What Is Pay as You Go Workers’ Comp?

Workers’ compensation insurance isn’t just a great way to help protect your business investment. In many states, it’s required if you have employees. Pay as you go workers’ comp lets employers pay only for the workers’ comp insurance they need in real-time.

The old way of paying for workers’ comp can take its toll on a small business. Business owners are forced to make their best guess about payroll at the beginning of the year—but a lot can change in 12 months. 

Teams grow and shrink, business can change, and a whole slew of things can alter your actual insurance premium. A business goes through a workers’ comp audit, which could result in an unexpected payment on their insurance premium. It’s messy and cumbersome, and it can be a cashflow nightmare.

Pay as you go (PAYG) workers’ comp coverage helps eliminate the guesswork, audits, and financial unknowns because it ties your insurance premium to actual payroll data. 

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Workers’ compensation insurance basics

What is workers’ compensation? Workers’ compensation is insurance that can help protect your business if an employee gets sick or injured on the job. It’s often required by law if you have employees. 

An injured or sick employee can receive workers’ compensation benefits to help cover expenses like medical bills, job retraining, and pay while away from work.

The majority of states require that businesses have workers’ comp insurance. However, some states allow businesses with a certain number of employees to elect coverage.

Many private providers offer workers’ compensation coverage nationwide. A few states (North Dakota, Ohio, Washington, and Wyoming), known as monopolistic states, offer workers’ compensation insurance through a state-operated fund.

What is pay as you go workers’ comp?

Pay as you go workers’ compensation allows you to make premium payments each time you run payroll. Your workers’ comp insurance liability is spread out throughout the year, and you only pay for what you need as you need it.

Traditional workers’ comp plans require large lump sum payments to cover the estimated cost of your liability. But with pay as you go workers’ comp, the amount you pay is based on each payroll you run. Your premium liability changes if you add or lose employees, or if their work roles change over time.

Some policy providers offer PAYG as an alternative to traditional workers’ comp. Your business can take advantage of pay as you go workers’ comp unless you live in a monopolistic state.

Benefits of pay as you go insurance

For many business owners, pay as you go workers’ comp is a good alternative to traditional lump sum payments. Here are some of the benefits of PAYG workers’ comp.

1. Eliminate lump sum payments

Making hefty annual payments can put a strain on your business budget and harm business cash flow management.

How much does workers’ comp insurance cost? Depending on factors like your business locality, industry, and payroll, workers’ compensation can add up. 

The average coverage rates by state range from $0.46- $1.74 per $100 in employee wages, with the national average being $1.04. 

Let’s say your coverage costs $0.80 per $100 of employee wages. You have five employees who will earn a combined total of $225,000. Divide the total wages by $100 to get $2,250. Then, multiply $2,250 by the workers’ comp rate to get $1,800.

Rather than paying the $1,800 at one time, you could make incremental payments each time you run payroll to ease your financial burden.

2. Pay only a real-time accurate premium

Traditional workers’ compensation insurance premiums are based on estimates. You must project what your payroll will be for the year and pay it upfront. At the end of the year, after going through an annual audit, your insurance provider either refunds you the difference or requests further payment.

With pay-as-you-go workers’ comp insurance, your payments are not estimates. Instead, you pay the money you owe based on your payroll. This lets you pay accurate premium amounts and avoid over- or under-estimating. 

Knowing exactly how much your workers’ comp should be for the year can be difficult to predict. You might decide to hire or let go of some employees, which can affect your rate. With pay-as-you-go workers’ compensation, you pay the amount you owe for each payroll you run.

Because of accurate premium amounts instead of estimates, you can enjoy a simplified annual audit process. Not to mention, paying real-time accurate premiums can also help you better manage your business budget throughout the year. 

3. Automate workers’ comp payments

You have a million and one things to do. Though necessary, remembering to make payments can slip your mind.

But with pay-as-you-go workers’ compensation, your policy provider can automatically collect your premiums each payroll if your payroll system supports it. Each time you run payroll, your policy provider will automatically debit the right amount from your business bank account to save you time.

What to look for in a workers’ comp policy provider

When choosing your workers’ comp policy provider, you likely want the best coverage at a reasonable price. What exactly should you look for?

When shopping for workers’ comp coverage for your small business, consider:

  1. Reputation: Check out customer reviews. Are customers happy with how the provider handles claims?
  2. Support: How easy is it to get a hold of the policy provider? Do they have licensed insurance professionals available to answer your questions and concerns?
  3. Integration: Does the PAYG workers’ compensation integrate with payroll software?
  4. Documentation of certificate of insurance: A certificate of insurance (COI) is a proof of insurance document. Your workers’ comp policy provider should have these documents available for you. 

Get payroll software that offers PAYG workers’ comp 

Simplify your employer responsibilities with pay-as-you-go workers’ comp. Patriot Software’s online payroll offers free workers’ comp integration with our partner, NEXT Insurance. 

Through this integration, you can automatically pay your workers’ comp insurance premium with each payroll. 

Sign up for Patriot’s payroll software today and get started with a free no-obligation trial. 

Already a Patriot customer? Get a free workers’ comp quote

NEXT Insurance specializes in small business insurance coverage for over 1,300 types of businesses. 

NEXT gives you easy access to your policy and customer support online 24/7 via web and mobile app, and you can get unlimited certificates of insurance (proof of insurance). If you have questions, their licensed, U.S.-based insurance professionals are available to help.

Start a free pay as you go workers’ comp quote with NEXT. 

This article has been updated from its original publication date of April 18, 2018. NEXT Insurance contributed to this update. 

This is not intended as legal advice; for more information, please click here.

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