What Is Included in Workers Compensation Payroll?

Workers’ compensation insurance provides benefits to employees who suffer work-related injuries or illnesses, covering medical expenses, lost wages, and rehabilitation. Businesses typically pay premiums for this insurance, and these costs are primarily determined by the payroll of their employees. The accurate calculation of payroll is a foundational element in determining the premium an employer pays for workers’ compensation coverage. Understanding what constitutes “payroll” for this specific insurance purpose is important for businesses to manage their insurance costs effectively.

Defining Workers’ Compensation Payroll

Workers’ compensation payroll, often called “remuneration,” serves as the base for calculating insurance premiums. This definition can differ from payroll definitions used for other purposes, such as income tax or unemployment insurance. The National Council on Compensation Insurance (NCCI), or state-specific rating bureaus, establish rules for what is included.

The primary objective of accurately classifying and reporting payroll is to ensure that insurance premiums reflect the actual risk exposure of a business. Misclassification or incorrect reporting can lead to significant premium discrepancies, potentially resulting in additional payments during an annual audit or even fines. An annual audit is a standard process where an insurer reviews a company’s payroll records and employee classifications to verify the accuracy of premiums paid.

Compensation Types Generally Included

Workers’ compensation payroll generally includes all forms of compensation paid to employees for their services. Gross wages and salaries form the core of included compensation, encompassing all earnings before any deductions for taxes or benefits. This also extends to retroactive pay, which is compensation added to a paycheck if an employee was previously underpaid.

Overtime pay is typically included, but often only the “straight time” portion is counted, not the premium. For example, if an employee earns $10 per hour and receives $15 for overtime, only the initial $10 per hour is included. Commissions and bonuses, including stock bonus plans and profit-sharing, are also generally included as part of an employee’s remuneration.

Paid time off, such as holiday pay, vacation pay, and sick pay, is also part of the payroll calculation. Reported tips are often included, as are earnings from piecework or other incentive plans. The value of non-cash remuneration, such as the rental value of housing, lodging, or meals, can also be included.

Compensation Types Generally Excluded

Certain types of payments or benefits are typically excluded from workers’ compensation payroll calculations, as they do not represent direct compensation for services rendered or are not considered part of the employee’s standard wages. Employer contributions to qualified retirement plans, such as 401(k) or 403(b) plans, are generally excluded. Employer contributions to health insurance or other welfare benefit plans are also not included.

Reimbursements for legitimate business expenses, such as travel, meals, lodging, or the cost of tools and uniforms, are usually excluded if properly documented. Payments for unused sick or vacation time upon an employee’s termination are often excluded. Discounts on goods or services provided to employees are also typically not included. Per diem payments may be excluded if directly tied to actual business expenses incurred by the employee.

Special Considerations for Certain Roles

For owners, officers, and partners, many states have minimum and/or maximum payroll caps that apply when calculating workers’ compensation premiums. Their reported payroll might be adjusted to fall within these established limits, regardless of actual earnings. Some states may also allow for the exclusion of certain owners or officers from coverage.

Family members employed by the business may also be subject to specific rules or exceptions, which vary by state. These rules relate to whether their payroll is fully included, partially included, or excluded, depending on their relationship to the business owner and their role. Businesses should check their state’s specific regulations regarding family employees.

Independent contractors and subcontractors are generally not included in a business’s workers’ compensation payroll because they are not considered employees. However, reclassification is a significant consideration. If an independent contractor’s working relationship resembles that of an employee based on factors like control or integration, they could be reclassified by an auditor. Their compensation would then be included, potentially leading to additional premium charges and penalties for the employer.