As an employer, you’re likely required to provide workers’ compensation insurance for your employees. This type of business insurance helps pay for employees’ medical bills and healthcare expenses if they become ill or are injured in the course of working for you.

But calculating workers’ compensation premiums can be confusing, as can knowing if your state requires you to offer workers’ comp or not. If you’ve recently hired your first employee and are new to the world of workers’ comp, keep reading. In this guide, we explain what workers’ comp is, how to calculate premiums and how workers’ comp can benefit businesses and employees alike.

Simplify your workers' compensation calculations

Incorrectly calculating workers' compensation premiums can affect your business’s cash flow. You can reduce compensation coverage costs by running payroll correctly and considering a pay-as-you-go workers' comp solution, both of which are offered by payroll software like ADP.

Jump to:

Featured partners

What is workers’ compensation insurance?

Workers’ compensation insurance is a type of employer-sponsored business insurance. If one of your employees becomes ill or is injured as a direct result of working for your company, your workers’ compensation insurance will help pay for their medical bills and ongoing healthcare costs.

In exchange for accepting a workers’ compensation insurance settlement, employees waive the right to sue your business for their injury or illness. Ideally, this insurance coverage benefits both you and your workers: Workers receive a fair settlement that helps them recover after a job-related illness or injury, and businesses avoid costly legal fees that could put them in the red.

SEE: How to Do Payroll: A Step-by-Step Guide (TechRepublic)

State governments require most employers in most states to offer workers’ compensation, though each state has slightly different laws about which businesses are exempt. (Texas is the only state where the government doesn’t require employers in any industry to maintain workers’ compensation coverage.)

Who pays workers’ compensation insurance premiums?

Employers are responsible for paying workers’ compensation insurance premiums.

While workers’ compensation coverage is required in most states, there are a few exceptions. (For instance, most businesses in Texas are exempt from mandatory coverage — though opting into coverage is a possibility and, for most companies, a wise choice.)

How are workers’ compensation premiums calculated?

Calculating workers’ compensation premiums is a multi-step process. You can streamline and automate the process with payroll software, but whether you work with a payroll provider or not, it’s a good idea to understand the math behind how premiums are calculated.

Generally speaking, your insurance company will use the following key metrics to calculate your premium.

1. Workers’ compensation classification codes

Workers’ compensation insurance companies use codes defined by the National Council on Compensation Insurance (NCCI) to determine your company’s risk. These codes are usually three to four digits long and represent your employees’ risk of injury or illness based on their job duties and your specific industry.

If your business’s classification code indicates that your employees work in a physically demanding, high-risk industry, you’ll pay a higher premium.

Typically, your business and your employees are assigned the same code — with some exceptions. For instance, if you employ both office workers’ and industrial laborers, each type of employee might be assigned a different code, and your premium will be lower for one group than for the other.

2. State laws

If your state requires workers’ compensation insurance, the state’s workers’ compensation bureau determines the baseline premium rate for businesses in your area.

3. Previous insurance claims

If your business has a history of submitting expensive insurance claims, your workers’ compensation premium will cost more than a business with a completely clean slate.

How much does workers’ compensation cost?

workers’ compensation insurance premiums are based on a variety of factors, which makes it hard to estimate exactly how much your business will pay in premium costs each year. However, The Hartford (one of the most popular business insurance providers in the U.S.) estimates that its small-business customers pay around $70 a month/$840 a year in workers’ comp premiums.1

SEE: A Complete Guide to Payroll Software (TechRepublic)

Since workers’ comp payments are based on how many workers you employ, you can count on your premium costs going up as your workforce expands. Additionally, your business will pay a higher premium if you work in a more dangerous industry (e.g., construction or welding) with higher physical risks to workers’ safety.

Who is exempt from workers’ compensation?

Texas is the only state in the U.S. that doesn’t require private employers to provide workers’ compensation coverage. (However, Texas-based companies that contract with any government entity are required to have workers’ comp insurance.)

Apart from Texas, though, every state — as well as Washington, D.C. — requires business owners operating in the state to have workers’ compensation insurance.

In other words, as long as you have at least one employee, odds are that you’re required to offer workers’ comp. However, the exact law differs from state to state. For instance, in some states, you aren’t legally obligated to take out a workers’ compensation insurance policy unless you have three or more employees.

In other states, businesses in certain industries aren’t required to have workers’ comp. For example, agricultural businesses in 15 states are exempt from the workers’ compensation requirement. Fourteen other states mandate workers’ comp coverage for all agricultural workers, and a further 21 states mandate coverage for some, but not all, types of agricultural work.

