Pay as you go workers comp is also referred to as monthly reporting, monthly self-reporting, monthly pay as you go, and probably some other names we can’t think of. The concept for pay as you go is fairly simple, it eliminates uncertainties. How? By using your actual payroll and risk as opposed to the payroll you think will be used for the year.
There are lots of reasons why your business might want to choose pay as you go workers compensation. Let’s talk about what it is, how it works, if it is a right fit for you, and how to go about purchasing this type of policy.
What is Pay As You Go Workers Comp?
Here’s the concept.
Instead of taking your annual payroll and dividing it by 12 to get your monthly premium your payroll is reported to the insurance carrier monthly and the premium you pay is based on your actual payroll for that month. Ultimately at the end of the policy period, you’ll have paid the exact same in both scenarios. The only difference is one method is preferred for cash flow. We all know cash flow is king.
Here’s some graphs that outline the following scenario. Let’s say you have a Contracting business located in California and your annual payroll is $1,200,000. If you want to know more on how exactly your workers compensation premium is calculated, check out our blog here. But for today’s scenario, the annual cost for this contactors policy is $292,800 based upon an annual payroll.
How does a typical workers compensation payment structure work?
The annual premium is divided into twelve equal installments. In this case the business will pay $24,400 monthly even though most of their business and income occurs during the summer months.
How does monthly reporting work?
The chart below accurately reflects the payroll of this business on a monthly basis. Their payroll is smaller in the winter months and larger in the summer months. When payroll is highest and the income of the business is highest, they pay the actual cost for that monthly period thus improving cash flow during the winter months. Any contractor knows that budgeting to get through the slow season is key and paying bills when you have the funds make the whole process a lot simpler.
Who would benefit?
So what types of businesses would benefit from a monthly pay as you go option? The answer is any business that has income that varies significantly from month to month. Typically these industries are:
- And many more
What about audits?
If you have pay as you go work comp, will you still have to perform an audit? Typically if your business is integrated with a payroll provider there should not be an audit at the end of the policy period. Whether your business will still have to perform an audit will depend upon a number of factors. It’s best to ask the question upfront when you purchase so you can know.
How to get Pay As You Go Workers Comp?
Make sure you work with a work comp professional. At Direct Work Comp, we have partners that can help you set up a pay as you go workers comp policy. We also integrate with several payroll providers. If you are thinking about next steps, reach out to us at [email protected].