Whether you are an employee or an employer, understanding workers’ compensation insurance is essential. This coverage protects workers and businesses alike when accidents happen. It creates a safety net for both sides. According to the U.S. Bureau of Labor Statistics (BLS), private industry employers reported about 2.6 million nonfatal workplace injuries and illnesses in 2023, showing just how often workers need this protection. It also keeps employers compliant with state laws that often require coverage. In this guide, we will walk through the basics of workers’ comp, who is covered, how payroll classes work, and what to expect during an audit.
What is workers’ compensation insurance?
Workers’ compensation insurance provides benefits to employees who suffer a work-related injury or illness. These benefits can include medical care, lost wages, disability benefits, and even death benefits for surviving family members. In exchange, employees give up the right to sue their employer for negligence in most cases.
Coverage typically applies when an employee is injured while performing job duties, whether it is a slip on a wet floor or a strain from lifting heavy boxes. It can also cover illnesses that result from workplace exposure.
Each state has a workers’ compensation board that governs how claims are handled. Because rules and requirements vary from state to state, it is important to work with a licensed agent who understands your specific regulations.
Who is covered under workers’ compensation?
Most full-time employees are covered under workers’ compensation coverage, but there are exceptions. In some states, part-time workers, contractors, or seasonal employees may not be eligible, while in others, they are. That is why employers must understand their obligations based on location and industry.
Coverage typically includes:
- Full-time and part-time employees
- Temporary workers
- Some subcontractors, depending on state law and job duties (though many are required to carry their own coverage)
It may not include:
- Independent contractors (depending on state law)
- Volunteers (though some states allow optional coverage)
- Sole proprietors (unless they opt in)
Even if your state allows some exemptions, it is often wise to carry coverage voluntarily. Without workers’ comp, you may be personally responsible for medical expenses or legal costs if someone gets hurt on the job.
How Payroll Classes Affect Workers’ Compensation Rates
Your premium for workers’ compensation insurance depends heavily on your business’s classification. Each job has a payroll classification code, which reflects the level of risk involved in that role.
For example, an office assistant has a lower risk of workplace injury than a roofer or machine operator. Each classification has its own rate, and those rates are applied to your actual payroll to determine your premium.
Accurate payroll classes are essential. Misclassifying employees can result in higher costs or audit adjustments. It can also create compliance issues if your insurance carrier determines that your payroll was incorrectly reported.
If your business includes different types of roles, such as administrative, sales, and fieldwork, it is important to break out payroll by category so each job is properly rated.
What happens during a workers’ compensation audit?
Each year, or at the end of your policy term, your insurance carrier will conduct a workers’ comp audit to verify that your reported payroll and classifications match what actually happened. This is because workers’ compensation premiums are typically estimated at the beginning of the policy year based on projected payroll.
During the audit, you may be asked to provide:
- Payroll records and tax filings
- Job descriptions or roles
- Contractor payments or 1099 forms
- Certificates of insurance for subcontractors
Audits can be conducted in person, remotely, or by mail, depending on your insurer. If your payroll was higher than expected, or if employees were misclassified, you may owe an additional premium. Conversely, if your payroll was lower or you overestimated, you could receive a refund or credit.
Preparing for audits is easier when you maintain accurate records throughout the year. A trusted agent or financial advisor can help you stay organized and avoid surprises.
What Workers’ Compensation Covers (and What It Does Not)
Workers’ compensation coverage helps employees receive benefits for injuries or illnesses that occur in the course of employment. Covered benefits may include:
- Medical care: doctor visits, surgery, medication, and rehab
- Disability benefits: temporary or permanent income replacement
- Death benefits: payments to surviving dependents
- Vocational rehab: job retraining if the worker cannot return to their old position
However, there are limitations. Most policies do not cover injuries that occur outside the scope of employment, injuries caused by drug or alcohol use, or situations involving intentional misconduct.
It is also important to understand that the employer pays the premium, not the employee. Carrying coverage is both a legal requirement in most states and a key part of responsible business ownership.
Why Workers’ Comp Varies from State to State
Because workers’ compensation insurance is regulated at the state level, everything from coverage requirements to benefit amounts can differ significantly. Some states have a state-run fund, while others allow you to shop for coverage through private insurers. Monopolistic states, such as Ohio, Washington, North Dakota, and Wyoming, require employers to buy coverage from a state fund.
Failing to comply with your state’s requirements can lead to fines, penalties, or lawsuits. This is why it is so important to work with an insurance provider that understands your state’s workers’ compensation board regulations.
There are also federal programs for specific groups, such as federal employees and maritime or longshore workers, who fall under federal compensation laws rather than state systems.
Workers’ Comp Is More Than a Requirement
While state laws may require it, workers’ compensation insurance is more than a legal checkbox. It is a safety net that protects your employees, your business, and your peace of mind. Whether it is covering medical expenses, helping workers receive benefits, or reducing your legal risk, it is one of the smartest protections you can put in place.
Getting the details right, like who is covered, how to classify roles, and how to prepare for audits, helps ensure your coverage is accurate and affordable. A qualified agent can guide you through the process and help you stay compliant, year after year.
Insure with Masters!
At Masters Insurance, we’re committed to helping you understand the factors influencing your insurance premiums and providing personalized solutions to meet your needs. Contact us today to learn more about how we can help you protect what matters most, with personalized support at every step!