What you should know about workers’ comp insurance

Janet Arrowood

Most businesses in Colorado — even those with just one employee — need to carry workers’ compensation insurance. Let’s start with the exceptions, then go into the details for the rest.

Who can be exempted from workers’ comp insurance? Sole proprietors and most business partners; subcontractors, provided you have proof they carry any required workers’ comp insurance; and verified independent contractors. For details, visit www.colorado.gov/cdle/node/20506 and www.pinnacol.com/
how-workers-comp-works#do-i-need-coverage. You must have proof of workers’ comp insurance from your subs. You might also have your independent contractors fill out the IRS Form SS-8 to help determine if they’re truly independent contractors or actually your employees.

Now you’ve seen the exemptions. What else should you know? Consider the following: how rates are calculated, how employees are classified, why you’re audited annually and why premiums go up or down at the end of each year.

How are rates calculated? Workers’ comp insurance rates are based on the type of business you’re in and the types of work your employees perform. Some businesses and jobs are riskier than others. So those businesses pay more — sometimes lots more. If you own a roofing or window washing company, your rates will be much higher than those for a staffing company or retail store.

How are employees classified? Your workers’ comp insurer will consider the majority functions of each employee’s job and set the rate accordingly. If your receptionist also engages in more hazardous work at your company, you’ll pay a higher rate than if the role was
100 percent office-based.

Why is there an annual audit of your workers’ comp insurance? Workers’ comp rates are based on estimated employee payroll. You provide this estimate to your workers’ comp insurer at the beginning of the year. Then, following the closeout of your year, you provide the actual employee payroll to your workers’ comp insurer.

Concurrent with your end-of-year payroll information is an annual audit. This audit could be a “self-audit” in which you follow a checklist and provide the insurer with specific information or the audit could be conducted by the insurer remotely, at your location or in the insurer’s office.

Why do premiums go up or down at the end of the year? You paid your monthly workers’ comp premiums and then you find out your premiums for the year that just ended could go up or down or stay the same based on the results of your audit. It’s important to understand workers’ comp rates for the just-ended year are calculated “in arrears” — meaning after the year has ended — so the rates reflect actual net payroll and actual jobs or roles for your employees.

You can save yourself a lot of grief by accurately estimating your upcoming year’s employee payroll and expenses and perhaps even overestimating a bit. Think of this like income tax withholding. You estimate your income, have a certain amount withheld for taxes and then when you file your return you either pay more because you made more or under-withheld, owe nothing because you estimated precisely or get a refund because you overpaid based on overestimating what you’d earn. Workers’ comp premiums function in much the same way as income tax payments.

Workers’ comp insurance is a necessary evil for most small businesses. Getting a retroactive premium increase based on your annual audit can be a rude shock.

As Brent Hemer, a commercial insurance specialist with Arrow Insurance in Avon and Frisco, put it, “Careful planning and coordination with your insurance specialist goes a long way toward avoiding unexpected premium increases.”

Note: This article is for general information and is not intended as legal, tax or insurance advice. Speak with a commercial insurance professional about the specifics of workers’ comp insurance.