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How Insurance Companies Measure Payroll (and Bill You For It)


Key Takeaways

Carl Niedbala - Founder Shield
Carl Niedbala

COO & Co-Founder

Payroll is payroll, right?

If you’re a growing business operating in the 21st century, you’ve most likely read about or experienced the importance of separating salaried employees from 1099 workers (Independent Contractors).  If you’re less well-read on the subject, bottom line is this: at the end of the year, your workers compensation insurance carrier will “audit” your payroll and charge you more if you’ve hired people throughout the year.   Note the use of the word “people” rather than employees, which is where the problems begin.

If you’ve experienced an insurance audit, you’ve probably experienced the pain points.  Maybe your workers compensation insurer charged you thousands of dollars at audit, maybe your new workers compensation policy was rated on a remuneration value significantly higher than what you’re showing on the books.  Either way, the takeaway here is to understand the separation of W2 employees and 1099 independent contractors, because this distinction plays a big role in how insurance companies measure payroll (and the size of your insurance bill) at the end of the day.

By implementing these practices you can start diving even deeper into what is and is not going to be picked up when it comes time for the end of the year payroll audit. Many employers budget only based on the total value of the base salary paid to their employees – this could leave significant gaps in your calculations!  If you’re a company that is very commission driven, or bonus heavy, it is not enough to only consider the base salaries.  On the contrary, if you recently had to let multiple employees go, an employer should know not to include severance pay in their payroll calculations.


How Payroll is Calculated by Insurance Companies

Here’s a deeper dive into Payroll Calculations through the lenses of an Insurance Company Auditor:

What is Included in Payroll:

  • Salary
  • Commissions
  • Bonuses
  • Extra pay for overtime work
  • Paid holidays/vacation/sickness
  • Payment to employees through a Profit Sharing Plan
  • Annuity Plans
  • Cost of rent/home purchase for an employee for whom the employer provides living arrangements.

What is Excluded from Payroll:

  • Tips
  • Severance pay
  • Payment for active military duty
  • Supper money for late work
  • Work Uniform Allowances


How It Works In Real Life

Here are a few examples showing how these payroll determinations could effect your bottom line:

On-Demand Food Delivery

Restaurants are going mobile more than ever.  The stationary waiter tending to your table throughout the entire meal is now a thing of the past (OK, not entirely phased out yet, but certainly not the only way to eat without cooking yourself!).  Many of these on-demand food and drink services utilize individuals to complete deliveries.  Though the tip afforded to these individuals is small, due to the mass delivery operations, the number can certainly add up.  Rest assured, this value will NOT be picked up as payroll.

Down Round of Funding

In the venture backed community, fundraising can often be cutthroat. Successes one year often lead to continued funding for the next round, but even the smallest inkling of potential trouble can deter investors.  In the event of a down round, where there needs to be significant layoffs, the amount of severance pay a company has could add up.  Don’t worry about paying extra on your WC Audit…this will NOT be picked up as payroll.

FinTech Companies Stealing Ideas from Old School Banks

FinTech has officially disrupted the banking industry and has some of the original giants scrambling to adapt to changing times.  However, it’s not uncommon for some FinTech companies to model a portion of their business after big banks, offering 401k and Profit Sharing Plans to their employees.  The payments made to these accounts ARE included as “payroll,” so be sure to brace for this on audit.

Online Real Estate Agency

Selling homes and apartments doesn’t have to mean a full day walking around the hot city looking for the best combination of price, space, and location.  Online sales channels are convenient and effective these days.  Still, there is usually a broker affiliated with each sale/rental, and that broker sure isn’t willing to skip out on their commission!  The commission recognized by sales personnel IS included as actual payroll.
While you may not have the need for this information in the immediately, now you know where to look when the time comes!  Feel free to reach out to us should you have any questions, or if you’d like for us to obtain a quote for your business.

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