How Workers’ Comp Premiums Are Calculated (Class Codes Explained)

Two businesses with the exact same payroll can pay wildly different workers’ comp premiums — sometimes a difference of 10x or more. That’s not random pricing; it’s the result of a fairly standardized formula that every insurer uses as its starting point, built around three inputs: what your employees actually do, how much you pay them, and your company’s own claims history. Understanding this formula won’t just satisfy your curiosity — it’s the foundation for knowing whether a quote you’re getting is reasonable, and for spotting the levers you actually control when it comes to lowering your cost.

Quick answer: Workers’ comp premiums are calculated using a base formula: (payroll ÷ 100) × your industry’s class code rate, then adjusted by your Experience Modification Rate (EMR), which reflects your company’s own claims history compared to similar businesses. On top of that, insurers may apply schedule credits or debits, premium discounts, and a minimum premium. Class codes are assigned based on the type of work your employees do, not your company’s name or industry label as a whole — which is why two companies in the «same industry» can have different codes and very different rates.

The Three Building Blocks

Before the formula makes sense, it helps to understand the three things it depends on:

Class code — a numeric code that describes the type of work a specific group of your employees performs.
Payroll — the total wages paid to employees under that class code, over a policy period (usually a year).
Rate — a dollar amount per $100 of payroll, specific to that class code and your state, that reflects the statistical risk of that type of work.

Step 1: Class Codes — What They Actually Describe

A class code is not really about your business as a whole — it’s about the job duties of a specific group of employees. Class codes are maintained primarily by the National Council on Compensation Insurance (NCCI), which sets standardized codes and advisory rates used in most states, though a number of states — including California, New York, Pennsylvania, and Texas, among others — have their own independent rating bureaus with their own code structures and rate filings instead of using NCCI’s directly.

This is why a single business can (and often should) have more than one class code. A landscaping company, for example, might have one class code covering groundskeepers and equipment operators — a physically demanding, higher-risk job — and a separate, much lower-rated class code covering the office manager who handles scheduling and invoicing. Each class code carries its own rate, and misclassifying employees under the wrong code (intentionally or by mistake) is one of the most common issues that surfaces during a workers’ comp audit.

Step 2: Payroll — What Actually Counts

The payroll figure used in the formula isn’t necessarily identical to what shows up on your payroll register. A few common adjustments apply, though exact rules vary by state and rating bureau:

Overtime pay is frequently included at the straight-time rate only — the extra overtime premium itself is often excluded from the payroll figure used to calculate workers’ comp premium.
Bonuses and certain other compensation may or may not be included, depending on the state and the type of payment.
Executive officers and business owners are often subject to a payroll cap and floor specific to their role — meaning even if an owner’s actual salary is very high (or very low), the state may require using a standardized minimum or maximum payroll figure for premium calculation purposes.
Overtime, tips, and certain fringe benefits may be excluded or partially excluded depending on state rules.

Because these adjustments genuinely vary, the payroll figure used for your workers’ comp quote may differ meaningfully from your gross payroll total — your insurer or agent should be able to show you exactly how they arrived at the number used.

Step 3: The Rate — Priced Per $100 of Payroll

Each class code carries a rate, expressed as a dollar amount per $100 of payroll, and set (or approved) at the state level. A low-risk office class code might carry a rate of well under a dollar per $100 of payroll, while a high-risk class code — roofing or logging, for example — can carry a rate many times higher, reflecting the dramatically different injury statistics behind each type of work. These base rates are periodically revised by the relevant rating bureau and are specific to each state, which is a major reason the cost of workers’ comp insurance varies so much by industry and by location.

The Base Formula

Putting the first three building blocks together gives you the manual premium — the starting point before any adjustments:

Manual Premium = (Payroll ÷ 100) × Class Code Rate

For a business with multiple class codes, this calculation is done separately for each code, then added together.

Step 4: The Experience Modification Rate (EMR)

The manual premium is just the starting point. Next, it’s adjusted by your Experience Modification Rate, often just called your «mod» or «EMR» — a factor that compares your company’s actual claims history to the expected claims history of similar businesses in your class code and state.

