How Is Workers' Comp Calculated?

A Workers’ Comp Calculation Guide for Employers

Workers’ compensation is a form of business insurance mandated by state law that provides wage loss benefits and medical coverage for employees injured in workplace accidents. For employers, understanding how workers’ comp works is critical to budgeting accurately and ensuring compliance with state regulations.

Premiums for workers’ compensation insurance are not one-size-fits-all. Instead, they depend on three core factors:

Industry risk level (determined by classification codes).
Total payroll size.
The company’s claims history, reflected in its Experience Modification Rate (EMR).

In this blog, we’ll explore how to calculate workers’ compensation premiums, how they’re determined and a few best practices for reducing your costs.

How To Calculate Workers’ Compensation

The formula used to calculate workers’ comp premiums is:

(Payroll / $100) × Classification Code Rate × EMR = Workers’ Compensation Premium

For example, a construction company with a $500,000 payroll, a classification code rate of 5.00 and an EMR of 1.2 would pay:

($500,000/$100) × 5.00 × 1.2 = $30,000 annually.

However, there may be discounts applied, such as for keeping a drug-free workplace, demonstrating safety, etc. It’s also important to note that workers’ compensation rates vary by state. Each state’s workers’ compensation board sets guidelines for coverage requirements, weekly wage calculations and dispute resolution. For instance, Florida’s system differs from California’s in how it handles employees’ average weekly wage and compensation benefits.

Why does this matter? Misunderstanding these variables can lead to overpaying for workers’ comp insurance or penalties for noncompliance.

Review our blog on how to reduce workers’ comp costs for more tips.

What Determines Workers’ Compensation Premium Costs?

Every business pays a unique rate for workers’ compensation coverage. Underwriters look at a combination of factors, not just payroll. Let’s break down the six major factors influencing premiums:

1. State Laws and Location

Workers’ compensation is regulated at the state level, so where you operate plays a major role in what you pay. States differ in:

Who must be covered and when coverage is required.
How wage loss and medical benefits are calculated.
Whether coverage is written by private carriers, state funds or a combination.

A business with locations in multiple states may see different workers’ comp costs for similar roles because each state sets its own rules and rate structures.

2. Payroll and Workforce Size

Payroll is one of the biggest drivers of workers’ comp premium. Your premium is typically calculated by applying a rate (per $100 of payroll) to each workers’ compensation classification code. In other words, the more payroll you have in each class code, the more premium is generated for that exposure.

That said, workers’ comp isn’t a one-size-fits-all “price tag” you can apply to every employee. Two businesses with the same headcount can have very different premiums depending on the type of work being performed. For example, a 20-person office made up mostly of clerical roles will generally be rated differently than a 20-person crew of drivers and field technicians.

What matters most is how your payroll is distributed across class codes and which job duties employees actually perform – not just your total number of employees.

It’s also important to remember that workers’ comp costs can change during the policy year. Wage increases, new job responsibilities, seasonal hiring, and turnover can shift payroll between classifications. At the end of the policy period, an audit compares the estimated payroll used to set your premium with the actual payroll paid. If your exposure was higher or lower than expected, your premium is adjusted to more accurately reflect that policy period.

3. Industry Type and Classification Codes

Classification codes, assigned by the National Council on Compensation Insurance (NCCI), categorize businesses by industry risk. High-risk sectors like construction or manufacturing have higher classification code rates than low-risk industries like retail or clerical work.

Misclassifying employees (e.g., labeling a roofer as an office worker) can trigger audits or fines, so it’s important to ensure the codes are correct.

4. Employee Classification

In addition to your overall business classification, how you classify individual employees matters. Clerical staff, field technicians and drivers may all work for the same company but fall under different classification codes and rates.

Separating employees by the work they actually perform allows the underwriter to apply appropriate rates to each group. For example, classifying office staff under a clerical code instead of a higher-risk field code can help keep your overall premium in line with your true exposure.

5. Claims History and Experience Modification Rate

Your loss history is another key driver of workers’ comp cost. An EMR, also called an experience modification factor or e-mod, uses your past claims to estimate whether your future losses are likely to be better or worse than businesses similar to yours. In many states, NCCI or a state rating bureau calculates this factor.

An EMR of 1.0 indicates an average claims experience for your industry.
An EMR above 1.0 (for example 1.3) signals higher than expected losses and increases your premium.
An EMR below 1.0 (for example 0.85) reflects better than average performance and can reduce your premium.

Consider two roofing companies with similar payroll and operations. The company with an EMR of 1.4 will pay significantly more for the same base premium than a competitor with an EMR of 0.85, because its recent claims suggest a higher likelihood of future losses.

Balancing these factors helps control workers’ comp costs. For instance, reducing workplace accidents through training lowers claims, improving your EMR over time. Consult our guide to understanding EMR ratings for deeper insights and clarity.

6. Safety Programs and Culture

A strong safety program and culture can have a measurable impact on workers’ comp costs over time. Proactive efforts such as regular training, documented safety procedures, near-miss reporting and return-to-work programs help prevent injuries and reduce the severity of claims when they occur.

Many carriers and some states offer credits or discounts for qualifying programs, such as drug-free workplace initiatives or formal safety committees. Fewer and less severe claims support a lower EMR, which can further reduce premiums in future policy periods.

How To Calculate a Workers’ Compensation Premium

Navigating workers’ comp calculations can feel overwhelming but breaking it into actionable steps simplifies the process.

5 Key Steps To Accurately Determine Your Workers’ Compensation Insurance Premium

Step 1: Understanding Classification Codes and Risk Ratings

Classification codes are numeric codes assigned by NCCI to categorize businesses based on industry risk. These codes directly impact your workers’ comp insurance rates.

