With pay-as-you-go workers' comp insurance, there's little to nothing to reconcile during year-end audits since you paid based on real wages throughout the year.
What is Pay-As-You-Go Workers’ Comp?
Updated: August 1, 2025
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Key Takeaways
Pay-as-you-go workers' comp spreads insurance costs throughout the year instead of requiring large upfront payments.
This payment method allows for better cash flow and accurate pricing, but makes monthly costs less predictable and isn't offered by all insurers.
Seasonal businesses, construction companies, growing startups and cash flow-sensitive businesses benefit most from this workers' compensation payment method.
What is Pay-As-You-Go Workers’ Comp and How Does It Work?
Pay-as-you-go workers' comp adjusts how you pay for coverage. Rather than paying thousands upfront based on estimates, you pay smaller amounts that match your actual payroll each period. This four-step process lets you avoid surprising year-end bills:
- 1
Setup
Your insurance carrier connects with your payroll provider (like ADP, Paychex or QuickBooks Payroll). Think of it as linking two systems that already handle your business finances.
- 2
Integration
When you run payroll, your system shares employee wages, hours worked and job types with your insurance carrier. Everything happens behind the scenes without extra paperwork on your end.
- 3
Automation
Your carrier calculates your premium using your actual payroll numbers and your industry's workers' comp rate. The system handles all the classification details automatically.
- 4
Payment
nstead of making large estimated payments upfront, you pay only for the coverage you used that pay period. The premium comes from your business account or becomes part of your payroll processing costs.
LEARN MORE ABOUT WORKERS’ COMP INSURANCE
Pay-as-you-go workers' comp is a payment method that could work for your business. Read about traditional workers' comp and other aspects of this broad insurance subject:
Pros and Cons of Pay-As-You-Go Workers’ Comp
Traditional workers' comp requires substantial payments upfront. Pay-as-you-go workers' comp spreads those costs across the year instead. This approach has benefits, but it won't work for every business:
Pros | Cons |
|---|---|
No large upfront payment. You avoid the cash flow hit from paying a large portion of your estimated annual premium at policy start. | Less cost predictability. Monthly payments fluctuate with your actual payroll, making it harder to budget exact business insurance costs. |
Pay for actual payroll. Your premiums match what you actually pay employees, not insurance company estimates that might be wrong. | Still subject to annual audits. Paying based on actual wages doesn't exempt you from the standard year-end audit process. |
Automatic premium adjustments. Your payments automatically increase or decrease with your staffing levels, so you never overpay during slow periods. | Limited availability. Not all insurance carriers offer pay-as-you-go options, which could limit your coverage choices. |
No year-end surprises. Since you've paid on real wages all year, there's usually little to reconcile during your annual audit. | May cost slightly more. Some carriers charge small administrative fees for the payroll integration service. |
What Does Pay-As-You-Go Workers’ Comp Cover?
Pay-as-you-go workers' comp provides the same financial protection for workplace injuries and illnesses as traditional workers' compensation policies. The payment method doesn't change what your policy protects.
An employee accidentally injures himself while performing their duties at work. | ✅ | A restaurant server burns their hand on a hot plate while delivering food to customers. Workers' comp covers this because the injury happened during everyday work activities. |
A worker develops an injury from daily tasks due to repetitive strain. | ✅ | A data entry clerk develops tendonitis in their wrist from typing customer information for hours each day. Workers' comp covers occupational illnesses that develop over time from job requirements. |
A worker gets injured while commuting to the office. | ❌ | A sales manager crashes their personal car on the way to work and breaks their arm. Commuting injuries aren't covered unless the employee was traveling for business purposes. General auto insurance would apply instead. |
An employee is hurt during their lunch break on company property. | ✅ | A warehouse worker slips on ice in the company parking lot while walking to their car for lunch. Most policies cover injuries on employer premises, even during breaks. |
An employee is injured while intoxicated at work. | ❌ | A construction worker falls from scaffolding after drinking alcohol during their shift. Workers' comp doesn't cover injuries when employees violate safety policies or break laws. |
A remote worker gets hurt in their home office. | ✅ | A customer service representative working from home strains their back while lifting boxes of office supplies sent by their employer. Work-related injuries at home are typically covered. |
An employee intentionally injures themselves. | ❌ | A factory worker deliberately cuts their hand to avoid working overtime. Workers' comp insurance coverage excludes self-inflicted injuries, regardless of the employee's motivation. |
A customer assaults one of your employees during business hours. | ✅ | An angry customer punches a retail cashier during a return dispute. Your policy typically covers violent incidents against employees while performing job duties. |
Understanding what workers' comp provides financial protection for your employees while managing business risks effectively.
