Workers Comp – How to Calculate

Workers Comp – How to Calculate

In the last two months, I’ve received several calls on this one, so I thought there might be others out there with similar questions. The software process and workflow is quite elegant and very useful.

The overall idea is that you estimate your total gross payroll, by comp code for the coming year and share that with the Insurance company for the renewal. Based on your estimates, a premium schedule is put together. Now, as the year actually gets underway, you want to track the total estimated premiums compared to the actual payroll, by comp code. And, as you’re paying your team, you want the job-specific costs to include this insurance cost when each week’s payroll is posted. The goal is to track premiums paid compared to the actual payroll to see if you’re over paid and getting a refund, under paid and you’ll owe, or right on target.

Let’s start with the rates – the policy renewals show the ‘retail’ posted rate by workers comp code, per $100 paid, then to the right is the estimated premium by category (estimated payroll times rate divided by 100). There’s usually a subtotal, but it’s kind of like the MSRP when you buy a car – it’s not the price you’re going to pay. Then there are about a dozen or so lines with various other charges and credits – Terrorism policy, Experience Mod rate, and so on. Then you see the premiums you’ll actually pay. The difference between the original total and the final premium is the discount they are applying. You can either ask your insurance agent for the net rate per $100 paid, by comp code (then check their math), or calculate the discount and apply it to each of the rates. If you do it yourself, be sure to double-check your math to be sure that the net rate times the estimated gross payroll will equal the total premiums.

With your net rate per $100 paid ready to go, by comp code, you’ll move to the Workers Comp table, the 5-3-2 screen. The pay calc actually looks at this table to get the rates when computing payroll based on the comp code in the payroll record (5-2-2).  We recommend you use the actual comp code and description. If you have the same comp code in multiple states, add a leading digit(s) to distinguish them since these codes have to be unique; no duplicates. Add the state abbreviation and enter the net rate. We recommend using the notes field at the end of each row to indicate the date the rates were changed and any other details, like a new carrier.

Whether you pay your premiums monthly, in 9 installments, or 11 installments, all premium payments are posted to the balance sheet. The Workers Comp pay calc (5-2-1 screen) has a designated credit account. It’s either a PrePaid Insurance account dedicated to Workers Comp (or with a separate Workers Comp subaccount), or it’s a Liability account. Whatever the account number is in the Credit field of the pay calc, that’s where the premiums are posted.

So what about OCIP and CCIP jobs? Create a separate Workers Comp code for these, maybe 9999. For qualifying jobs, use this special comp code with no rate, since the owner or GC will be paying those premiums. This allows the total wages, by job, to be ready for your yearend audit, and the job will not be charged the expense. The rate field is left blank for this one.

To recap – get the retail rate per $100 paid, by comp code; determine if your WC pay calc uses an Asset or a Liability account for the Credit; post all payments to this account (Debit); payroll automatically posts the accrued expense (Credit). The running balance is the difference between your payments and your actual payroll. When the insurance year comes to an end, you may owe, or you may have a credit, but you won’t have any extraordinary expenses. Make these payments, or receive the refund, to the very same balance sheet account. Your jobs will be correctly burdened, and you’ll take the swings out of the Income statement; what a deal! – CMW