What is Workers' Compensation Insurance?

Workers' compensation is a state-regulated insurance system. Employers provide coverage, and employees injured at work receive benefits for medical treatment and lost wages, generally without having to sue the employer. Requirements vary by state, including which employers must carry coverage and how it is purchased.

How coverage is obtained

• Private insurance in most states
• State funds, which compete with private insurers in some states
• Monopolistic state funds in a few states, where coverage must be obtained from the state; see our Ohio and Wyoming guides
• Self-insurance for some larger employers

How premiums are calculated

Premiums are usually based on payroll by job classification code, multiplied by a rate per $100 of payroll, and adjusted by an experience modification factor reflecting your claims history. A roofer's classification costs far more than a clerical worker's.

The annual audit

Insurers estimate premium at the start of the policy, then audit actual payroll at the end. If payroll grew or employees were misclassified, an additional premium is billed. Keeping payroll reports by job classification makes audits simpler.

Contractors

Insurers may charge premium for uninsured subcontractors. Collect certificates of insurance from subcontractors before work begins.

In the books

Record premiums as an expense, often as part of payroll costs, and track deposits and audit adjustments. Premiums are generally deductible business expenses; see ordinary and necessary expenses.

Federal programs

Federal employees and certain industries are covered by federal programs; the Department of Labor's Office of Workers' Compensation Programs explains them. See also our payroll services.

Related terms

• Ordinary and Necessary Expenses: Ordinary and necessary is the basic test a business expense must meet to be deductible.

Browse more definitions in the small business glossary.