California generally requires employers with employees to carry workers' compensation insurance. If you run a shop, a restaurant, a landscaping crew, or a contracting business in San Diego County, you already know that. What you may not know is that there is more than one way to pay for workers' comp.
Most policies are billed the traditional way. A newer option, often called pay-as-you-go, works differently. Here is how each one runs, and how to tell which might fit your business.
How traditional workers' comp billing works
With a traditional policy, the carrier starts with an estimate. You tell them how much payroll you expect over the next twelve months, split by job type. The premium is figured from that number.
Many policies then ask for an upfront deposit. The amount and the payment terms vary by carrier and by policy, so ask about yours.
Then comes the part that catches people off guard. After the policy ends, the carrier audits your actual payroll. If you paid out more than you estimated, you owe the difference. If you paid out less, you may get a refund.
Picture a landscaping company that estimates a quiet year, then lands two big commercial jobs and hires extra crew in the spring. The estimate was low. The audit shows it. The bill arrives months after the money went out the door.
The reverse happens too. A restaurant estimates high, has a slow year, and waits on a refund. Either way, you were paying on a guess.
How pay-as-you-go works
Pay-as-you-go ties the premium to what you actually pay your people. Each pay period, the premium is calculated from that period's real payroll. In most cases this runs through a payroll service that connects to your policy. Payroll runs, the numbers pass along, and the premium follows.
Big payroll week, bigger premium payment. Slow week, smaller one. There is usually less of a large deposit sitting up front, though that depends on the carrier.
Because the premium tracks real payroll all year, it may reduce audit surprises at the end. It can also help cash flow, since you are paying in step with the money coming in and going out. Neither is guaranteed. It depends on the carrier, the setup, and how clean your payroll records are.
Who it tends to fit
Pay-as-you-go often makes sense for businesses where payroll moves around.
- Seasonal businesses. Think of a pool service that staffs up for summer, or a retailer that hires for the holidays. Payroll swings, and the premium can swing with it.
- Growing businesses. If you are adding people faster than you can forecast, an estimate goes stale quickly.
- Uneven payroll. Contractors who work project to project often have busy stretches and dry ones.
- Tight cash flow. Keeping a big deposit tied up can be hard on a small operation. Paying as you go may ease that.
A business with steady, predictable payroll and the cash to handle a deposit may do fine with traditional billing. It is not a question of one being right. It is about which one matches how your money moves.
Trade-offs and what to ask
Is my payroll provider compatible? The system usually depends on a payroll service that connects to the policy. If you run payroll by hand or use a provider the carrier does not work with, this option may not be open to you. Or you may need to switch providers.
Will there still be an audit? Yes, audits can still happen. Pay-as-you-go may make the numbers line up better, but the carrier can still check your records.
Are my classification codes right? Every job type carries a class code, and the codes affect your rate. A roofer coded as an office worker is a problem waiting to show up. Get these checked.
Does the carrier offer it, and do I qualify? Not every carrier offers pay-as-you-go, and not every business qualifies. Availability can depend on your industry, your size, and your claims history.
What happens if payroll reporting is late or wrong? Ask how the carrier handles missed or incorrect reports. You want to know that before it happens.
Is pay-as-you-go right for your business?
CBIS is a family-owned independent agency in Santee, serving San Diego County since 1982. Because CBIS is independent, an agent can look at more than one option instead of pushing a single product.
If you want to know whether pay-as-you-go workers' comp could work for your business, talk with a licensed agent at CBIS. Call (858) 283-7575 or Get a Coverage Review. Have your recent payroll and a rough list of job roles handy, and the conversation will go faster.
CBIS | Agency Lic. #0F09685