Do You Pay Workers’ Comp on Bonuses?

Workers’ compensation insurance protects employees who experience work-related injuries or illnesses, providing them with medical care and lost wages. This coverage also shields employers from direct liability. Premiums for this insurance are calculated based on an employer’s payroll, and bonuses often factor into this calculation.

Determining Workers’ Compensation Payroll

Workers’ compensation premiums are determined by what insurance carriers define as “remuneration” or “wages.” This payroll forms the basis for evaluating risk and coverage cost. Remuneration generally encompasses all monetary compensation an employee receives for work.

This typically includes regular wages, salaries, commissions, the straight-time portion of overtime pay, and vacation, holiday, and sick pay. Defining assessable payroll broadly accurately reflects the total earnings an employer pays to its workforce, correlating to the insurer’s overall exposure and potential risk.

Inclusion of Bonuses in Payroll

Bonuses are generally included when calculating workers’ compensation premiums, as they are considered remuneration for services rendered, similar to regular wages, and represent earned compensation regardless of whether they are part of a regular paycheck or a separate incentive.

Common bonuses, such as performance, holiday, sign-on, and retention bonuses, are typically treated as assessable payroll. If a bonus is performance-based or non-discretionary—meaning it is expected upon meeting certain conditions—it will usually count towards reportable wages. However, truly discretionary bonuses, which are not tied to specific performance metrics and are given at the employer’s sole discretion, are sometimes excluded. Some state regulations may also have specific exclusions for certain gifts or awards not considered regular compensation.

Reporting Payroll for Workers’ Compensation

Employers are required to accurately report their payroll, including applicable bonuses, to their workers’ compensation insurance carrier. Reporting often occurs quarterly or annually, depending on insurer requirements. Accurate and timely reporting is important for ensuring premiums are calculated correctly and to avoid potential issues during audits.

A workers’ compensation payroll audit is a routine process conducted by insurance carriers, typically at the end of each policy term. The audit verifies reported payroll figures against actual compensation paid to employees. During an audit, employers should provide detailed documentation, including payroll records showing regular wages, overtime, commissions, and bonuses, along with tax forms like W-2s and quarterly federal tax returns (Form 941s). Maintaining organized records streamlines the audit process and confirms insurance compliance.