To understand your business’s workers’ compensation obligations, meet with a legal professional who can explain the ins and outs of workers’ comp insurance in your state.

Frequently asked questions

What is workers’ compensation insurance?

Workers’ compensation insurance is a state-mandated insurance program paid for by employers. If an employee is injured or becomes ill as a result of their job, workers’ compensation insurance pays benefits like health care costs and lost wages.

In return for accepting a workers’ compensation insurance payout or settlement, the employee agrees not to sue their place of employment.

What is the most important factor in determining the cost of workers’ compensation premiums?

Workers’ compensation premiums are determined by how big your workforce is. The more employees you have on payroll, the higher your monthly workers’ compensation premiums will be.

Along with workforce size, factors like the type of work your employees perform can impact insurance premium costs. (For instance, if you operate in a high-risk industry like construction, you’ll probably pay a higher premium than a small arts and crafts business located in an office setting.)

Finally, if you’ve submitted claims in the past that have resulted in large payouts (or if you’ve submitted an above-average number of claims), your insurance premiums are likely to increase.

What situations qualify an employee for workers’ compensation coverage?

If an employee is injured while working at a job or experiences an illness directly related to the job they were performing, they might be eligible for workers’ compensation benefits. They must have been an employee at the time the injury or illness occurred, and their employer must have workers’ compensation insurance for the employee to be eligible.

The employee must also apply for workers’ compensation coverage before their state’s application deadline. They’ll likely need to submit documentation demonstrating that the injury or illness was directly related to their work as well as evidence that they attended medical appointments, received official diagnoses and underwent recommended medical treatment.

Are workers’ compensation premiums tax deductible?

Yes, if your state requires workers’ compensation insurance, you can likely write off your workers’ compensation premium costs when filing end-of-year business taxes. Your tax professional can offer specific financial advice about tax write-offs tailored to your unique situation.

Read next: What Payroll Documents Do You Need to Pay Employees? (TechRepublic)


  1. The Hartford, “How Much Does Workers’ Comp Insurance Cost?” Accessed 1 Nov. 2023.

1 Deel

Visit website

Run payroll in 100+ countries and 200+ currencies from a single place. Deel’s comprehensive global platform eliminates the ongoing admin of local compliance, taxes, and benefits. With in-house experts across 100+ countries, dedicated CSM’s, visa and PTO support, and more, Deel provides unmatched payroll expertise and service. Plus, with a single point of contact, we eliminate handovers, providing you with faster support and compliance, so your entire global team gets paid quickly and securely.

Learn more about Deel

2 Paylocity

Visit website

Simplify payroll, automate processes, and stay tax compliant, all in one spot. Our tools help you tackle the day-to-day, so you can focus on your people. Empower employees to view checks, request time off, clock in/out and update their personal data with Employee Self Service. Pull expense reimbursements into paychecks and run custom reports to get the data you need. Build a better future for your organization with a scalable solution focused on your business outcomes, priced for your budget.

Learn more about Paylocity

3 Multiplier Technologies

Visit website

With Multiplier, pay any number of global employees easily in multiple currencies. Eliminate the hassle of maintaining individual providers per country. Generate a single invoice and pay international teams in minutes. Have a consolidated dashboard to manage global payroll from a single window.

Learn more about Multiplier Technologies

4 Paycor

Visit website

Payroll can be a time-consuming, administrative task for HR teams. Paycor’s solution is an easy-to-use yet powerful tool that gives you time back in your day. Quickly and easily pay employees from wherever you are and never worry about tax compliance again. Key features like general ledger integration, earned wage access, AutoRun, employee self-service and detailed reporting simplify the process and help ensure you pay employees accurately and on time.

Learn more about Paycor

5 Workforce Now - ADP

Visit website

ADP Workforce Now serves clients across nearly every industry who are looking to manage their human capital management needs across payroll, HR, benefits, talent, and time and labor, among others. ADP Workforce Now provides clients with custom-tailored solutions that fit their organization, so they can save time and money while getting expert support and accuracy.

Learn more about Workforce Now - ADP

Subscribe to the Daily Tech Insider Newsletter

Stay up to date on the latest in technology with Daily Tech Insider. We bring you news on industry-leading companies, products, and people, as well as highlighted articles, downloads, and top resources. You’ll receive primers on hot tech topics that will help you stay ahead of the game. Delivered Weekdays

Subscribe to the Daily Tech Insider Newsletter

Stay up to date on the latest in technology with Daily Tech Insider. We bring you news on industry-leading companies, products, and people, as well as highlighted articles, downloads, and top resources. You’ll receive primers on hot tech topics that will help you stay ahead of the game. Delivered Weekdays