Pay-as-you-go workers’ compensation is an insurance payment plan that bases your premium on your actual payroll. This is different from traditional plans that use projections to determine your costs and can result in an extra bill at the end of the policy. Choosing pay-as-you-go workers’ comp minimizes this risk and allows you to spread premium payments throughout the year.
In addition to making workers’ comp costs more manageable, The Hartford’s pay-as-you-go workers’ comp, called XactPay, does not require a down payment, monthly fees, or service charge.
How Pay-As-You-Go Workers’ Compensation Insurance Works
The insurers and payroll companies that offer pay-as-you-go workers’ compensation insurance adjust your premium every time you run payroll. They typically do this in one of two ways:
- Self-reporting: With these plans, you send your payroll information to your insurers. This usually requires uploading or entering your data into your insurer’s online platform.
- Payroll integration: In some cases, insurers and payroll companies work together to automate a pay-as-you-go plan. The payroll company shares your data with your insurer so it can calculate your premium and withdraw the appropriate amount.
Both methods result in a more accurate workers’ compensation insurance premium, which is beneficial when your insurer audits your policy at the end of its term. Plus, pay-as-you-go workers’ comp is also good for your cash flow because you don’t have to make a large down payment or pay the entire premium in one lump sum as you do for traditional plans.
How Pay-As-You-Go Workers’ Comp Makes Premium Audits Easier
Workers’ compensation insurance costs are based on your business’s annual payroll. Because this figure can change over the course of a policy term, insurers use an estimate to charge an initial premium and then conduct an audit when your policy is about to expire. If the auditor determines that you didn’t pay the correct premium, you may end up with a refund or a bill for the amount you fell short.
Preparing for an audit is a stressful situation for a small business owner but pay-as-you-go workers’ compensation can make it easier. You may still see some adjustments when the audit is over, but these are usually minimal because you paid a more accurate premium from the start.
Pros & Cons of Pay-As-You-Go Workers’ Compensation Insurance
The big selling point of pay-as-you-go workers’ comp is that it frees up capital you can use to run your business. That’s not to say it’s necessarily cheaper than a traditional payment plan, but your upfront costs are typically lower, and you’re less likely to see a bill after a workers’ comp audit. However, as much as pay-as-you-go solves some problems, it may create other issues.
Pros of Pay-As-You-Go Workers’ Comp
- Lower upfront cost: Workers’ comp costs can be a significant portion of a small business’ budget, and traditional payment plans require a business owner to either pay the entire premium at once or make a large down payment, often 25% of the total bill. Pay-as-you-go often requires some down payment, but it’s seldom as much as under a traditional plan.
- Eliminates premium financing: Business owners who choose pay-as-you-go seldom need premium financing because most insurers don’t require a large down payment, and the monthly bills are usually more manageable.
- More accurate premiums: Your insurer bases your premium on your actual payroll, so you’re less likely to overpay. This keeps more money in your pocket that you can use to run your business.
- Smaller post-audit adjustments: Because your premium is more accurate, you’re less likely to see a large bill or refund after your audit. Your auditor may still find errors in classifications, but the adjustment should be less of a shock.
- Automated payments: Integration between your insurance company and your payroll provider means payments are taken out of your account automatically. This simplifies the work on your end and reduces the likelihood of missed payments and late fees.
Cons of Pay-As-You-Go Workers’ Comp
- Potential budget issues: Opting for automatic payments may cause small business owners to pay less attention to their workers’ comp costs. For example, you may not remember that hiring staff adds both payroll and insurance costs immediately.
- Limited choices: Payroll companies may work with only one insurer, so business owners who get workers’ comp through those companies don’t have an opportunity to compare policies and premiums.
- Audit still required: Pay-as-you-go plans make audits less stressful, but they can’t eliminate them completely. Your premium is still based on an estimate, and your insurer will want to make sure they’ve charged the correct amount.
Pay-As-You-Go Workers’ Compensation Insurance Providers
QuickBooks users who want to automate workers’ comp payments
Businesses that do not use a payroll service but still want a pay-as-you-go plan
Manufacturers, contractors, and auto industry businesses
Professional firms where employees may be promoted to partners
The most common way to get pay-as-you-go workers’ comp is through payroll providers. However, workers’ compensation is a complicated policy, so we recommend working with an insurance carrier that offers a pay-as-you-go plan. Luckily, these are becoming more and more common.
The Hartford is a national business insurance leader that is constantly working to improve customer relationships. One way it’s done this is by bringing small business owners XactPay, its version of pay-as-you-go workers’ compensation insurance. Business owners who opt-in on XactPay have 170 payroll companies to choose from, including QuickBooks and Paylocity. This, combined with the carrier’s ability to write broad workers’ comp insurance for a wide range of industries, makes The Hartford a smart choice for most businesses.
EMPLOYERS is a good choice for small business owners who do not use a payroll provider. While its PrecisePay plan works with a handful of payroll companies, it can also accept payroll data submitted directly from the business owner. As the policyholder, you can upload files directly to its secure site or use an interactive Excel spreadsheet provided by EMPLOYERS.
AmTrust Financial is a leading provider of workers’ compensation insurance for small businesses that’s a top choice for riskier industries like manufacturing, contracting, and auto. Businesses in these industries can struggle to find coverage, but they fall within AmTrust’s underwriting guidelines. Plus, AmTrust offers three distinct plans in its Pay-As-You-Owe workers’ comp: one for businesses working with local payroll services, one for those with a national payroll company, and a self-reporting option.
Professionals with employees who can be promoted to partners, such as accountants, insurance agents, and lawyers, should consider getting workers’ comp with Travelers. In many states, business owners aren’t required to carry workers’ comp for partners so that a midterm promotion can have a major impact on workers’ comp costs. Travelers’ broad coverage, combined with its pay-as-you-go platform TravPay makes the company an ideal choice for professional firms.
Pay-As-You-Go Workers’ Compensation Insurance Example
Let’s look at how a pay-as-you-go plan can help you better manage your cash flow. Imagine that you’re a plumber in California. As the sole proprietor, you’re not required to get workers’ comp, but business is going well, so you hire a second full-time plumber (class code 5183) and pay that person $56,000 per year. The base rate for this class code is $5.63, so your workers’ comp costs look like this:
Plumbers ($5.63 x $56,000 / $100)
Because you opt for pay-as-you-go workers’ comp, you don’t have to pay that entire amount upfront. Instead, you pay a small down payment and then a bill after the first time you run your biweekly payroll. Your plumber’s biweekly pay is approximately $2,333, so your first workers’ comp bill looks more like this:
Plumbers ($5.63 x $2,333 / $100)
Ultimately, this plan doesn’t save you any money, except potentially a down payment and late fees, but it does allow you to keep more money in your pocket each month.
Please note that these calculations are approximations and reflect the base rate for a plumber in California. They also assume the business owner is not subject to an experience modifier and hasn’t received any discounts or premium credits. Additionally, insurance carriers may have minimum premiums for workers’ compensation policies, often starting around $250 annually.
A pay-as-you-go payment plan is the right call for any business owner who wants a more manageable workers’ compensation insurance bill and fewer surprises at the end of the policy term. However, workers’ comp is complicated, so business owners should first look to insurance carriers rather than payroll companies for coverage.
Our top pick for pay-as-you-go workers’ compensation insurance is The Hartford because it partners with 170 payroll companies, including industry-leading QuickBooks. This comprehensive list and The Hartford’s broad workers’ compensation coverage makes it an excellent option for small business owners.