If you're like most business owners in most states, you probably need Workers' Compensation Insurance as soon as you hire an employee. That's old news, right? But did you know that how you classify your employees plays a major role in the cost of your Workers' Comp policy? (To learn more about what other factors affect your Workers' Comp premium, read our Workers' Comp Insurance Cost Analysis.)
Let's explore these Workers' Comp codes in more detail and discover how proper classification can help save your business money.
Workers' Comp Classification Codes and Saving Green
Workers' Comp class codes are three or four digit codes created by the National Council on Compensation Insurance, an organization that gathers data and prepares objective Workers' Comp Insurance rates. There are more than 700 codes, and each code…
- Denotes the amount of risk and type of hazard each job or work environment may entail.
- Assigns a certain "value" based on these conditions.
- May be used by your insurance provider to price your Workers' Compensation Insurance.
To illustrate how these codes are used, let's look at an example.
Say you're an interior designer who mostly deals with residential clients. Eventually, you start getting requests from your clients to help with their commercial properties – meaning bigger projects. To expand, you decide to hire an on-staff general contractor and an administrative assistant. Your Workers' Comp policy must cover them both.
When your employees are added to your policy, your assistant admin should get the clerical work code, a code that denotes less work risk and usually has a lower rate attached to it. On the other hand, your contractor's work is almost always considered high-risk and its code assigns a higher rate.
For more on Workers' Comp classification codes, read the article "How Do I Use Workers' Compensation Class Codes?"
Employer Beware: The High Cost of Misclassifying Employees
To save money, you might consider misclassifying employees to reduce your Workers' Comp premiums, but this misstep will be spotted in an annual premium audit. The audit (sometimes called a "payroll audit") is used to give an accurate Workers' Comp premium for your policy period.
If you accidentally make a classification error, you'll be responsible for paying the outstanding amount you owe once the premium has been recalculated. If you unintentionally misclassify employees, you may end up spending more on premiums than you need to. You could save money upfront by having your insurance agent classify your employees.
Also, be aware that classifying your employees as independent contractors so you don't have to cover them with Workers' Comp is illegal. Depending on where you live, you could face a misdemeanor or felony charge. Plus, you'll have to pay serious fines and penalties for neglecting to carry coverage.
Learn more about the high cost of misclassifying workers in our post "5 Business Insurance Mistakes Costing You Money."
Independent Contractor or Employee: Know the Difference
The difference between independent contractors and employees can be confusing. It's important to understand the distinction because…
- The IRS can audit your business for misclassifying employees as independent contractors. You could end up owing back taxes, benefits, and overtime pay.
- If your employee is really an independent contractor, you're spending unnecessary money. As an employer, you pay part of your employees' Social Security and Medicare taxes. You're probably also paying for their Workers' Compensation coverage, if your state requires it.
Independent contractors usually have free rein over the manner in which they complete their work. That means they set their own schedules, except for deadlines. They usually provide their own tools and supplies for the work at hand, and they have the freedom to work for other clients.
For more tips on determining the type of workers you employ, check out "Workers' Comp Insurance: When Is Someone a Contractor?"