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Corin Cook

By: Corin Cook on May 5th, 2022

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Workers’ Compensation Pay as You Go (Payroll Deduct): Advantages/Disadvantages

Business Insurance | Workers Compensation

You’ve finally made it through the workers’ comp quoting process. Your agent has asked you all sorts of complex questions about your business and every single one of your employees and now you think you’re finally in the clear, ready to move forward with a policy. Then your insurance agent asks you one additional question: “Do you want to sign up for payroll deduct?”

Without any background knowledge, this can be a hard question to answer.

Since you’re not a workers’ comp expert, you may be wondering: What is payroll deduct? Should I participate in it? What are the pros and cons? 

Fortunately, your friendly agents here at Berry Insurance are workers’ comp experts, and we can help you with that decision.

In this article, we’ll explain payroll deduct, including the advantages and disadvantages so you can decide if it’s right for you.

What is workers' compensation pay as you go (payroll deduct)?

Payroll deduct or pay as you go is an option workers’ comp carriers offer that allows you to pay for a portion of your workers’ compensation insurance each pay period.

Each time you complete payroll, your payroll data is sent automatically to your workers’ comp company who calculates the cost based on payroll, then deducts your worker’s comp every pay period.

Without payroll deduct, and depending on your carrier, premium size, etc. you could pay monthly, quarterly or annually.

Advantages of payroll deduct:

More accurate payments:

If you use payroll deduct, your workers’ compensation payments will be more accurate. 

Without payroll deduct, your premium is calculated at the beginning of the year using estimated payroll, which will not take into account unexpected staffing changes or raises. This means you will be paying more or less on workers’ comp than you should be until it is corrected during your audit and you either receive or make a payment to make up the difference. 

With payroll deduct, you are paying only exactly what you owe for workers’ comp each pay period.

No audit:

And paying exactly what you owe in workers’ comp each pay period translates to another advantage: no audit.

That’s right, if you elect to use payroll deduct, you will not have to complete that annoying and stressful audit at the end of your workers’ comp policy period. A workers’ comp audit is intended to correct your workers’ comp payments. If you under- or over-paid based on your payroll estimates at the beginning of the year, the audit will uncover that and you will either pay or be reimbursed to correct the amount.

But if you’re paying the accurate amounts throughout the year, there is nothing to correct. That means you won’t need an audit - lucky you!

Disadvantages of payroll deduct:

Your payroll system may disqualify you:

In order to use payroll deduct, your insurance carrier needs to coordinate with your payroll vendor. 

However, insurance carriers only work with certain payroll vendors. So if you’re not using a payroll vendor your workers’ compensation company contracts with, you won’t be able to participate in payroll deduct.

So one of the disadvantages of payroll deduct is that it isn’t always widespread and available for everyone.

You have to supply your payroll information:

If you’re signing up for payroll deduct, you will need to do a little extra work at the beginning to set it up.

You will have to provide your insurance carrier with all your payroll information. If you don’t do that before your policy goes into effect, the carrier will not be able to set up the payroll deduct.

Manage and reduce your workers’ comp payments:

We know we’re in the business of providing workers’ compensation, but that doesn’t mean we are blind to just how frustrating it can be. 

But signing up for payroll deduct can simplify things by creating more accurate payments and eliminating the need for an audit.

Because if you’re anything like us, you probably don’t want to add an audit to your already-full list of business obligations.

And if you’re like us, you would probably also love to reduce the amount of those payments. To learn how you can make that possible, check out this article: How to Reduce Workers’ Comp Costs by Managing Employee Injuries.

 

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