Worker’s Compensation Accruals
For some businesses, worker’s compensation premiums are not a big item on their agenda. They have minimal risk factors and little changes in their payroll numbers during a year. But for others, the work comp insurance audit at the end of the insurance cycle can mean a big catchup premium to pay. If you aren’t calculating and accruing this anticipated expense throughout the year, the amount can often take you by surprise. Financial surprises that dip into your cash flow are never easy to deal with. Thankfully, there are ways to keep that final premium number from being a surprise. It’s through accruals.
Each year when your work comp policy is renewed, you are provided with the premium rates for each of the different categories that your workers fall under. These rates are applied to the estimated payroll for each of the categories to determine your estimated insurance premium for the year. At the end of the year, during your work comp audit, the insurance company will apply these rates to your actual payroll totals for each category to determine your true annual premium. If you’ve added workers, given significant raises or performed work under a new, higher rated work category, your premium will likely be much higher than the original estimate.
The way to prepare for this added expense is to set up an accrual system which calculates the amount of work premium due on each payroll processed. Many payroll software systems include this as one of their optional functions. By applying the work comp rates (less any discounts) to the payroll, by labor categories, you can keep a running total of your estimated work comp premiums. With the ability to compare your accrued work comp premiums against the estimated premiums, any overages can be planned for ahead of time.
The best time to implement a work comp accrual is on your work comp insurance renewal date. This way, no payroll’s are missed in your accrual and your reporting will provide the most accurate numbers possible. If that renewal date is coming up shortly, the time to start planning for implementation of this strategy is now!