An EMR of 1.0 is exactly average for your industry and size.
An EMR below 1.0 (say, 0.85) means your claims history is better than average, and it reduces your premium.
An EMR above 1.0 (say, 1.25) means your claims history is worse than average, and it increases your premium.

New businesses typically start with an EMR of 1.0, since there’s no claims history yet to calculate one. The EMR is generally based on a rolling window of your claims history (commonly the three years prior to the most recent completed policy year, deliberately excluding your most recent year to allow time for claims to develop), which is why a single bad year doesn’t instantly wreck your rating, but a pattern of claims over several years will. This topic has enough nuance to deserve its own deep dive — see what is an Experience Modification Rate and why it matters for how it’s actually calculated and how to influence it over time.

Applying the EMR gives you the standard premium:

Standard Premium = Manual Premium × EMR

Step 5: Additional Adjustments Insurers May Apply

Beyond the core formula, several other adjustments commonly come into play:

Premium discount. Many states apply a built-in discount for larger premiums, on the theory that fixed administrative costs make up a smaller percentage of bigger policies.
Schedule rating. Insurers may apply a credit or debit (often within a set percentage range) based on a more subjective assessment of your specific safety practices, management, and workplace conditions — this is one of the more negotiable parts of a quote.
Expense constant. A flat per-policy fee added to cover the insurer’s fixed administrative costs, separate from the risk-based premium itself.
Minimum premium. Insurers typically set a minimum premium regardless of how small your calculated premium comes out to, which matters for very small businesses with low payroll.
Deductible options. Some insurers offer a lower premium in exchange for the employer accepting a deductible on claims — shifting some of the risk (and cash-flow burden) back to the business.

A Worked Example

To make this concrete, here’s a simplified example using round numbers (actual rates vary by state and change over time, so treat this as illustrative, not a quote):

A small landscaping company has $200,000 in annual payroll under a groundskeeping class code with a rate of $8.00 per $100 of payroll.
Manual premium: ($200,000 ÷ 100) × $8.00 = $16,000.
The company has a slightly better-than-average claims history, with an EMR of 0.90.
Standard premium: $16,000 × 0.90 = $14,400.
After a small schedule credit and the insurer’s expense constant, the final quoted premium might land close to $14,000-$14,800.

Compare that to an office-based consulting business with the same $200,000 payroll under a low-risk clerical class code rated at $0.35 per $100: manual premium of just $700, before any EMR adjustment. This is the clearest illustration of why class code — not just payroll size — drives most of the difference in what businesses pay.

Frequently Asked Questions

Can I choose my own class code? Not really — class codes are assigned based on the actual duties your employees perform, not by preference, and insurers verify this during underwriting and again during your annual audit. Deliberately misclassifying employees to get a lower rate is a common source of premium disputes and back-billing.

Why did my premium go up even though my payroll didn’t change much? The most common causes are a rate change from your state’s rating bureau (rates are revised periodically), a change in your EMR following recent claims, or a reclassification of some employees into a different class code.

Does a single workers’ comp claim guarantee my premium will go up? Not automatically, and not by a huge amount for one moderate claim — your EMR is based on a multi-year pattern, not a single incident, and there’s a mathematical dampening built into most EMR formulas specifically so that one claim doesn’t cause a wildly disproportionate swing. A pattern of repeated claims has a much larger cumulative effect.

Is there anything I can do to lower my premium besides just reducing payroll? Yes — improving your EMR over time through better safety practices and claims management, correctly classifying employees, and shopping your policy across carriers (rates for the same class code can vary between insurers) are the main levers. We cover this in detail in how to lower your workers’ comp insurance premium legally.

Do all states use the same class codes and rates? No. Most states use NCCI’s standardized codes and advisory rates, but several states — including California, New York, Pennsylvania, and Texas — maintain their own independent rating bureaus with codes and rates specific to that state.

This article is for general informational purposes only and does not constitute legal, insurance, or financial advice. Workers’ compensation rating rules, class codes, and formulas vary by state and change periodically. For an accurate quote or rating review, consult a licensed insurance agent or your state’s rating bureau.