Workers' compensation is mandatory the moment you hire your first W-2 employee in 49 states (Texas is the lone exception). Premiums are calculated from three numbers: your payroll, the class code rate per $100 of payroll, and your Experience Modification Factor (ex-mod). The first two are largely fixed. The ex-mod is the lever you control.
How the ex-mod is calculated
An ex-mod of 1.00 means your loss history matches the industry average. Below 1.00 you get a credit (pay less). Above 1.00 you pay a surcharge. NCCI (or your state's rating bureau) uses three years of loss data, weighted by frequency more than severity. A handful of small claims hurts your ex-mod more than one large claim.
Five proven ways to lower your ex-mod
- Run a return-to-work program so injured employees come back to light duty quickly. 2) Audit your class codes. Misclassification is the most common reason businesses overpay. 3) Use a pay-as-you-go workers comp model that bills off actual payroll instead of estimates. 4) Implement a documented safety program (10 to 15 percent credit available in many states). 5) Settle small claims quickly to keep frequency down.
Audit traps that cost you thousands
At year end the carrier audits actual payroll against estimates. Common gotchas: subcontractors without certificates of insurance get added to your payroll. Bonuses, overtime, and PTO are all included. Officer and partner exclusions vary by state and require the right form on file.
Pay-as-you-go vs. annual policies
Traditional policies require an estimated annual deposit and reconcile at audit. Pay-as-you-go (PAYG) integrates with payroll providers (Gusto, ADP, Paychex) and bills the exact premium each pay period. PAYG eliminates audit surprises and is now the default for businesses with fluctuating payroll.
Quick comparison
| Industry | Class code example | Typical rate per $100 payroll |
|---|---|---|
| Clerical office | 8810 | $0.20 to $0.50 |
| Restaurants | 9079 | $1.50 to $3.00 |
| General contractor | 5403 | $5 to $12 |
| Roofing | 5551 | $15 to $35 |
| Trucking | 7228 | $5 to $10 |
Key takeaways
- An ex-mod of 1.00 means your loss history matches the industry average.
- Run a return-to-work program so injured employees come back to light duty quickly.
- At year end the carrier audits actual payroll against estimates.
Final word
Insurance is at its best when you understand the product before you need it. Bookmark this guide, share it with anyone shopping for workers' compensation insurance this year, and reach out via our contact page if you have a question we have not answered.
Related reading on InsureLab
Sources & further reading
Frequently asked questions
Do I need workers' comp for 1099 contractors?+
Generally no, but states are aggressive about reclassifying 1099s as employees. Always require certificates of insurance from contractors.
Are owners and partners required to be covered?+
Most states allow corporate officers and LLC members to opt out via a state form. Doing so saves premium but means no coverage if they are injured.
Does workers' comp cover remote employees?+
Yes, injuries in the course of work are covered regardless of location. Document remote work arrangements clearly.
Found this helpful?
Share it with a friend who's about to renew their policy — and browse our other guides while you're here.