Workers’ compensation insurance is a crucial expense for any business with employees. It protects your business and your workers in case of work-related injuries or illnesses. But traditional workers’ comp payment methods can sometimes lead to unexpected costs and cash flow challenges. That’s where Pay-As-You-Go workers’ compensation comes in.
What is Pay-As-You-Go Workers’ Compensation?
Traditional workers’ compensation policies often require you to pay an estimated premium upfront. Then, at the end of the policy year, an audit is conducted to reconcile the estimated payroll with your actual payroll. If your actual payroll was higher than estimated, you’ll owe an additional payment.
Pay-As-You-Go (PayGo) works differently. It integrates directly with your payroll system, allowing you to pay your workers’ compensation premium each time you run payroll.
How Does Pay-As-You-Go Work?
Instead of a large upfront payment, your premium is calculated based on your actual payroll for that pay period. This information is then automatically reported to your insurance carrier or a third-party administrator.
Why is Pay-As-You-Go Beneficial?
- Improved Cash Flow: You avoid large upfront payments and only pay for the coverage you need in each pay period.
- Reduced Audit Surprises: PayGo minimizes the risk of a large, unexpected premium adjustment after an audit because your payments are based on actual payroll.
- Simplified Administration: It can streamline your payroll and insurance processes by automating premium payments and reporting.
How Can Pay-As-You-Go Save You Money?
While PayGo itself is a payment method, the way you set up your payroll reporting can impact your costs. Here’s how:
- Avoid Payroll Provider Fees: Some payroll providers (like ADP) may charge fees for reporting your payroll to your insurance company. These fees can add up significantly over the year.
- Example: A fee of $15 per pay period, with weekly payroll, can cost you $780 annually!
- Optimize Reporting Methods:
- Direct Syncing: If your insurance carrier and payroll provider can directly “sync” (talk to each other), you can eliminate these reporting fees.
- Third-Party Reporting: Companies like SmartPay can act as intermediaries to report payroll, but they may also charge fees (though sometimes lower than payroll providers).
Important Considerations
- Subcontractors: Remember that PayGo typically only covers employees on your payroll. You are responsible for ensuring that any 1099 subcontractors you hire have their own workers’ compensation insurance.
- Carrier Availability: PayGo isn’t offered by all workers’ compensation insurance carriers.
- Reporting Options:
- Self-Reporting: You report payroll yourself to the insurance carrier.
- Payroll Reporting: Your payroll company directly shares payroll data with the insurer.
- Third-Party Reporting: An intermediary (like SmartPay) handles the reporting.
Questions to Ask Your Insurance Agent
- “Do you offer Pay-As-You-Go workers’ compensation?”
- “What are the available payroll reporting options?”
- “Are there any fees associated with payroll reporting, and how can I avoid them?”
Conclusion
Pay-As-You-Go workers’ compensation can be a valuable tool for managing your cash flow and avoiding surprise audit bills. By understanding your options and working with your insurance agent, you can optimize your workers’ comp costs and protect your business.