Sep 9, 2025
How to Use Payroll Codes to Cut Comp Costs
Upeka Bee
For most business owners, the annual workers' compensation premium feels like a tax you can’t control. It’s an unpredictable expense that just keeps rising. You see the bill, you pay it, and you hope it doesn't go up too much next year. But what if a significant portion of that cost was based on information you could control?
Many businesses overpay for workers' compensation simply because their payroll systems are not structured to reflect their actual risk accurately. They fall into common traps of misclassification that insurers rarely correct on their own.
This guide will demystify the connection between your payroll and your premiums. We’ll explore the payroll codes that define your rates and provide a legal, data-backed playbook for ensuring you only pay what you owe.
How Your Payroll Becomes Your Premium
To control your costs, you must first understand how they are calculated. The formula for your workers' comp premium is:
(Payroll / $100) x Classification Code Rate x Experience Modification Rate (EMR)
While your EMR (your company's safety score) is a long-term project, the most immediate and impactful factor you can control is the classification code rate. This rate is determined by a system of payroll codes, known as workers' compensation classification codes.
These four-digit codes, managed by the National Council on Compensation Insurance (NCCI) or state rating bureaus, are assigned to different job functions based on their level of risk. A high-risk job, such as a roofer (Code 5551), will have a rate that is higher than a low-risk job, such as a clerical office employee (Code 8810).
How to Use Payroll Codes to Your Advantage
Slashing your premium is about accuracy. Here are some legal strategies for utilizing payroll codes to reduce your rates.
1. Splitting payroll with separation of duties
Let's say you run a small construction company. Your governing classification code is construction, which has a very high rate. However, you have an employee who spends 60% of their time on a construction site and 40% of their time in the office doing purely clerical work.
Many founders incorrectly assume that the entire payroll of this employee must be assigned to the high-risk construction code. However, NCCI rules allow for the ‘separation of payroll’ if the employer keeps verifiable records of the exact hours the employee spends on each task.
If you do this, you can assign 60% of their wages to the expensive construction code and 40% to the cheap clerical code (Code 8810), which can save you thousands of dollars on a single employee. The key is that the records must be verifiable, accurate, and contemporaneous.
2. Leveraging the standard exception codes
The NCCI has designated certain job functions as standard exceptions. These are roles so typical to nearly every business that they are almost always assigned their own, low-risk classification code, even if the primary business operation is high-risk. The key standard exceptions are:
Clerical office employees (Code 8810): This category applies to employees who are separated from all other operational hazards by walls, screens, or counters and whose work is purely clerical in nature.
Outside salespersons (Code 8742): This applies to employees who work primarily away from the employer's premises to solicit new business.
Drivers and their helpers (Code 7380): This applies to employees whose work is primarily on public roads.
Failing to identify and separate payroll for standard exception employees correctly is one of the most common and costly mistakes seen during premium audits. If you have a salesperson visiting clients, their payroll should not be lumped in with your manufacturing code.
3. Master the employee vs. independent contractor rules
Ensure you are only paying for the workers you are legally required to cover. Misclassifying an employee as an independent contractor to avoid paying premiums is a common form of fraud with severe consequences.
The key is to understand the rules to confidently identify actual independent contractors. The legal status of a worker is determined by factors such as behavioral and financial control (the IRS test) or even stricter state-specific rules (like the ABC test), not solely by a 1099 form.
By mastering these rules, you can correctly classify your workforce and legally exclude independent contractors from your payroll.
4. Audit subcontractor certificates of insurance (COIs)
If you hire a subcontractor who does not have their own workers' compensation insurance, their injured employee can file a claim against your policy. This can impact your claims history and drive up your premiums for years.
The legal strategy to prevent this is to create an ironclad process for insurance verification. Before any subcontractor begins work, you must obtain a valid certificate of insurance (COI) from them that proves they have their own active workers' comp policy. For best practice, you should also be named as a certificate holder, so you are notified if their policy is canceled.