High-risk industries like construction or manufacturing have higher rates due to greater exposure to workplace injuries.
Low-risk industries, such as clerical work, have lower rates because employees face fewer hazards.

For example, a roofing company might pay $18.00 per $100 of payroll, while an accounting firm pays just $0.30. Incorrectly classifying employees can lead to overpayment or penalties, so it’s important to always verify classifications using the NCCI code lookup tool.

Step 2: Calculating Payroll for Workers’ Compensation Premiums

Payroll is the starting point for calculating premiums. It includes:

Wages and salaries.
Bonuses, commissions and overtime.
Employee benefits like housing allowances or stipends.

The formula divides payroll by $100 because workers’ compensation rates are quoted per $100 of payroll. For instance:

A landscaping company with a $1,000,000 payroll and a classification rate of 7.00 would calculate:

($1,000,000/$100) × 7.00 = $70,000 base premium

Common payroll mistakes to avoid include:

Underreporting payroll: This triggers audits and back charges.
Including exempt earnings: Some states exclude tips or severance pay and may also discount overtime pay.
Misclassifying contractors: Independent contractors may still require coverage depending on state laws.

Step 3: Factoring in the Experience Modification Rate

Your EMR adjusts premiums based on your workers’ compensation claims history.

EMR of 1.0: Average claims history for your industry.
EMR above 1.0 (e.g., 1.4): Indicates higher-than-average claims, raising premiums.
EMR below 1.0 (e.g., 0.75): Reflects fewer claims, lowering premiums.

Here’s how to improve your EMR:

Implement behavior-based safety programs to reduce workplace accidents.
Develop return-to-work programs to minimize lost wages for injured workers.
Conduct routine safety audits to address hazards proactively.

For example, a restaurant with an EMR of 0.85 could save $2,500 annually on a $100,000 premium compared to a competitor with a 1.1 EMR.

Step 4: Considering the Impact of State Laws

Workers’ compensation laws vary significantly by state, affecting coverage requirements and costs. Key differences include:

Coverage thresholds: Texas doesn’t mandate coverage for private employers, while California requires it for all businesses with one employee.
State-run vs. private insurance: Ohio and Washington use state-funded programs, whereas Florida allows private carriers like FFVA Mutual.
Benefit calculations: Some states base weekly wage loss benefits on 66.67% of the employee’s average weekly wage, others use different percentages.

Always consult your state’s workers’ compensation board website for specifics. For example, Florida employers can visit Florida Division of Workers’ Compensation for rate charts and compliance tools.

Step 5: Preparing for Workers’ Compensation Audits

A workers’ compensation audit is an annual review by your insurer to verify payroll, employee classifications and claims data. Proper preparation prevents surprises:

Keep detailed records: Maintain payroll reports, job descriptions and injury logs.
Review classifications: Ensure roles align with current NCCI codes.
Address discrepancies: Correct underreported payroll or misclassified roles before the audit.

Consequences of errors include:

Underreporting payroll → Retroactive premium hikes.
Misclassified employees → Fines or policy adjustments.

Calculating workers’ comp premiums requires precision at every step — from classifying employees to preparing for audits. Even small errors can lead to inflated costs or penalties.

Best Practices for Reducing Workers’ Compensation Costs

Managing workers’ comp costs requires a proactive approach to safety, compliance and claims management. Here are a few actionable strategies to help you lower workers’ compensation premiums while fostering a safer workplace:

Prioritize safety: Implement workplace safety programs to reduce workplace injuries and improve your EMR. Tailor protocols to industry risks, selecting offerings like ergonomic assessments or hazard training.
Audit proactively: Conduct regular safety audits to identify risks and align with industrial relations standards, reducing lost wages claims.
Classify correctly: Ensure employees are assigned accurate classification codes to avoid overcharges. Track gross wages (including overtime) to prevent payroll errors.
Establish return-to-work programs: Offer light-duty roles to injured workers to minimize weekly compensation payouts and speed recovery.
Document diligently: Maintain precise payroll and injury records to avoid audit penalties. Stay updated on workers’ comp law changes.

Workers Comp Calculation FAQs

How is workers’ compensation premium calculated?

Most insurers use a similar formula:

(Payroll ÷ 100) × Classification code rate × Experience Modification Rate (EMR) = Premium

Credits, debits, discounts, fees and state assessments are then applied to arrive at your final bill.

What information do I need to estimate my workers’ comp cost?

You will need your estimated payroll by classification code, your current or projected EMR and the rates that apply in each state where you have employees. An agent or carrier can help you apply those pieces to get a working estimate.

Is there an average workers’ comp cost per employee?

Not really. Cost depends on what each employee does, where they work and your loss history, so two companies with the same headcount can pay very different amounts. Looking at cost per $100 of payroll for each class is more accurate than using a single per-employee average.

Why does my workers’ comp premium change from year to year?

Premium often changes when payroll goes up or down, your mix of job roles shifts, your EMR is updated or state rates are revised. Your annual audit reconciles estimated exposure with actual exposure, which can also increase or decrease what you owe.

What can I do to help lower my workers’ comp premium over time?

Focus on preventing injuries, resolving claims quickly and documenting job duties clearly. Strong safety programs, accurate classifications and a favorable EMR all support more competitive workers’ comp pricing.

How FFVA Mutual Can Help You Manage Workers’ Compensation Costs

Understanding how workers’ comp is calculated is the first step to controlling costs — but partnering with the right insurer ensures long-term success. At FFVA Mutual, we specialize in helping businesses like yours optimize workers’ compensation programs.

Ready to get started? Find an agent for a personalized quote or contact our team to discuss audit prep or classification reviews.

How Is Workers’ Comp Calculated?