Pay-as-you-go workers' comp insurance
What is a pay-as-you-go workers' comp policy?
Pay-as-you-go workers' compensation is a payment option for small businesses looking to save money on upfront insurance costs. With this workers' comp pricing structure, your premiums will change as your payroll changes throughout the year.
Workers' comp is required in most states for businesses with employees and is often required for independent contractors and sole proprietors who work in high-risk industries, such as construction.
Workers' comp coverage can save your business money in the event of an employee injury or illness, as it helps pay for medical expenses and lost wages for work-related injuries. It can also help protect your business in the event that an employee sues over a work-related injury.
Many personal health insurance plans will not cover business injuries or accidents, making workers' comp a necessity. This is often why those who aren't legally required to carry workers' comp, such as subcontractors, opt to carry the coverage.
To offset the upfront cost of workers' comp, you may want to consider a pay-as-you-go pricing plan, especially if your business has a variable number of employees throughout the year or if a hefty insurance down payment would be a hardship.
How does pay-as-you-go workers’ comp work?
A traditional workers' compensation policy's premium is generally based on estimated yearly payroll and the number of employees a business is expected to employ throughout the year.
This often requires a large upfront sum based on the estimates, with an audit at the end of the annual policy.
With a pay-as-you-go plan, the premium increases or decreases based on real-time payroll cycles as reported by your payroll service provider. Premiums are paid in set installments throughout the year, often corresponding to payroll.
That way, if you have a lower payroll for a period of time, you'll be paying a lower premium for that payroll period. What you pay is more reflective of the actual payroll than the traditional plan's annual estimates.
How much does workers' compensation insurance cost?
Your pay-as-you-go policy is adjusted each pay period and the costs will vary depending on a number of factors, including:
- Payroll
- Claims history
- Industry and risk factors
- Location
- Business size and number of employees
- Coverage limits
Hear from customers like you who purchased workers' compensation coverage.
What is the difference between traditional workers’ comp and a “pay-as-you-go” payment plan?
Traditional and pay-as-you-go workers' compensation both provide coverage for you and your employees, but they differ in how the premiums are calculated and paid.
With a traditional workers' comp plan, small business owners typically obtain a policy based on estimated annual payroll. They'll pay a down payment based on projected payroll (often about 25% of estimated gross payroll wages) and then make quarterly or monthly payments throughout the following 12-month period.
At the end of the policy year, the insurance company conducts an audit and makes adjustments based on the year's actual payroll and state requirements.
This may result in a rebate if you were found to have overpaid or a bill if you undercharged for the previous year. Depending on how close the estimate was, this could be a pretty sizable difference in projected versus actual numbers.
With a pay-as-you-go plan, small business owners generally pay a smaller upfront payment (usually around 10% of gross payroll wages). For the rest of the year, workers' comp premiums are adjusted regularly based on up-to-date payroll data.
What are the benefits of a pay-as-you-go workers' comp plan?
One of the biggest benefits of a pay-as-you-go plan is the lower upfront down payment. This can be helpful for small business owners who may not want to put down a large lump sum at the beginning of their policy. For some businesses, a huge workers' comp down payment can be a stressful drain on the company bank account.
Other benefits include:
- Policies are updated regularly to stay consistent with payroll so businesses pay more accurate premiums instead of premiums based on estimates.
- Insurance company audits are less frequent and disruptive because the insurance company has received up-to-date payroll information throughout the year.
- Small businesses feel more confident in their cash flow projections because premium payments are based on actual payroll, not estimates.
- Business owners don't have to constantly adjust their insurance policies if staffing changes occur because payroll adjustments are already automated.
Pay-as-you-go workers' compensation insurance is especially beneficial for businesses that hire seasonal workers or whose payroll changes unexpectedly over the course of a year, such as retail and landscaping businesses.
What are the disadvantages of a pay-as-you-go workers’ comp policy?
Four states require small businesses to purchase workers' comp from state-operated plans and are subsequently not eligible for a pay-as-you-go payment structure.
These states are:
Additionally, your payroll service may have limitations on the insurance providers they are able or willing to work with.
While a pay-as-you-go plan often provides more accurate and up-to-date data to your insurance carrier, you will likely still be audited at the end of the year, and there still may be payment adjustments, especially depending on any job classification changes that may take place.
How do I get a pay-as-you-go workers’ comp plan?
Contact a TechInsurance agent today to see if a pay-as-you-go workers' comp policy might be a good option for your small business. Our licensed insurance agents can answer any questions you might have about your policy needs and other business insurance options.
Complete an easy online application to get insurance quotes from top-rated U.S. insurance providers. Once you find the right insurance coverage for your needs, you can start your policies and receive a certificate of insurance, usually within 24 hours.