One-Stop Payroll Solution for Lowering Costs
Accurate employee classifications are a core part of the HR function. These require a deep understanding of job duties and meticulous record-keeping. DianaHR brings human expertise to slash your payroll costs and boost HR compliance.
Job description and classification audits: Our experts create the HR infrastructure to lower your workers' comp costs. They work with you to draft detailed, accurate job descriptions that provide the necessary evidence to support the correct, lowest-cost classification codes.
Time tracking for payroll separation: They help you implement and manage the time tracking systems and policies required to separate an employee's payroll management between different class codes legally.
Audit-ready records: Our HR experts ensure your payroll records are clean, accurate, and ready for an insurer's premium audit.
Master payroll management with DianaHR. Get in touch today.
FAQs
1. What is a workers' comp classification code?
A workers' compensation classification code is a four-digit number assigned to a specific type of job function based on its level of risk. These codes, managed by the NCCI or state rating bureaus, each have a unique insurance rate per $100 of payroll. High-risk jobs, such as construction, have very high rates, while low-risk jobs, like clerical office work, have lower rates.
2. Can I legally split an employee's payroll between two different class codes?
Yes, this is legally permissible under NCCI rules, provided you follow the separation of payroll or separation of duties guidelines. To do this, an employee must perform two distinct job functions with different levels of risk (e.g., manufacturing and clerical work). Most importantly, you must maintain meticulous, verifiable, and accurate records (such as detailed timesheets) that track the exact hours the employee spends performing each distinct task.
3. What is a ‘Standard Exception’ in workers' compensation?
Standard Exceptions are a few common, low-risk job roles that are almost always assigned their own classification code, even if the company's primary business is high-risk. The key standard exceptions are Clerical Office Employees (Code 8810), Outside Salespersons (Code 8742), and Drivers (Code 7380). For example, the payroll for a bookkeeper working in an office at a manufacturing plant should be assigned to the low-cost clerical code, not the expensive manufacturing code.
For most business owners, the annual workers' compensation premium feels like a tax you can’t control. It’s an unpredictable expense that just keeps rising. You see the bill, you pay it, and you hope it doesn't go up too much next year. But what if a significant portion of that cost was based on information you could control?
Many businesses overpay for workers' compensation simply because their payroll systems are not structured to reflect their actual risk accurately. They fall into common traps of misclassification that insurers rarely correct on their own.
This guide will demystify the connection between your payroll and your premiums. We’ll explore the payroll codes that define your rates and provide a legal, data-backed playbook for ensuring you only pay what you owe.
How Your Payroll Becomes Your Premium
To control your costs, you must first understand how they are calculated. The formula for your workers' comp premium is:
(Payroll / $100) x Classification Code Rate x Experience Modification Rate (EMR)
While your EMR (your company's safety score) is a long-term project, the most immediate and impactful factor you can control is the classification code rate. This rate is determined by a system of payroll codes, known as workers' compensation classification codes.
These four-digit codes, managed by the National Council on Compensation Insurance (NCCI) or state rating bureaus, are assigned to different job functions based on their level of risk. A high-risk job, such as a roofer (Code 5551), will have a rate that is higher than a low-risk job, such as a clerical office employee (Code 8810).
How to Use Payroll Codes to Your Advantage
Slashing your premium is about accuracy. Here are some legal strategies for utilizing payroll codes to reduce your rates.
1. Splitting payroll with separation of duties
Let's say you run a small construction company. Your governing classification code is construction, which has a very high rate. However, you have an employee who spends 60% of their time on a construction site and 40% of their time in the office doing purely clerical work.
Many founders incorrectly assume that the entire payroll of this employee must be assigned to the high-risk construction code. However, NCCI rules allow for the ‘separation of payroll’ if the employer keeps verifiable records of the exact hours the employee spends on each task.
