating the premium for workers' compensation involves several key factors, but can be summarized with a basic formula:

Workers’ Compensation Premium = (Payroll / $100) x Class Code Rate x Experience Modification Rate (EMR)

Let's break down this formula:

  1. Payroll: This refers to the sum of all wages paid to employees, which is usually assessed per $100 of payroll.

  2. Class Code Rate: Every industry has different levels of risk, which are categorized into class codes. Each code has an associated rate determined by state or industry regulatory bodies, reflecting the riskiness of the job roles.

  3. Experience Modification Rate (EMR): This is a multiplier based on your company's claim history relative to others in your industry. An EMR greater than 1 indicates a claims history worse than average, increasing your premium, whereas an EMR under 1 suggests a better than average history, decreasing your premium.

Step-by-Step Guide to Calculating Your Premium

  • Step 1: Compile your total gross payroll. Include all forms of employee compensation here.

  • Step 2: Classify your workforce correctly. Different work types within your business can fall under different class codes. Accuracy here is critical to ensure proper premium calculation.

  • Step 3: Apply the class code rates. Obtain these rates from your workers' compensation insurance carrier or your state's regulatory body.

  • Step 4: Factor in your EMR. Your insurer will provide this number, which adjusts based on your past insurance claims.

  • Step 5: Do the math. Multiply your adjusted payroll figure by the class code rate and EMR to find out your premium.

The Importance of Accurate Calculations

Correct premium calculations are crucial. Overestimating can tie up funds that could be used elsewhere in your business, while underestimating can lead to significant financial liabilities if audited. Regular reviews and diligent record-keeping can help manage these risks effectively.


While calculating and managing workers' compensation can be complex, understanding the basics can greatly enhance your ability to control costs and plan financially. For many small business owners, outsourcing this task, along with other financial obligations, to accounting experts can be a prudent decision.

At J. Hall and Company, we're dedicated to supporting small businesses with tailored accounting services, ensuring compliance, and optimizing financial performance. We use payroll software with our small business clients that automatically calculates workers’ compensation and we would be happy to put you in touch with one of our payroll partners. Allow us to manage your accounting needs so you can focus on what you do best—running your business. Reach out anytime to discuss how we can assist with your accounting and payroll needs!