What Wages Are Subject to Workers' Comp?

Why pay more for something when you don’t have to? Overpaying for anything can be quite painful. 

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When it comes to your workers’ comp premium, it's possible to avoid that pain, as long as you know which wages are subject to workers' comp insurance. If you don't record all wages that qualify for workers' compensation, you could end up having to pay a hefty bill at the end of your policy term. Why? Because technically you underpaid for coverage.  

So, what wages are subject to workers' compensation? Well, it varies in every state, so it's best to check with your insurance agent on your specific regulations. However, let's review what wages are subject to workers' comp in California to get a good sense of what may be included for you.

Wage Classifications: What’s the Big Deal? 

Before we outline the wages included (and excluded) from your payroll when it comes to calculating your workers' comp premiums, you'll need to understand why this information is essential. 

For starters, when you purchase workers' comp insurance, your premium payments are typically estimated. Your estimated premium calculations are determined by factors such as employee wages. This includes bonuses and paid time off.

Insurance companies verify your payroll estimates match your premiums by conducting a workers' compensation audit. If you're thinking an audit sounds daunting, it can be if you don’t have a tool like Hourly, which connects your payroll data directly to workers’ comp in real-time, so your premiums are always based on actual wages (not estimates).

But, if you don’t have Hourly (which, by the way, will keep track of what wages are, and aren’t, subject to workers’ comp too), and you miss some wages that should be counted towards your workers' compensation premiums, you could end up underpaying for coverage. 

Unfortunately, this means that after your workers' compensation audit, your insurer may require you to cut a big check for the amount you didn't pay during the policy term. Not to mention, you could end up paying a surcharge for incorrect information even if it was an honest mistake. 

What Wages Are Subject to Workers’ Compensation?

Now that you see the importance of understanding the different types of wages subject to workers’ compensation, your premium calculation should include*:

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• Wages and salaries including retroactive pay (compensation added to a paycheck if an employee was underpaid for some reason)
• Overtime or double time pay at the employee's base rate. So, if a worker makes $10 an hour (their base), but they work overtime at $15 an hour, you only owe workers' comp on the $10 rate for those extra hours.
• Paid time off like holiday pay, vacation pay, and sickness pay
• Commissions and draws against commissions, which are salary plans where you give a set amount of money to your employees regularly in projected commissions, and at the end of the pay period, you will give them their remaining commissions (if they earned more commissions than their regular pay). So, if you paid an employee $1,000 in commissions in advance every month and they actually made $2,000 by the end of it, you would give the $1,000 remaining at the end of the month—all of which are subject to workers’ comp.  
• Bonuses including stock bonus plans
• Employer payments (required by law) to statutory insurance or pension plans, such as the Federal Social Security Act.
• Payments to employees outside of time worked, such as piecework, profit sharing (rewards employees a percentage of business profits), or incentive plans.
• Hand tools or power tools payments for when they are used by employee or third-party to complete work for your company
• Apartment or housing accommodations provided to an employee based on comparable properties 
• Lodging (other than apartment or housing accommodations) employees receive as part of their compensation
• Meals employees receive as part of their compensation 
• Store certificates, merchandise, credits, or any other substitute part of an employees' compensation 
• Payments for salary reduction, retirement, or cafeteria plans
• Davis-Bacon wages (rates for all workers on federal or federally assisted contracts) paid to employees or placed by an employer into third-party pension trusts
• Annuity plans
• Payment for commercial filming 
• Employee reimbursements even if they don’t technically qualify as a reasonable business expense.  

What Wages Are NOT Subject to Workers’ Compensation? 

On the other hand, there are some wages that are not subject to workers’ compensation, including*:

• Employee tips and other gratuities
• Employer payments to group insurance plans or pension plans, and to third-party pension trusts for the Davis-Bacon Act or a similar law (pension trust must be qualified under IRC Sections 401(a) and 501(a))
• Particular rewards for individual invention or discovery‍
• Dismissal or severance payments (excluding worked time or vacation days)‍
• Active military duty payments
• Employee discounts on goods bought from the employer
• Payments for dinners during late work ‍
• Work uniform stipends
• Sick pay to an employee by a third-party like an insurance provider that is paying disability benefits‍
• Employer-provided advantages such as automobile use, an airplane flight, reward trip (contest winner), a discount on property or services, club memberships, entertainment or event tickets‍
• Employer contributions to salary reduction, employee savings plans, retirement accounts, or cafeteria plans

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In some cases, reimbursed expenses and the cost of equipment—like personal protective equipment to guard your employees from harm while on the job (except for hand or power tools) may be omitted from a workers’ comp audit if all three of the following circumstances apply:

• The expense was necessary for you to run your business  
• The employee’s expense is shown and recorded individually for your bookkeeping purposes
• The total amount of reimbursement for each employee matches the amount of business expenses you recorded for that employee

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*Remember these points only apply to California, but you can use them as a framework to think about what may apply in your state. Make sure to check with your insurance agent to find out the specifics for your state.

Is Workers’ Compensation Based on Gross Wages?

Workers’ compensation is based on employees’ gross wages. Gross wages include all earnings for worked and non-worked time, such as paid time off.  

While laws vary by state, workers can receive a percentage of pre-tax wages when they get paid from a claim. In Washington, for example, employees receive 60 percent of their gross monthly wages in workers’ comp claims, an additional 5 percent for a spouse, and 2 percent for each dependent child.

Who is Subject to Workers’ Compensation?

While workers’ compensation laws vary by state, generally speaking, most employers must purchase workers’ compensation coverage for their employees. Requirements typically depend on the nature of your business, the size of your business and the type of work your employees are doing. 

Keep in mind, every state has its own definition of a covered employee. To verify who is subject to workers’ compensation in your state, you can visit FindLaw for your state’s requirements. 

Is Workers Compensation a Payroll Expense?

Workers’ comp insurance is a payroll expense, just another cost of running your business. Workers’ comp costs typically appear on your income statement and impact your overall earnings.

The amount left after your expenses is usually your taxable income. 

Relax, You’ve Got This!

Determining wages subject to workers’ comp is a bit confusing. But, it doesn’t have to be. Now you’re armed with all the knowledge you need. So, relax, take a deep breath, and pat yourself on the back. You’re a business owner ready to tackle whatever comes your way.