How is Workers Comp Calculated? | DirectWorkComp


Businesses whether small or large can calculate their work comp premium or what is called the “manual premium” using the formula below.  The formula is rather straightforward but there are variables that can adjust the premium substantially.

The formula for determining your work comp premium is as follows:

(Payroll / 100) x (Class Code Rate) = Manual Premium

This formula will get you an idea of the manual premium but if you read below, it is really not as easy as the formula listed. Each business is unique, so when determining premium there is not a “one size fits all” formula. The factors listed below will give you a little more information on what else goes into how your workers’ comp is calculated.


Every job classification can be described by a 4 digit code called a “class code”.  Each state may have a unique or specific description for each code.  In some cases, multiple job descriptions may use the same class code.  Let’s look at a fairly common code 8810.  8810 is the national code for “Clerical Office Employees NOC” but it could also be used for Air Traffic Controllers, Telemarketers, Telephone Answering Service, Weight Management Centers and more depending upon which state you are in.

Here’s a sample description from NCCI of what type of work would fall into this class code.

8810 Scopes Description

One of the most important things a business can do is make sure they are using the right class code for their business.  Misclassification is common and can result in higher premiums. If you want more information about class codes, read our class codes post.


So now that we have determined our class code, what is next?  Well, we need to determine the rate for that specific class code, and this is where things can become complicated. It comes down to your state. In some states, it is fairly easy to determine your class code rate, in others it may be more difficult.  It is also important to note that the state that your business operates in will affect your rate and how your rate is determined.

Here’s how it works.

There are three different ways that a state can use to calculate their rate.  Depending upon the state your business operates in will determine how the class code rate is calculated and how you can find your rate.

NCCI STATE – There are 36 states in the United States that use a company called NCCI.  NCCI stands for National Council on Compensation Insurance and performs the rating and calculations for workers compensation.  Every insurance company in these states reports their premiums and losses to NCCI so they can calculate or promulgate the rates for each class code in that state.

  • In some of the NCCI states, NCCI will produce a rate for each class code that insurance companies must use. In these states all insurance companies will use the same rate, but then can deviate these rates from the manual base rate.  If you don’t know what the manual rate is an increase or decrease may be hidden in your policy and you might not even know it.  This deviation could be 15% or more.
  • In other scenarios NCCI will produce a base rate and each insurance company will add their loss cost to the base rate. This is also known as a loss cost multiplier.  In these states each insurance company may have a different rate for the same class code.  Depending upon the experience of each carrier, some carriers may have a higher loss cost multiplier than others costing your company more money.
  • In NCCI states there will also be an assigned risk pool for businesses that cannot purchase coverage in the standard market. Businesses who cannot or unable to purchase coverage in the standard market will have to use the Assigned Risk Pool.  Businesses may have to use this pool for a number of reasons. Here is a few reason why a business may be in the assigned risk pool:  High hazard job classifications that the standard market is unwilling to take, poor loss history, a startup company with no prior experience are a few examples.  If your business must purchase coverage from the assigned risk pool, prepare to pay higher rates than the standard market such as 20%-40% more.

INDEPENDENT BUREAU STATE – These states will not use NCCI and will calculate their own rates for their state.  The states may use a similar calculation as listed above for NCCI and will also have an assigned risk pool.

MONOPOLISTIC STATE – There are 4 states that are considered monopolistic states.  These states are Ohio, Washington, Wyoming and North Dakota.  If you are a business that works in these states you need to purchase your workers compensation coverage direct from that state as there is a good chance that your workers compensation policy will not provide coverage.  These states set the rate and your business will not have any other options than the State Fund.  Most workers compensation insurance policies have language in the policy that says something to the effect that they’ll provide coverage except in monopolistic states.

Here’s a great map that shows how each state calculates workers compensation rates.


Let’s say we have been able to find the right class code for our business and for this example we are going to use a plumbing shop called Bob’s Plumbing.  Below is a summary of the operations.

