Worker's Compensation for Small Businesses A Look At How Premiums Are Calculated

Starting a business is a big risk; hiring employees is an even larger responsibility that any business owner must understand and prepare for. Employees can be injured as they go about their daily activities in the workplace.

If an accident occurs, workers’ compensation provides healthcare benefits, cash benefits, or both to employees who get injured or ill due to their work. 

In most states, it is a requirement for businesses to have worker’s compensation insurance. Here’s a look at how workers’ comp premiums are calculated.

Experience Modification Factor (EMF or e-mod)

The experience modification factor of a small business constitutes a business’ comp claims history. It helps the insurers know how soon or frequently they expect a company to make a worker’s compensation claim based on one’s history. The industry average of a new business without claims history is an EMF of 1.0, where the number could go down after years without a claim or increase after several claims.

The lower the EMF number, the lower the premium compared to a higher EMF. As a small business, avoiding worker’s compensation claims would be wise.

Workers’ Compensation Classification Rate

The National Council on Compensation Insurance (NCCI) has numerical class codes for different types of jobs. For example, a software engineer has a different code from a construction worker, where each code is associated with a higher rate for more risky job types. Insuring a construction worker with a higher risk of physical injury would be more costly than a software engineer. The standard NCCI system is used in most states, while a modified version is used in a few other states.

The Business Payroll

As part of the worker’s compensation formula, the insurer uses the existing or the projected payroll if it’s a new business. A certain amount of premium is paid for every $100, depending on the average weekly salary of the employees.

State Taxes and Fees

Worker’s compensation is regulated at the state level, where some states have their own worker’s comp funds to provide for the coverage. Different states allow small businesses to buy coverage through a private provider or from the state fund. Workers’ comp coverage is more costly if you buy it from a state fund than through a private carrier.

Safety Measures

If you own a hotel with a fully functioning kitchen and don’t have a smoke detection system or a fire extinguisher, the premiums are likely to go higher. Most insurers want to see an effort to meet the industry safety regulations, and it will be a lot easier if the business has risk management strategies.

The Insurer

Policies are usually different among insurers; some are more costly than others. This may vary due to factors such as the position in the market; larger companies are more expensive than smaller companies.


The amount of premium that any small business pays depends on the factors named above, which varies depending on one’s state. No matter how much it costs, it’s a good investment since it helps protect your business finances while looking out for the welfare of the employees.

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