Workers' Compensation Insurance
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Pay-as-you-go workers' compensation insurance

A pay-as-you-go workers’ compensation plan can make it easier for small business owners to obtain coverage while maximizing the cash that they have on hand.

What is pay-as-you-go workers' compensation insurance?

Pay-as-you-go workers’ compensation insurance is a type of workers’ comp insurance with flexible premiums that change throughout the year. These premiums are dependent on changes to your number of employees and your payroll data throughout a 12-month span.

Workers’ comp insurance is required in most states for businesses with employees. It may also be required for sole proprietors who work in riskier professions, such as construction and building design.

Workers’ compensation coverage protects your business and your employees from the healthcare costs and lost wages in the event that an employee suffers a work-related injury or illness.

Most regular health insurance policies are unlikely to cover these injuries, so without workers’ comp, either you or your employees could be stuck paying the medical bills out-of-pocket after a mishap.

How does pay-as-you-go workers’ compensation work?

With a traditional workers’ compensation plan, the premiums are based on your estimated annual payroll and your number of employees for the year.

With a pay-as-you-go workers’ compensation plan, you can obtain the same type of workers’ comp coverage available in a traditional plan, but with flexible premiums that can change according to how many employees you have in each payroll cycle.

What’s the difference between “pay-as-you-go” and a traditional workers’ compensation payment plan?

A “pay-as-you-go” workers’ compensation policy can give you the same coverage as a traditional plan, but using a different method of paying the premiums.

Traditional workers' compensation plan

With a traditional workers’ comp plan, an employer buys coverage with a lump-sum down payment, such as 25 percent of the employer’s estimated gross payroll wages, followed by monthly or quarterly premiums for the rest of the year.

At the end of a policy year, your insurer will conduct an audit to make sure you had the right amount of coverage for your state, and that you paid the right premiums.

Based on this audit, your insurer may give you a rebate for overpayment or a bill for underpayment of your workers’ comp premiums.

Pay-as-you-go workers' compensation plan

With a pay-as-you-go workers’ comp policy, your upfront payment is much lower, such as 10 percent of your estimated payroll. Your insurance premiums for the rest of the year would then be adjusted according to your real-time payroll figures for each pay period.

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What are the pros and cons of pay-as-you-go workers’ comp?

One of the main benefits to pay-as-you-go workers’ comp insurance is that the initial down payment is likely to be much lower than a traditional plan. This makes it easier for small business owners to afford the policy without draining their bank account.

Benefits of a pay-as-you-go workers’ comp policy

A pay-as-you-go plan will also reduce the amount of guesswork you have to make in estimating your insurance costs. Every time you run payroll, you’ll know exactly how it affects your insurance rates.

Additionally, you are less likely to face a surprise bill at the end of the year with a pay-as-you-go plan, because your premiums are adjusted on a regular basis according to your actual payroll figures. With a traditional plan, your premiums are based on estimates.

This can be especially helpful for businesses whose payroll size and number of employees rise and fall based on seasonal demand, as it can be hard to estimate your employee data for an entire year.

For example, catering companies and florists typically see a surge in demand during holidays and the summer wedding season.

General contractors may experience rapid changes to their payroll based on the construction season, economic fluctuations, or a surge in demand after a storm.

If you use a payroll service company, you might be able to have your payroll vendor work with your insurance company to set up automated payments on your workers’ compensation premiums every time it runs payroll.

The end of the year audit with your workers’ comp insurance provider is typically much easier with a pay-as-you-go plan, because the insurance company will have received your actual payroll figures throughout the year.

Disadvantages of a pay-as-you-go workers’ comp policy

A pay-as-you-go plan might not be available in your state if you’re required to purchase your workers’ comp coverage from a state operated plan. The states mandating these plans are: North Dakota, Ohio, Washington, and Wyoming.

Your payroll provider might also have a limited number of insurance carriers they work with on workers’ comp which reduces your coverage options.

You’ll still face an audit at the end of your coverage period, and you could still face a premium adjustment based on the job classifications of your employees. Keep in mind that your gross payroll data is only one aspect of your premium costs, as your insurance company also considers the type of work being done by each employee and their class codes.

How to get a pay-as-you-go workers’ comp plan

One way to obtain pay-as-you-go workers' comp insurance coverage is to contact your existing provider to see if they allow this option.

If you use a payroll service provider, you might see if they can assist you in obtaining coverage and see which carriers they work with.

You could also contact Insureon to see how we can help you with workers’ comp and other helpful types of small business insurance.

Compare workers' compensation quotes from trusted carriers with Insureon

Complete Insureon’s easy online application today to compare insurance quotes from top-rated U.S. carriers. You can also consult with an insurance agent on your business insurance needs. Once you find the right types of coverage for your small business, you can begin coverage in less than 24 hours.

Updated: September 14, 2022
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