Bob’s Plumbing has an inside clerical position that answers the phone and does billing as well as several people in the field who provide plumbing services.  The class code for clerical is going to be 8810 and the class code for Plumbing – NOC and Drivers is 5183.  For the purposes of the example, we are going to use made-up rates that are not state specific.

The clerical position is paid $50,000 per year. – Class Code 8810

There are 4 plumbing technicians that each makes $65,000. 4 Technicians at $65,000 each which equals $260,000 of payroll.  Class Code 5183

The owner provides estimates, does plumbing, and would also be classified in the Plumbing NOC code.  Owners of businesses have the option of purchasing workers compensation coverage on themselves or excluding themselves from coverage.  The purchase of workers compensation for an owner can be a little tricky and will usually need to be negotiated at the policy effective date and certainly before any claim.  It is always best to have the carrier confirm whether or not coverage applies for the owner. For the purposes of this calculation, we will exclude the owner.

Here is an example of a problem for an owner of a business.   The owner(s) does not take a regular paycheck or paycheck at all and when benefits and premiums are calculated via payroll this can present problems.  If a business isn’t paying a premium on an owner it’s unlikely the insurance company is going to pay benefits.  Please negotiate and confirm benefits ahead of time.

Back to the calculation

(Payroll / 100) x (Class Code Rate) = Manual Premium

The rate for Clerical class code 8810 is $0.25

The rate for Plumbing class code 5183 is $3.00

($50,000 / 100) x $0.25 = (500) x $0.25 = $125

($265,000 / $100) x $3.00 = ($2,650) x $3.00 = $7,950

$125 + $7,950 = $8,075.  This would be the Manual Premium of Bob’s Plumbing.

calculate workers comp


We now have the Manual Premium of Bob’s Plumbing which is $8.075.   This premium can be adjusted by several factors that can make the premium higher or lower depending upon your company’s loss history or the Insurance company you are insured with.

The variables that can adjust your premium are listed below.  We’ll go into detail on all of them.

  • Experience Mod Factor
  • Premium Discount
  • Rate Deviations
  • Credits or Debits
  • Dividends


The Experience Mod Factor for all businesses will start at 1.0.  The Mod Factor will either be higher or lower than that and will represent either a credit or debit on your work comp policy.  The Mod Factor will be based upon your company’s loss experience in the three prior policy years.  If your loss experience was higher than actuarily estimated than you’ll have a debit mod and your number will be greater than 1.0.  If your company had favorable loss experience and was better than actuarily estimated than your mod will be lower than 1 and is considered a credit mod.

Here is how this would work on the above calculation.

  • Premium of $8,075 x credit mod of .90 = $7,267.50
  • Premium of $8,075 x debit mod of 1.10 = $8,882.50

As you can see, if your business can have a favorable loss ratio you see substantial savings.

It is important to note that not all businesses will have an experience mod factor.  Generally speaking, because each state is different, your business’s work comp premium needs to exceed $3,750 annually in order for a mod to be calculated. For more information on this, check out “what is an experience mod.”


A premium discount is a discount that applies to the workers compensation the larger a company’s workers compensation is.  There are some administrative cost savings associated with larger premiums and this discount helps with that.  Generally, discounts start at $5,000 in premium and gradually increases as premiums increase.  This discount is only available in states where rates are approved and published.  In those states where loss costs are published insurers are free to discount the expense factor of their premium by adjusting their loss cost adjustment.  The discount is applied after the mod expense factor is applied.


An insurance company is required to file their rates for all lines of business in the state they operate in.  This would include workers compensation.  Many times an insurance company will consist of smaller companies that may file deviated rates.

Let’s say an insurance company has a preferred company for best in class business, a standard company, and a high-risk company for businesses that may have high risk or unfavorable loss history.  They may file rates in each state for each of these companies that are what is called “deviated rates”.  Here’s how it works.  The best in class company may use a rate that is 85% of the standard rate, or a rate that is discounted 15%.  The high-risk company may file a rate that is 115% of the standard rate or 15% higher.  Here’s how it might work on the plumbing company.

