Small businesses, as the readers of this blog know all too well, juggle a crushing number of demands day to day. Significant among those is providing workers’ comp insurance to ensure their investment and effort aren’t put at unnecessary risk in the event an employee is injured. Workers’ comp is not a “nice to have” employee benefit; it’s the law for most small businesses with employees, with those laws varying from state to state.
Traditional workers’ comp can place tremendous pressure on a small business’s cash flow. This can impact its ability to pay employees and other expenses, locking up the capital necessary to grow and expand the business, and creating complicated year-end audits. Not fun. But, there is another workers’ compensation product available that addresses those challenges — one that is tailor made for the needs of small businesses: Pay As You Go (PAYG). Despite its advantages, a blind study conducted by The Hartford in 2017 indicates that only about 10 percent of small businesses are even aware that PAYG workers’ comp insurance exists. As such, more small businesses need to understand the impact traditional workers’ comp can have on their success, and the many benefits of adopting PAYG.
The Challenges of Traditional Workers’ Comp
With traditional workers’ comp insurance you might sit down with your insurance agent at the beginning of every year to estimate how much payroll you believe you’ll have for the coming year. Your agent then reaches out to its base of insurance carriers (the more the better) so they can work up quotes based on that estimated payroll number. Once a carrier is selected, you are put on a schedule to pay the estimated insurance premium – monthly, quarterly, or all at once if the premium is small enough. On top of that, carriers typically require a 25 percent down payment.
At the end of the year, the carrier conducts an audit and asks for “actual” payroll numbers to determine if you overpaid and are thus owed money, or if you underpaid and need to come up with even more cash. The trouble lies in the word “estimate.” By not working with actual payroll numbers, you’re exposed to financial vulnerabilities, time-consuming audits and the stress that comes from not having a clear, confident picture of demands on cash. If you owe money, you have to come up with that cash, while trying to pay 25 percent down for the new year and making your first payment for the new year based on the preset schedule – all around the same time. Again, decidedly not fun.
Simply, traditional workers’ comp insurance products are imprecise. So why struggle needlessly?
Pay As You Go: Built with Small Businesses in Mind
Right away, small business owners can benefit from the smoother cash flow created by PAYG. PAYG works closely with payroll companies to receive your payroll data immediately after you run it, and your monthly premium payment is calculated based on actual payroll ran, instead of estimated numbers. This frees up your cash flow both throughout the year, and at the end of the year audit period. Insurance carriers also love PAYG workers’ comp largely because they receive payments in a very predictable and accurate way. Some carriers even incent businesses to take advantage of this product by waiving that hefty 25 percent down payment on the premium.
Key Benefits of PAYG:
- Accurate insurance premiums, based on actual payroll data, are calculated and automatically paid to the insurance carrier after each pay period
- No hefty down payments
- An audit process that is typically simple, less time-consuming and far less costly because the premiums you paid throughout the year were accurate
- Doubles as a simple cash flow management tool
- The majority of low risk small businesses are good candidates
PAYG is designed with the small business in mind and is a little-known product that deserves much greater visibility.
With the right agent, and by asking the right questions, small businesses can focus on doing what they set out to do – running a successful business, following their passion, and protecting their most valuable asset: their employees. Most of all, small businesses can spare themselves the unnecessary financial headaches and risks to their cash flow that are unavoidable by-products of last century’s workers’ comp administration process.
By: Bob Mayo, Director of Business Development, AP Intego Insurance Group
The SmallBizRising Blog is designed to be an educational content hub pulling information, best practices and practical advice for the small business owner and features topics including accounting, marketing, technology and more. Be sure to subscribe to stay up to date with new content as it is posted. The blog was created by The Neat Company and receives contributed content from a group of contributing companies that provide technology, services and solutions to small businesses.