How Understanding Workers’ Compensation Can Keep You from Overpaying
Updated: Apr 30
Workers’ Compensation is required by law by almost all states, so understanding some basics can help you reduce your costs, reduce errors on audit, and save your company by knowing:
How to properly report remuneration
Include/exclude owners & officers.
Determine what forms of payroll are not subject to reporting for workers’ compensation premium & audit.
Payroll/Remuneration: All payroll whether estimated, or reported is subject to Workers’ Compensation except for:
Tips and other gratuities received by employees.
The value of special rewards for individual invention or discovery
Dismissal or severance payments, except for time worked or accrued vacation.
Payments for active military duty
Employee discounts on goods purchased from the employer.
Premium for overtime and double time.
Dinner money for late work
Work uniform allowances.
Sick pay to an employee by a third party such as an insured’s group insurance carrier that is paying disability income benefits.
Employer-provided perks such as: use of an automobile, (2) an airplane flight, (3) an incentive vacation (e.g., contest winner), (4) a discount on property or services, (5) club memberships, (6) tickets to entertainment events.
Employer contributions to salary reduction, employee savings plans, retirements, or cafeteria plans (IRC 125) – contributions made by the employer that are determined by the amount contributed by the employee.
Payroll subject to Workers’ Compensation includes:
Wages or salaries, including retroactive wages. (Check with your insurance company auditor to have them provide state caps on individual weekly wage) Not capping individual wages is a common cause for over-reporting.
Commissions and draws against commissions.
Bonuses including stock bonus plans.
Straight time pay for overtime work.
Pay for holidays, vacations, or periods of sickness.
Payments to employees on any basis other than time worked, such as piecework, profit sharing, or incentive plans.
The rental value of an apartment or house provided for an employee.
The value of lodging, other than apartment or house, received by employees as part of their pay.
The value of meals received by employees as part of their pay.
The value of store certificates, merchandise, credits, or any other substitute for money received by employees as part of their pay.
Payments for salary reduction, employee savings plan, retirement, or cafeteria plans that are made through employee-authorized salary reduction from the employee’s gross pay.
Expense reimbursements to employees to the extent that employers’ records do not substantiate that the expense was incurred as a valid business expense (Note: when it can be verified that the employee was away from home overnight on the business of the employer, but the employer did not maintain verifiable receipts, a reasonable expense allowance, limited to $30 day, is permitted)
When Owners and officers contemplate including themselves or rejecting coverage under Workers’ Compensation there is one baseline that is consistent. You must reject and sign an officer’s rejection form for your payroll to be excluded from any audit process. The absence of a signed rejection constitutes inclusion. In most states (including CA) there is a Minimum/Maximum payroll assigned to owners/officers of a company. For the year 2021 the Min/Max is $54,600/$139,100. Each state has different rules so be sure to consult your insurance provider to determine which state governs your owners and officers. Furthermore, to reject coverage, an owner/officer must have 10% or more ownership to reject Workers Compensation.
Ultimately, workers’ compensation at its root is straight-forward but understanding and effectively reporting the correct amounts can keep you from overspending in this vital line item of any business owner’s budget. There are ways to recover excess dollars paid on prior years, so, if you’re concerned that you may have had this happen to you, contact us and we can connect you to resources that can work with you and the carrier to rectify so you can be refunded any unintended over payments
Article Credit: Hugh Scott, Bolton & Company