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What Wages Are Subject to Workers' Comp?

Wages Subject to Workers' Comp Thumbnail GraphicWages Subject to Workers' Comp Thumbnail Graphic
min read
August 21, 2023

Why pay more for something when you don’t have to? Overpaying for anything can be quite painful. 

When it comes to your workers’ comp premium, it's possible to avoid that pain, as long as you know which wages are subject to workers' comp insurance. If you don't record all wages that qualify for workers' compensation, you could end up having to pay a hefty bill at the end of your policy term. Why? Because technically you underpaid for coverage.  

So, what wages are subject to workers' compensation? Well, it varies in every state, so it's best to check with your insurance agent on your specific regulations. However, let's review what wages are subject to workers' comp in California to get a good sense of what may be included for you.

Wage Classifications: What’s the Big Deal? 

Before we outline the wages included (and excluded) from your payroll when it comes to calculating your workers' comp premiums, you'll need to understand why this information is essential. 

For starters, when you purchase workers' comp insurance, your premium payments are typically estimated. Your estimated premium calculations are determined by factors such as employee wages. This includes bonuses and paid time off.

Insurance companies verify your payroll estimates match your premiums by conducting a workers' compensation audit. If you're thinking an audit sounds daunting, it can be if you don’t have a tool like Hourly, which connects your payroll data directly to workers’ comp in real-time, so your premiums are always based on actual wages (not estimates).

But, if you don’t have Hourly (which, by the way, will keep track of what wages are, and aren’t, subject to workers’ comp too), and you miss some wages that should be counted towards your workers' compensation premiums, you could end up underpaying for coverage. 

Unfortunately, this means that after your workers' compensation audit, your insurer may require you to cut a big check for the amount you didn't pay during the policy term. Not to mention, you could end up paying a surcharge for incorrect information even if it was an honest mistake. 

What Wages Are Subject to Workers’ Compensation?

Now that you see the importance of understanding the different types of wages subject to workers’ compensation, your premium calculation should include*:

What Wages Are NOT Subject to Workers’ Compensation? 

On the other hand, there are some wages that are not subject to workers’ compensation, including*:

In some cases, reimbursed expenses and the cost of equipment—like personal protective equipment to guard your employees from harm while on the job (except for hand or power tools) may be omitted from a workers’ comp audit if all three of the following circumstances apply:

*Remember these points only apply to California, but you can use them as a framework to think about what may apply in your state. Make sure to check with your insurance agent to find out the specifics for your state.

Is Workers’ Compensation Based on Gross Wages?

Workers’ compensation is based on employees’ gross wages. Gross wages include all earnings for worked and non-worked time, such as paid time off.  

While laws vary by state, workers can receive a percentage of pre-tax wages when they get paid from a claim. In Washington, for example, employees receive 60 percent of their gross monthly wages in workers’ comp claims, an additional 5 percent for a spouse, and 2 percent for each dependent child.

Who is Subject to Workers’ Compensation?

While workers’ compensation laws vary by state, generally speaking, most employers must purchase workers’ compensation coverage for their employees. Requirements typically depend on the nature of your business, the size of your business and the type of work your employees are doing. 

Keep in mind, every state has its own definition of a covered employee. To verify who is subject to workers’ compensation in your state, you can visit FindLaw for your state’s requirements. 

Is Workers Compensation a Payroll Expense?

Workers’ comp insurance is a payroll expense, just another cost of running your business. Workers’ comp costs typically appear on your income statement and impact your overall earnings.

The amount left after your expenses is usually your taxable income. 

Relax, You’ve Got This!

Determining wages subject to workers’ comp is a bit confusing. But, it doesn’t have to be. Now you’re armed with all the knowledge you need. So, relax, take a deep breath, and pat yourself on the back. You’re a business owner ready to tackle whatever comes your way. 

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