Your Workers’ Compensation premium can be logically broken down to being based on three major components.
The first is payrolls paid to owners by their classification code. For example, most builders who are owners of their business would typically be classified as either residential carpentry, executive supervisor, outside sales, or clerical depending on the size of the business and how it’s structured. Each of these classifications carry a different risk of injury and a different rate as a result. The various rates are applied per $100 of payroll.
It’s important to note that there are special rules that apply for owners. Sole proprietors, partners, and LLC members are automatically excluded from coverage under their own Workers Compensation policy but may sign a form electing to be included under coverage. On the other hand, corporate officers are automatically included for coverage but may sign a form to be excluded. If an owner is excluded, his or her payroll is not counted for premium determination purposes.
For sole proprietors, partners, and LLC members who sign the form electing to be included under coverage, their payroll is assumed to be a set amount that varies by each state law. For example, in South Carolina, the amount is assumed to always be $32,900 as of 2009.
For corporate officers who are covered, their actual payroll is used but is subject to a minimum payroll and a maximum payroll that varies per each state’s law. For example, in South Carolina as of 2009, the minimum payroll to be used for premium determination purposes is $15,600 and the maximum payroll to be used is $130,000. It is also important to note that the term payroll includes other forms of compensation such as bonuses and distributions.
The second major component of your premium is payrolls paid to employees broken out by classification code. Many smaller builders sub out 100% of their labor and don’t have payrolls paid to non owner employees with the possible exception of some clerical or executive supervisor labor. On the other hand, some medium sized and larger builders may perform some work with their own employee crews which would be classified according to the type of work they perform. Once again, the rates vary according to the classification code of the worker and are applied per $100 of W-2 payroll.
The third major component of your premium is amounts paid to uninsured subs broken out by classification code. An uninsured sub is one that can’t provide you with a currently valid certificate of insurance that evidences that they carry Workers Compensation on themselves. Once again, the rates vary greatly according to the classification code of the sub and are applied per $100 of amounts paid to the sub for labor only. A later video will provide instructions for how you can properly deduct from uninsured subs to recoup your cost.
When setting up your first policy or your renewal on an annual basis, you’re required to come up with good faith estimates of your estimated payrolls and amounts paid to uninsured subs for the next 12 months. Those estimated numbers broken out by each classification code of worker will be the basis for the estimated premium that you will be charged when your policy is set up. Your insurance carrier will likely offer either a payment plan or you will be on a monthly self audit where you report your payroll and sub activity on a monthly basis and pay as you go.
The policy premiums you pay are just an estimate and you’ll be audited at the end of the policy year and an adjustment will be made at that time to take into account your final premium.
“Low balling” your estimates for payroll and amounts paid to uninsured subs is dangerous because you’ll be facing a huge audit bill that is payable within 30 days. If you can’t pay within 30 days, your policy will be cancelled at that time and you could literally be forced out of business. It is always best to set up your policy based on your best estimates, especially since low or no interest rate payment plans are available to spread the cost over many months.