How to Keep Insurance and Workers' Comp From Eating Your Profit

Do I need workers' comp if I'm a one-person shop?

In most states you must carry workers' comp as soon as you hire your first W-2 worker (Housecall Pro), but the rules for a one-person shop vary by state. Ask your state's contractor registration office or your insurance agent before you assume either way.

Four things change the answer:

• Whether you have any employees on payroll, even part time.
• Whether your state lets a sole owner opt in or out of coverage for themselves.
• How your state treats 1099 helpers, which is where many owners get burned.
• Whether a client, a general contractor or a lender wants proof of coverage no matter what the law says.

Get the answer in writing from the office or agent you called, and keep it in your job files. Do not guess based on what the guy down the street does.

How much does workers' comp cost in my trade?

Workers' comp pricing depends on your total payroll, your trade's risk level and your claims history (Housecall Pro), so the honest answer is a rate per hundred dollars of payroll that your carrier sets for each class.

The math is simple: divide your annual payroll by 100, then multiply by the rate. Say you run an electrical shop: the average comp rate is $2.63 per $100 of payroll, roughly $87 a month per employee (Jobber). For example, average general liability for electrical contractors is about $684 per year (Jobber). Your own numbers will differ by state, carrier and trade, so treat those as ballparks, not quotes.

Example: say the same $40,000 of payroll sits at three different class rates (illustrative only, these rates are made up to show the math and are not sourced data).

Same payroll, and the top row costs nine times the bottom row. That is why the class code is the next thing to check.

How do class codes cause audit bills, and is pay-as-you-go worth it?

A class code is the risk category your carrier assigns to each worker's pay, and a wrong code means a wrong premium that usually shows up as a bill at audit. Pay-as-you-go can help because premium follows actual payroll, but ask your agent whether a carrier offers it in your state.

Example: suppose an estimator who works only in the office is coded as field labor at $9 per $100 instead of $1 per $100. Say that person is paid $50,000, then the premium is $4,500 instead of $500, and you may not find out until the audit. The numbers are illustrative to show the math, not a sourced statistic.

Here is how to keep codes honest:

• Ask your agent for the list of codes on your policy and what each one covers.
• Write a one-line job description for every person, based on what they really do day to day.
• Ask the agent whether office or estimating pay can be split from field pay, and what records the carrier wants to see.
• Keep check-in and check-out times by job so you can show where hours went. The crew app in MagicBuild records those times for each job.
• Report payroll honestly and on time. Guessing low saves nothing once the auditor shows up.

If you already have a wrong code, email your agent, describe the real duties, and ask for a corrected code and a revised premium. Ask what the carrier's appeal process is if they say no.

Is pay-as-you-go workers' comp worth it?

It is worth a quote if your payroll swings from month to month. Instead of paying a big estimate up front and a true-up at year end, your premium follows what you actually paid that period. Availability, fees and rules vary, so compare the total cost against a standard policy.

Does a higher deductible really save money?

Yes, a higher deductible usually lowers the premium on policies that have one, but it only pays off if you could cover the deductible from cash without stopping work. Divide the yearly savings into the extra deductible to see how many claim-free years it takes to break even.

Say raising a deductible from $1,000 to $5,000 saves $300 a year. The extra $4,000 you would pay on a claim takes about 13 years of savings to earn back, so if you expect a claim sooner than that, skip it.

A higher deductible makes more sense when:

• You have a cash cushion in a separate account just for this.
• Your work is lower risk and you rarely have claims.
• The premium drop is large compared to the added deductible.

Also ask your agent how a claim affects your renewal before you file small ones. Rates feel arbitrary after a single claim because carriers weigh claims history, so a minor repair you can pay yourself may cost less than the renewal increase.

Will shopping carriers and bundling policies save me money?

Usually yes, because carriers price the same shop differently, so get at least three quotes on the same limits each year and ask for a package quote on general liability, auto and comp. Some carriers discount bundles, but only a side-by-side quote tells you whether it beats separate policies.

Have this ready before you call anyone:

• Payroll by person and what each person does
• Your trade mix and yearly revenue
• Loss history from your current carrier
• A list of vehicles and who drives them
• Certificates from the subs you use

Compare quotes on the same limits, deductibles and exclusions, not just the bottom-line number.

How do I control per-vehicle insurance costs?

Start by listing every vehicle, who drives it, and whether it is really used for work. Remove vehicles you no longer use, keep driving records clean, and tell your agent honestly how each truck is used, since rules on personal versus commercial coverage vary. Then divide the yearly cost of each truck by the jobs it works, and add that to your bids. The free job cost calculator is a quick way to see what a truck adds per job.

What happens if I use uninsured subs?

It can cost you jobs and money: most general contractors and municipalities won't consider uninsured or underinsured subcontractors (Jobber), and your own carrier may count their pay as your payroll at audit. Policy wording and state rules vary, so ask your agent how yours treats subs.

Before a sub sets foot on site:

• Get a current certificate of insurance and check the dates.
• Ask to be named as certificate holder so you hear if it lapses.
• Put insurance requirements in your sub agreement.
• Keep the certificate in the job file.

If you are losing bids to someone who skips insurance, don't match the price by dropping coverage. Show the client your certificate, explain what happens on their property if someone gets hurt and the other guy has no coverage, and let them decide if the lower number is worth that risk. Many clients will pay a little more for that peace of mind.

What should I do this week to cut insurance and comp costs?

Pull your policies and your last audit, call your agent with three questions, and price insurance into every bid. Small changes here add up over a year of jobs.

1. Ask whether each worker is in the right class and whether pay-as-you-go is available.
2. Ask what a higher deductible would save and how a claim would hit renewal.
3. Ask for a package quote and compare it with two other sources.

Then make sure your bids carry the cost. MagicBuild shows job profit, files receipts to each job and syncs with QuickBooks, so you can see whether insurance and labor are leaving enough margin. It costs $69 a month with 14 days free, and your crew and clients don't cost a seat. Start a free trial, or try the free job cost calculator first.