Bob’s Plumbing is the best in class operation and so the insurance company places his business in their preferred tier.  This is what would happen to his premium.  We need to now change the assumptions of what the actual class code rate is and assume the new deviated rate.

Here was the standard calculation

($50,000 / 100) x $0.25 = (500) x $0.25 = $125

($265,000 / $100) x $3.00 = ($2,650) x $3.00 = $7,950

$125 + $7,950 = $8,075.  This would be the Manual Premium of Bob’s Plumbing.

Premium of $8,075 x credit mod of .90 = $7,267.50

Here is a deviated calculation.

  • The rate for Clerical class code 8810 is $0.25 x 85% = $0.21
  • The rate for Plumbing class code 5183 is $3.00 x 85% = $2.55

($50,000 / 100) x $0.21 = (500) x $0.21 = $105

($265,000 / $100) x $2.55 = ($2,650) x $2.55 = $6,757.50

$105 + $6,757.50 = $6,862.50.  This would be the Credit Deviation Premium of Bob’s Plumbing.

Premium of $6,862.50 x .90 Mod Factor = $6,176.25

If your business can obtain coverage in the preferred deviated tier, it be substantial savings.  The savings alone on an $8,000 policy would be $1,200 lower than the standard rate.



Your company’s workers compensation premium can be further adjusted via credits or debits.  A credit or debit is a further adjustment of up to 15% or 20% of the premium.

A credit or debit may be added to your policy depending upon a number of factors such as:

  • Loss history
  • Business practices
  • Cost containment programs such as
    • Return to Work Programs
    • Nurse Triage
    • Designated Physician
    • Safety Programs
  • Class of business

The better your company’s practices the easier it is for your company to be able to obtain a discount on the workers compensation policy. Alternatively, if your company is having losses, poor risk management, or other negative practices you may see a debit.

Here’s a summary:

The Standard Manual Premium was $8,075.

Because we are a best in class operation, we were able to find coverage with an insurance company and placed in a deviated tier, so our premium was $6,862.50.

  • The Mod factor of .90 was applied making our new premium $6,176.50.
  • Now if we can get a carrier to apply a 15% credit again ($6,176.50 x 15% = $1,007.50) the premium would be further reduced by $1,007.50.
  • This means that $6,176.50 – $1,007.50 = $5,169.

What started as a manual premium of $8,075 can be reduced to $5,169 in annual premium.  Alternatively, if debits and higher rates were applied, the potential rate could be $11,747.  It’s easy to see how favorable practices can save a business big money on workers compensation insurance premiums.



There is one final component that can adjust the work comp premium of your business and this one can have a significant impact on your final cost.  It is called a dividend.  A dividend is primarily based upon whether or not your business had any losses. A dividend is usually issued after the end of your policy term and after the audit has been completed.

In order for your company to receive a dividend there are a few key metrics that need to be met.

  • The first one is premium. Typically, your company must have an annual premium that exceeds $10,000 in premium.
  • The second metric is the loss ratio. In order for your company to receive the maximum dividend there should not have been any losses during the prior policy period.

Dividends can be significant.  There are carriers that can provide up to a 40% dividend on the final work comp premium.   Not all carriers offer a dividend program and not all carriers have a program that can provide up to a 40% dividend. It is important to look for a carrier that is best for your business.



We know we threw a lot of information at you, but we want to help answer your questions! A lot of variables go into how workers comp premiums are calculated. The final cost your business will pay for workers compensation insurance can be influenced by a number of factors. In order for your company to achieve the lowest rates long term, it requires some work.

We can help and it only takes 3 minutes.

You can get an online quote in just 3 minutes to see how much your company can save on work comp premium. Fill out your quote on our quote page here, or contact us to see how we can help your business at 888-399-1190 or drop us a note at [email protected].

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