If you do this, you can assign 60% of their wages to the expensive construction code and 40% to the cheap clerical code (Code 8810), which can save you thousands of dollars on a single employee. The key is that the records must be verifiable, accurate, and contemporaneous.
2. Leveraging the standard exception codes
The NCCI has designated certain job functions as standard exceptions. These are roles so typical to nearly every business that they are almost always assigned their own, low-risk classification code, even if the primary business operation is high-risk. The key standard exceptions are:
Clerical office employees (Code 8810): This category applies to employees who are separated from all other operational hazards by walls, screens, or counters and whose work is purely clerical in nature.
Outside salespersons (Code 8742): This applies to employees who work primarily away from the employer's premises to solicit new business.
Drivers and their helpers (Code 7380): This applies to employees whose work is primarily on public roads.
Failing to identify and separate payroll for standard exception employees correctly is one of the most common and costly mistakes seen during premium audits. If you have a salesperson visiting clients, their payroll should not be lumped in with your manufacturing code.
3. Master the employee vs. independent contractor rules
Ensure you are only paying for the workers you are legally required to cover. Misclassifying an employee as an independent contractor to avoid paying premiums is a common form of fraud with severe consequences.
The key is to understand the rules to confidently identify actual independent contractors. The legal status of a worker is determined by factors such as behavioral and financial control (the IRS test) or even stricter state-specific rules (like the ABC test), not solely by a 1099 form.
By mastering these rules, you can correctly classify your workforce and legally exclude independent contractors from your payroll.
4. Audit subcontractor certificates of insurance (COIs)
If you hire a subcontractor who does not have their own workers' compensation insurance, their injured employee can file a claim against your policy. This can impact your claims history and drive up your premiums for years.
The legal strategy to prevent this is to create an ironclad process for insurance verification. Before any subcontractor begins work, you must obtain a valid certificate of insurance (COI) from them that proves they have their own active workers' comp policy. For best practice, you should also be named as a certificate holder, so you are notified if their policy is canceled.
One-Stop Payroll Solution for Lowering Costs
Accurate employee classifications are a core part of the HR function. These require a deep understanding of job duties and meticulous record-keeping. DianaHR brings human expertise to slash your payroll costs and boost HR compliance.
Job description and classification audits: Our experts create the HR infrastructure to lower your workers' comp costs. They work with you to draft detailed, accurate job descriptions that provide the necessary evidence to support the correct, lowest-cost classification codes.
Time tracking for payroll separation: They help you implement and manage the time tracking systems and policies required to separate an employee's payroll management between different class codes legally.
Audit-ready records: Our HR experts ensure your payroll records are clean, accurate, and ready for an insurer's premium audit.
Master payroll management with DianaHR. Get in touch today.
FAQs
1. What is a workers' comp classification code?
A workers' compensation classification code is a four-digit number assigned to a specific type of job function based on its level of risk. These codes, managed by the NCCI or state rating bureaus, each have a unique insurance rate per $100 of payroll. High-risk jobs, such as construction, have very high rates, while low-risk jobs, like clerical office work, have lower rates.
2. Can I legally split an employee's payroll between two different class codes?
Yes, this is legally permissible under NCCI rules, provided you follow the separation of payroll or separation of duties guidelines. To do this, an employee must perform two distinct job functions with different levels of risk (e.g., manufacturing and clerical work). Most importantly, you must maintain meticulous, verifiable, and accurate records (such as detailed timesheets) that track the exact hours the employee spends performing each distinct task.
3. What is a ‘Standard Exception’ in workers' compensation?
Standard Exceptions are a few common, low-risk job roles that are almost always assigned their own classification code, even if the company's primary business is high-risk. The key standard exceptions are Clerical Office Employees (Code 8810), Outside Salespersons (Code 8742), and Drivers (Code 7380). For example, the payroll for a bookkeeper working in an office at a manufacturing plant should be assigned to the low-cost clerical code, not the expensive manufacturing code.
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