I make light of this, but I get it. How do you know what your payroll is going to be for the next 12 months? It could be $100,000, but if you get the Initech contract, it could be $200,000. If your new line of s’more takes off like you think it will, it could be $300,000. If BarDonHill O’ClinTrump gets elected, your payroll may be $0 and you’ll most likely move to Canada.
Some industries don’t have to worry about this. Take the insurance industry. Our payroll stays about the same, growth comes very steadily, and if we do amass more payroll than expected, our rates are low enough to not have to stay up at night thinking about the additional costs.
But other higher risk industries whose workers comp incurs a significant cost are not like us insurance geeks hanging out in our little cubicles.
Construction is one that may vary greatly in payroll. Payroll fluctuates not just year to year, but from month to month. As one project ends, a new project starts. In between projects, there may be little to no payroll.
Farming is another example. They have fluctuating payroll because their work depends on the season. One month they’re picking and crushing grapes, and the next month, there’s nothing going on except sampling the various pinot noir varieties. I know, I know, there’s never really “nothing going on” at a farm, but the point is that payroll can fluctuate.
Sometimes it’s not the nature of the industry itself, but the stage of life the business is in. If it’s a startup, who knows what the payroll will actually be? Will the market respond like they think it will? If so, what are the payroll ramifications?
The reason for the anxiety that befalls when one has to estimate next year’s payroll is not just because the future is unknown; it’s because the business owner will have to pay a potentially expensive workers comp policy based on that estimate! If he overestimates payroll, he’ll be starving his business of much needed cash and have to wait months after his policy expires and the final audit is completed before his insurance company refunds his overpayment. If he underestimates payroll, he’ll pay a nice low monthly premium throughout the year, but will have to write a big check once the final audit is completed.
My friends, there is a solution to this madness. It’s called monthly reporting. Or Pay As You Go. Or Pay As You Owe. Or some other snazzy name. Regardless of what the insurance company calls it, the concept is the same. You pay each month based on your actual paid payroll.
How does it work? There are basically two ways:
The first one is through monthly self reporting. This is where the insurance company sends you a bill each month with a table on it. You write down your actual paid payroll in each of the appropriate classes and multiply it by the rates the insurance company has provided, write the check, and send it in. The online version of this is usually available as well.
The second way to do it is by integrating it into your payroll service. Your payroll service essentially does the payroll reporting for you. You report your payroll to the payroll service, and they fill out the form and send the check to your workers comp carrier. This used to be a somewhat exclusive service that was only available through the two big national payroll services (Paychex and ADP), and only if you got your insurance through their wholly owned insurance brokerages. But now, availability is much more widespread. How is this all made possible? Through the use of companies like RPM, that coordinate between your payroll service and the insurance company.
So what’s stopping you? Well, for one, your insurance company has to make it available for it to happen. And regarding the second variation; both your insurance company and your payroll service have to be on board. If you’re with State Fund – sorry, you’re stuck with their fixed billing plan based on your payroll estimates. But otherwise, this service is becoming widely available.
If you can, take advantage of this, business owners, and take a load off! Use your prognostication skills for other things like lotteries or Super Bowl scores!
I’m the commercial producer and owner at Gillespie Insurance Services.
Gillespie Insurance Services helps people and businesses in California, Arizona and Nevada.