3 Workers’ Comp Payroll Deductions Most Often Missed by Employers.

3 Workers’ Comp Payroll Deductions Most Often Missed by Employers


If any of your workers are getting overtime, are those extra dollars included in your workers’ compensation premium calculations? If you answered ‘yes,’ you may be artificially inflating your payroll; i.e., paying higher premiums than is warranted.


Overtime, double time, and severance pay are typically allowed as deductions for workers’ compensation premium calculations. Yet companies large and small often overlook these three points. Knowing what deductions are allowed in your jurisdiction(s) and understanding how to apply them can save payers big dollars — immediately.



Accurate Payroll & Class Codes


Injury management is the area where most workers’ compensation cost-cutting strategies are focused, and with good reason. Reining in workers’ compensation costs through safety efforts, effective return-to-work programs, and best practices in medical management are proven to contain overall costs. But risk management is only part of the equation.


If you’re not reviewing your payroll (remuneration) and class codes for accuracy, you may be missing significant opportunities to quickly and easily reduce workers’ comp costs. Depending on the jurisdiction, there can also be an opportunity for deductions from uniform allowances, to officer excess and gratuities, to employer-provided perks. Ask your premium auditor or audit manager to reveal deductions you are allowed to take and still have an accurate assessment of your risk.



The Big 3


A majority of jurisdictions allow deductions for


  • Overtime pay
  • Double time pay
  • Severance pay


Workers’ compensation premiums are designed to assess risk exposures appropriately. But paying someone double time to work on a Sunday, for example, doesn’t double his risk of injury; nor days paying out a golden parachute to a worker who has left the company. Taking allowable deductions can drastically lower your payroll — and your workers’ compensation premium.*


*Note: Compared to a guaranteed cost structure, employers in a high-deductible program may not be as greatly impacted by payroll deductions due to the significant latitude carriers possess with adjustments and credits/debits in the premium formula.



How to Do it


Getting the most out of allowable deductions is dependent on accurately presenting your payroll. Your workers’ compensation premium is based on your gross payroll (remuneration) including, for example, salaries, commissions, bonuses, vacation, holiday and sick pay.


Overtime and other payments can be excluded. But it’s important to exclude only premium portion greater than the standard rate:


Here’s how to figure your payroll with overtime deductions:


Say your company pays overtime — time-and-a-half — for someone who works on a Saturday and double time for working on Sunday. A worker who makes $10 per hour would get $15 for working on a Saturday and $20 for working on a Sunday. Let’s say he worked 8 hours both days.


To determine accurate payroll, you would deduct the $5-per-hour extra he made on Saturday and the $10-per-hour extra he made on Sunday. To calculate the exclusion:


Saturday                                  8 Hours x $5 =   $40

Sunday                                    8 Hours x $10 = $80


Total amount excluded from payroll = $120 ($40 for Saturday and $80 for Sunday)


You only need to pay premium on the worker’s regular $10-an-hour rate for the extra hours he worked, not the additional dollars.


Employers need to maintain payroll records that show the regular rate of pay, the overtime earnings, and a summary by type of operation performed, in order to get credit for the overtime excess.


It’s also important to understand that increases in wages are not eligible for exclusion. If you increase a worker’s base wage, that increased amount would need to be included in the payroll.


For severance pay, the calculation is easy. You can exclude these dollars paid to someone who no longer worked at the company to the extent it does not include pay for time worked or accrued vacation.


While these deductions may not seem significant, they can add up quickly and result in major savings.





You want to make sure your employees are properly covered for any work-related injuries they incur. However, you don’t want to pay any more workers’ compensation premium than necessary.  Knowing and applying allowed deductions can go a long way to dramatically reducing your workers’ compensation premiums while still paying the appropriate amount.




Michael Stack - AmaxxAuthor Michael Stack, CEO Amaxx LLC. He is an expert in workers’ compensation cost containment systems and helps employers reduce their workers’ comp costs by 20% to 50%.  He works as a consultant to large and mid-market clients, is a co-author of Your Ultimate Guide To Mastering Workers Comp Costs, a comprehensive step-by-step manual of cost containment strategies based on hands-on field experience, and is founder & lead trainer of Amaxx Workers’ Comp Training Center .


Contact: mstack@reduceyourworkerscomp.com.

Workers’ Comp Roundup Blog: https://blog.reduceyourworkerscomp.com/


©2018 Amaxx LLC. All rights reserved under International Copyright Law.


Do not use this information without independent verification. All state laws vary. You should consult with your insurance broker, attorney, or qualified professional.

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