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7 reasons small business owners should pay workers’ compensation through their payroll service

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Healthy cash flow is essential for any company but is particularly vital for small and medium-sized businesses (SMBs) that operate without the safety nets common at their larger competitors. Firms with under 500 employees account for more than half of all private-sector jobs in the U.S. And it’s these same SMBs that have been hardest hit by the devastating sales losses, workforce cuts, temporary closures and other disruptions caused by COVID-19.

As small businesses attempt to recover, getting cash flow back on track will be a top priority. And while there’s no easy answer to magically restart the economy, there are small but meaningful ways that SMBs can save money, unlock working capital and improve their competitive position.

Unlock cash by rethinking workers compensation

One of the easiest and most often overlooked ways is to bundle workers’ compensation payments with your regular payroll.

This simple change can:

  • Eliminate annual workers’ compensation down payment
  • Reduce monthly premiums
  • Spread payments more evenly across the ups and downs of hiring cycles

This approach can save many SMBs 25-30 percent or more while retaining your current agent, policy and insurance provider.  

Workers compensation safeguards staff and employers

Most businesses—regardless of location or industry—carry workers’ compensation insurance. These policies protect both employees and employers. If injury or illness occurs while on the job, workers’ compensation can cover the affected employee’s medical expenses, rehabilitation costs and even lost wages. Some policies also pay death benefits to families if an employee is killed on the job.

For employers, workers’ compensation insurance keeps your business in compliance with state regulations. It can also safeguard you from lawsuits if employees incur on-the-job injuries.

Workers’ compensation requirements differ from state to state, so it’s best to review the statutes for all the locations where your employees work, then consult your insurance provider about necessary coverage. 

Headcount, salaries and industry determine your costs

Workers’ compensation costs vary widely. Some SMBs may pay a few thousand dollars for their policy, while others will need to factor in a six-figure expense each year.

Carriers base workers’ compensation costs on the number of employees on the payroll and their salary levels.

Estimated versus actual staffing creates headaches

One of the biggest challenges with workers’ compensation is accurately calculating an organization’s headcount and salaries throughout the calendar year. It’s particularly difficult for seasonal businesses like construction or hospitality, which may ramp up hiring for peak periods in summer or holidays. The furloughs and layoffs common during COVID-19 also impact typical staffing levels.

In a traditional workers’ compensation model—one where the SMB pays the insurance provider directly—the insurer uses the information submitted at renewal time to estimate policy costs for the entire year.

In this scenario:

  • Headcount and salary information is submitted for your business
  • The business pays an upfront deposit each year—typically 20 percent
  • There are also monthly premiums. These are typically “front-loaded” and more expensive during the first 6-8 months of the year
  • At the end of the year, the insurer conducts an audit to validate actual versus estimated employee counts, salaries and costs

Unfortunately, if your business had a growth year and significantly increased hiring levels, you may face unpleasant additional costs as a result of the audit. Or, if your business needed to furlough or lay-off staff because of COVID-19, you may overpay during part of the year.

Unlocking this “hidden” working capital can be a lifeline for SMBs. To access it requires only a simple change to a model where your insurance provider can leverage current, accurate payroll data rather than projections.

Direct payroll integration simplifies payments, improves cash flow

Fortunately, there’s a smarter way for SMBs to handle workers compensation. Did you know it’s possible to manage your fees through a payroll provider?

Some payroll providers offer a “pay-as-you-go” workers’ compensation solution that links premiums directly to payroll for a healthier cash flow and a simplified payment process.

Look for a best-in-class, direct payroll integration that does not require any changes to the existing workers’ compensation policy. Some providers will let you keep your relationship with your local agent, maintain your current coverage and use the insurance provider of your choice.

Here’s how direct payroll integration works:

  • Each pay period, payroll is sent to your provider
  • The payroll provider communicates your actual payroll to your workers’ compensation provider
  • The insurer calculates the premium cost for that payroll period
  • The insurer automatically debits your designated bank account for the premium amount

Premium Link is fast and easy to implement; all it takes is a phone call. Customer service staff work directly with your insurance provider to set up the necessary data transfers. There’s no software to install or need for complicated IT involvement. Your payments are automatic and accurate, making it easy to budget for workers’ compensation expenses throughout the year.

man using laptop

7 reasons to consider direct payroll integration

Few SMBs pay their workers in advance. Yet that’s exactly how traditional workers’ compensation arrangements function. Your business makes a substantial investment in the first quarter of each policy period that can represent as much as 40-45 percent of your total annual cost—in effect, paying in advance for coverage across the year.

This type of ‘pay-as-you-go’ model ends that practice and returns valuable working capital to your business, where it can be leveraged for other operational expenses or strategic initiatives.

Here are seven other reasons to make a switch in how you pay your workers compensation:

1.  No down payment. Traditional workers’ compensation solutions require a hefty down payment, typically 20 to 25 percent of the total policy cost. When you integrate your workers’ compensation through a payroll provider, insurance providers waive this requirement, giving you an immediate competitive advantage and a boost to your business cash flow.

2.  More accurate calculations. Coverage based on your estimated or projected headcount and salaries can leave your business open to unpleasant surprises and additional costs at year end, or have you overpaying across the calendar year. It’s especially important for seasonal businesses, or during COVID-19, when staffing levels are likely to fluctuate.

By integrating your workers’ compensation with actual payroll numbers, your insurance provider works with current, accurate data. You benefit by paying-as-you-go for the exact coverage you need. Budgeting and forecasting your cash flow is simpler and more accurate.

3.  Lower premiums. With a traditional approach to workers’ compensation, your insurance provider spreads the premiums over the first nine months of the policy, often with more expensive totals in the first quarter. As a result, your cash flow suffers.

With a pay-as-you-go model, payment is more frequent and spreads your premiums across all twelve months, resulting in lower monthly premiums.  You also enjoy the convenience and predictability of automatic debits from any bank account you specify, with payments that coincide with your payroll schedule: weekly, bi-weekly or semi-monthly.

premium link comparison

4.  Keeping your current insurer.  Some  payroll providers  also offer insurance services. But there are options available that won’t apply pressure to switch your workers’ compensation coverage. A best-in-class payroll partner will understand the value of choice and let you select the insurance provider that’s the best fit for your business. This continuity makes it easier for you to stay focused on what matters most: running your business.

5.  Stronger cash flow. Even during excellent economic cycles, savvy SMBs keep a close eye on business revenues, expenses and overall cash flow. With the numerous disruptions to sales, supply chains, staffing and customer receivables due to COVID-19, maintaining that laser focus on cash flow is more critical than ever. While workers’ compensation may not be the largest line-item in your budget, every advantage helps your company bounce back faster.

6.  No year-end surprises. These services also calculate your monthly workers’ compensation premiums based on actual—not projected—payroll. It’s one of the biggest benefits of integrating your workers compensation with your payroll provider. That means minimal, if any, adjustments and a streamlined audit process at the end of the year. There’s no risk of over- or under-payments and their resulting impact to your cash flow.

7.  Easy implementation. A final consideration for SMBs is the caliber of partner you choose for services. At the end of the day, look for a provider that is dedicated to helping your business maintain workers’ compensation without the complications.

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