Workers' Compensation Basics for Employers

Workers' compensation is insurance that pays medical bills and part of lost wages when an employee is hurt or becomes ill because of work. It is not a payroll tax, but it connects closely to payroll: premiums are usually based on payroll, and the question of who is an employee decides who is covered. It is also one of the first things a business should check when hiring in a new state.

Who regulates it

The U.S. Department of Labor says the federal workers' compensation programs it runs cover federal workers and certain other groups, such as longshore workers and miners with black lung disease. Employees of private companies and of state and local governments should contact their state workers' compensation board. That means the rules differ from one state to the next: who must have coverage, which businesses and workers are excluded, what penalties apply, and how coverage can be obtained.

Illinois rules

The Illinois Workers' Compensation Act, in section 4, requires employers that fall under the Act to provide compensation in one of several ways: obtain approval to self-insure after an application and financial statement, furnish security or a bond, or insure their entire liability through an authorized insurance carrier. Employers can also join an approved group workers' compensation pool.

The enforcement provisions are strict:

• The Illinois Workers' Compensation Commission can issue a work-stop order requiring a business to stop operations at a worksite if it finds the employer knowingly failed to provide coverage.
• The statute allows civil penalties for knowing and willful failures, with a stated maximum of $1,000 per day and a minimum penalty of $20,000.
• An individual employer, corporate officer or director, partner or LLC member who knowingly fails to provide coverage is guilty of a Class 4 felony, and a negligent failure is a Class A misdemeanor. The statute excludes officers or directors of publicly owned corporations.

The Commission's website includes an employer insurance coverage search tool that lets people check whether an employer has coverage. Contractors, customers and property owners sometimes ask for proof of coverage, so it is smart to keep your current certificate of insurance on hand. The statute describes general contractors and subcontractors among those who must comply.

How other states differ

Texas shows how different the rules can be. The Texas Department of Insurance says private employers can choose to carry workers' compensation coverage, but it is not required in most cases. Employers who carry it limit their liability when an employee sues for damages, except in cases of gross negligence causing a fatality. Employers who do not carry it are known as non-subscribers and face different rules and legal risks, so Texas employers should read the state's guidance before deciding. Other states set their own thresholds based on the number of employees, the type of work or the form of the business.

If you have employees in several states, you need to confirm coverage for each work state and not assume the headquarters policy covers everyone. See multi-state payroll.

How premiums relate to payroll

Insurance carriers set workers' compensation premiums using the following pieces, although the exact method differs by state and carrier:

• Payroll. Your estimated payroll for the year, usually shown by job classification.
• Classification codes. Each type of work has a code with its own rate. Office work generally costs less than construction.
• Claims history. Past claims can raise or lower your rate.
• Audit. At the end of the policy year, carriers commonly audit payroll records to true up the premium.

Example (hypothetical rate). A business with $400,000 of payroll in a class that costs $1.50 per $100 of payroll would have an estimated premium of $400,000 / 100 x $1.50 = $6,000. Actual rates vary widely by state, class and carrier.

Because the audit relies on your payroll records, accurate job classifications and a clean separation of employees from contractors matter. If a carrier decides that a worker you treated as a contractor is an employee, it can add premium for that payroll. See employee vs. independent contractor.

Who is covered, and common exceptions

Coverage rules depend on the state, and they often treat owners, officers, family members, household workers, farm workers and independent contractors differently. Many states let some owners or officers opt in or out. Household employers should check whether their state requires coverage for domestic workers. See household employer rules.

Common mistakes

• Assuming a payroll or staffing vendor provides coverage when it does not.
• Letting a policy lapse after a renewal problem.
• Misreporting job classifications or payroll to lower the premium.
• Forgetting to add coverage when you hire in a new state.
• Using subcontractors without collecting proof of their insurance.
• Waiting to report an injury to the carrier.

How we can help

We coordinate payroll reports with your insurance audits, help you track employee and contractor payroll by classification and flag state coverage questions during multi-state hiring. We can work alongside your insurance broker, who handles the policy itself. See our payroll services and accounting services. This is general information, not legal advice about coverage.

Frequently asked questions

General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.