How workers’ comp works, what drives your premium, and how accurate payroll and time records make audits and claims easier.
Each state runs its own workers’ compensation system. Employers buy a policy from a private insurer, a state fund where one exists, or self-insure if eligible. When an employee is injured on the job, the policy covers medical treatment and a portion of lost wages, and may cover rehabilitation and other benefits. In most states, workers’ comp is the employee’s main remedy against the employer for workplace injuries.
Requirements are set by each state. Common variations include:
Misclassifying employees as contractors does not avoid the requirement and can create serious liability; see our guide to independent contractor vs. employee. Check your state agency’s rules before you hire your first employee.
Premiums are usually built from three parts:
| Factor | What it means |
|---|---|
| Classification codes | Each type of work has a code and a rate per $100 of payroll, reflecting how risky the work is |
| Payroll | Remuneration paid to employees in each classification |
| Experience modification | A factor based on your past claims compared with similar businesses, once you have enough history |
In simple terms: premium is roughly (payroll / 100) x class rate x experience modification, plus fees and adjustments. For example (fictional), $200,000 of payroll in a class with a rate of $2.00 per $100 would mean a base premium of about $4,000 before modifications. Real rates vary widely by state, insurer and class.
Because premiums depend on payroll, insurers usually estimate premium at the start of the policy and audit actual payroll at the end. If payroll was higher, or more of it fell in higher-rated classes, you may owe more. If you have employees who do work in more than one classification, some states allow payroll to be split between codes only if you have accurate records showing hours in each type of work. Without records, all of the payroll may be assigned to the highest-rated class.
This is where time tracking pays off. If your time system records which job or task each hour was spent on, you can produce reports by classification for the audit. See our article on job costing time tracking.
Workers’ comp is part of the full cost of employing someone, along with wages, payroll taxes and benefits. Include it when you calculate labor cost or the cost of hiring. Our labor burden calculator helps put the pieces together.
EZTime records hours for every employee, and can track time by job or task, which makes it easier to show payroll by type of work at audit time. Approved hours export to payroll, and digital forms help keep incident reports and safety records organized. Coverage, classification and claim decisions stay with you, your insurer and your advisors.
In almost every state, yes, once you have employees, though thresholds and exemptions vary. Texas allows most private employers to opt out.
Mainly from payroll in each job classification, the rate for each class and your experience modification, plus fees and adjustments.
A review by the insurer, usually after the policy period, comparing estimated payroll with actual payroll by classification.
Genuine contractors are generally not covered by your policy, but misclassified workers may be treated as employees, and uninsured subcontractors can affect your premium.
Generally yes, for injuries that arise out of and in the course of employment, but the details depend on state law and the facts.
Records of hours by job or task can support splitting payroll between classifications at audit time, where your state allows it.
Approved hours leave EZTime as payroll-ready Excel or PDF reports for whoever runs your payroll.