Workers compensation premium is calculated on payroll — specifically, on every $100 of payroll allocated to each class code. Getting the payroll right at inception prevents large audit surprises at renewal. Getting it wrong is one of the most common E&O risks in commercial lines.
Workers comp payroll typically includes:
• Gross wages and salaries • Overtime pay (in most states, only the straight-time portion) • Commissions • Bonuses (in most states) • Holiday and vacation pay
It typically excludes tips (in some states), employer contributions to pension plans, severance pay, and payments to independent contractors who carry their own WC.
Each employee's payroll must be allocated to the class code that matches their primary job function. A construction company might have:
• Carpenters (code 5403) • Roofers (code 5551) • Clerical (code 8810) • Owners/officers (code varies by state)
The single biggest mistake is lumping all employees into one class code. Clerical employees have dramatically lower rates than field workers — misclassifying clerical as field workers means the client pays too much. Misclassifying field workers as clerical means they are underinsured and an audit will result in a large additional premium.
Most states have specific rules for how owner, officer, partner, and LLC member payroll is counted for WC purposes. Some states allow owners to exclude themselves from WC coverage. Others require a minimum and maximum payroll be used regardless of actual compensation. These rules vary significantly by state — agents must check NCCI or state bureau rules for each state where coverage is written.
The best way to avoid large audit bills is to collect accurate payroll estimates upfront and review them with the client at mid-term. If the client's business grew significantly during the year, their actual payroll will be higher than estimated — resulting in an additional premium charge at audit. Agents who check in at mid-term can adjust the policy and spread the cost rather than presenting the client with a surprise bill.
AgencyAssist collects all the information covered here through a plain-English client intake link. No phone calls, no PDF forms, no missing fields — just a complete, submission-ready ACORD package.