Hire your first employee and two things become true the same day. You owe payroll taxes. And in most states, you owe workers' compensation coverage. People treat those as separate errands. They're not, mostly.
Here's the frame that keeps you out of trouble. The price of workers' comp is a payroll number. The coverage is an insurance policy governed by state law. Get the payroll part running well and the money side takes care of itself. Get the state part wrong and no amount of clean payroll saves you.
One line up front: this is a plain-language explainer, not legal advice. Comp rules vary by state, and edge cases turn on your exact facts. Confirm with your state's workers' comp board or an insurance agent before you rely on any of this.
Why premium is a payroll number
A comp premium is built from two things: your wages and your job classification codes. The formula is blunt.
Payroll (per $100 of wages) × class-code rate = premium.
A desk job might carry a rate of $0.20 per $100 of payroll. A roofer might carry $15 or more. Same $100 of wages, wildly different cost, because the risk of injury is wildly different. Multiply the rate by your total payroll in that class and you have the annual premium.
Because the number is driven by wages you're already running, payroll software is the natural place to compute it. That's the whole idea behind pay-as-you-go.
Pay-as-you-go vs the traditional way
The old model: you estimate your annual payroll, the carrier bills a lump-sum premium up front — often with a deposit — and at year end an auditor checks your actual payroll against the estimate. Guess low and you get a surprise bill. Guess high and you floated the carrier money all year.
Pay-as-you-go flips it. Your payroll system reports actual wages to the carrier every run and the premium is deducted each pay period off real numbers. No big deposit. No year-end true-up shock, because there's nothing to true up. If you run $8,000 one month and $12,000 the next, the premium tracks it.
Rough illustration. Traditional: estimate $200,000 payroll, pay a $2,000 premium plus a 25% deposit ($500) in January, then owe a $600 audit bill in December because you actually ran $260,000. Pay-as-you-go: the system deducts roughly $20 per $1,000 of wages each run, so December holds no surprise. The total is similar. The cash flow and the audit risk are not.
You don't estimate a board and pay for it up front. You measure, you cut, you pay for what you used. Comp works the same way now — if your payroll runs it.
Class codes, and how misclassification burns you
Class codes are where clean payroll goes to die. Each employee gets a code for the work they actually do. Put an employee in a cheaper code than their real job and the premium looks great — until the auditor reclassifies them.
Say you tag a warehouse worker as "clerical" at $0.30 instead of "warehouse" at $4.00. On $50,000 of wages that's $150 vs $2,000. The auditor finds it, backdates the correct code, and bills the difference plus penalties. Pay-as-you-go doesn't save you here — it just makes the wrong number wrong faster. Codes have to be right at setup.
Who files vs who just refers
This is the part that decides whether comp is actually a payroll feature for you or a second vendor you manage yourself. Some payroll providers run integrated pay-as-you-go comp: they compute premium off each run, remit it, and handle the reporting. Others just hand you a referral to a broker and step back — you get a normal annual policy and the payroll system does nothing further.
| Provider | Pay-as-you-go workers' comp? | Files/reports for you? | Broker partner | Notes |
|---|---|---|---|---|
| Gusto | Yes — integrated, premium off actual payroll each run | Yes — reports wages to the carrier, no year-end deposit | NEXT Insurance (embedded) | Closest thing to "comp as a payroll feature." Quote and policy live inside payroll. |
| OnPay | Yes — integrated pay-as-you-go | Yes — remits and reports off real wages | Partner carriers via in-app broker | Same model as Gusto; comp premium tracks each run, no big upfront deposit. |
| QuickBooks Payroll | Partial — pay-as-you-go available through a partner | Some — carrier handles reporting; payroll feeds wage data | AP Intego / NEXT | More of a connected referral than fully native. Works, but you're closer to a separate policy. |
| ADP RUN | Yes — pay-by-pay program | Yes — for policies placed through ADP's insurance arm | ADPIA (ADP Insurance Agency) | Strong if you buy the policy through ADP. Bring an outside policy and you're back to referral-plus-deposit. |
The pattern: the tighter the integration, the less you deal with a year-end audit and a deposit. A pure referral gets you covered but leaves the cash-flow and reporting work on your desk.
When comp is actually required
This is the state-law half, and it's where "payroll feature" stops being the whole story.
- Headcount triggers vary. Many states require coverage the moment you have one employee. Others set the bar at three, four, or five. A handful exempt very small employers entirely. Your first hire is the moment to check, not assume.
- Owners and officers. Sole proprietors, partners, and LLC members can often exclude themselves, and corporate officers can sometimes opt out. Rules differ by state and by entity type.
- Industry overrides. Construction and a few other trades face stricter rules — sometimes coverage from the first worker regardless of the general headcount threshold.
Miss the requirement and the penalties are not payroll-sized. States levy fines, stop-work orders, and in some cases personal liability for an injured worker's costs. This is the "until it isn't" — the price is a payroll number, but the obligation is a legal one.
The monopolistic-state exception
Four states don't let you buy comp from a private carrier at all. In Washington, Ohio, North Dakota, and Wyoming, you buy coverage from a state-run fund — full stop. These are the monopolistic states.
What that means for payroll: the neat "integrated pay-as-you-go through a partner carrier" story mostly doesn't apply. Your payroll provider can't place a private policy where private policies aren't sold. You deal with the state fund directly, and your payroll software's role shrinks to feeding wage data. If you operate in one of these four, don't expect the embedded-comp feature to do the job — plan on the state fund.
1099 contractors and the trap
Your comp policy covers employees, not genuine independent contractors. A real 1099 contractor carries their own coverage, and you generally don't pay premium on what you pay them.
The trap is misclassification. Call someone a 1099 contractor when the state says they're an employee, and at audit time their pay gets swept back into your covered payroll — premium, back-premium, and penalties. Worse, if a misclassified worker gets hurt, you may be on the hook directly because you carried no coverage for them. The same test that governs payroll-tax classification governs comp. Get it right once, in both places.
The short version
- Premium runs off wages and class codes. That's a payroll number.
- Pay-as-you-go deducts it each run off real payroll — no big deposit, no year-end true-up shock.
- Class codes must be right at setup. Auditors reclassify, backdate, and bill the gap.
- Coverage is state-law insurance: headcount triggers, owner exemptions, and industry rules all vary.
- WA, OH, ND, and WY are monopolistic — you buy from the state fund, not a private carrier.
- 1099 contractors aren't on your policy. Misclassified ones become your problem at audit.
Comp rules follow your state. So do we.
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