How Much Pay-As-You-Go Workers’ Comp Do You Need?
Workers' comp policies have two sections. The first covers medical bills and lost wages, with your state setting the limits. The second part protects you from employee lawsuits. Since you get to pick those limits, consider these:
Your state's lawsuit environment
Some states have more aggressive personal injury attorneys or higher jury awards, making higher limits more important for adequate protection.
Your payroll amount
Larger payrolls create more exposure since higher-paid employees have more potential lost wages in serious injury cases.
Your industry's risk level
Construction companies face higher liability exposure than accounting firms because severe injuries that lead to lawsuits occur more frequently.
When you're ready to explore where to get pay-as-you-go workers' comp, compare the employers' liability limits (the amount your policy will pay if an employee sues you directly) each carrier offers, since this represents your main coverage decision.
Who Needs Pay-As-You-Go Workers’ Comp?
Most businesses with employees need workers' comp insurance, though some sole proprietors and very small businesses may be exempt depending on state rules. Pay-as-you-go works exceptionally well for these industries:
Seasonal businesses
Restaurants, landscaping companies and retail stores that hire extra staff during busy periods avoid overpaying during slow months since premiums adjust with actual payroll.
Construction companies
Project-based construction work means staffing levels change constantly. Pay-as-you-go lets you avoid the guesswork of estimating annual payroll when you don't know which projects you'll win.
Growing businesses
Startups and expanding companies can't predict their workforce size accurately. Traditional policies often underestimate growth, leading to large year-end bills.
Cash flow-sensitive businesses
Any company struggling with considerable upfront payments benefits from spreading costs throughout the year instead of paying substantial premiums at the start of the policy.
Businesses with fluctuating wages
Companies with commission-based employees or overtime-heavy industries see their actual payroll vary from estimates.
New businesses
First-year companies have no payroll history on which to base estimates, making pay-as-you-go a safer choice than guessing wrong and facing audit surprises.
Pay-As-You-Go Workers’ Comp Insurance: Bottom Line
Pay-as-you-go workers' comp helps you avoid those hefty upfront insurance bills. Instead, you pay throughout the year based on what you actually spend on payroll. Your monthly costs will vary more than with traditional policies, and you'll have fewer insurance companies to choose from. But if you run a seasonal business, construction company, or growing startup, this payment method can be a lifesaver for your cash flow.
Workers’ Comp Pay-As-You-Go: FAQ
We've answered some frequently asked questions about pay-as-you-go workers' comp to help you decide if it works for your business:
Is pay-as-you-go workers' comp cheaper?
You'll find pay-as-you-go more affordable because it eliminates the need for large upfront payments and charges only for actual payroll. Since premiums adjust automatically during slow periods, you avoid overpaying. The main savings come from better cash flow, though monthly costs become less predictable.
Who offers pay-as-you-go workers' comp?
Major carriers offer this through payroll providers like ADP, Paychex, and QuickBooks Payroll. Not all insurers provide this option, limiting your choices. Work with agents specializing in pay-as-you-go coverage to find participating carriers and compare employers' liability limits.
What are the disadvantages of pay-as-you-go workers' comp?
Monthly payments fluctuate with payroll, making budgeting harder. Limited carrier availability restricts coverage options. Some insurers charge administrative fees for payroll integration, and you'll still face annual audits despite paying on actual wages throughout the year.
How do you calculate pay-as-you-go workers' comp premiums?
Your carrier automatically multiplies actual payroll by your industry's workers' comp rate each pay period. The system handles classification codes when your payroll provider shares employee information. It removes the guesswork since you pay based on real wages rather than estimates.
Will I still need a workers' comp audit with pay-as-you-go?
Yes, annual audits remain required, but there's usually little to reconcile since you've paid on real wages. Audits become verification processes rather than major reconciliations, eliminating the year-end surprises with traditional policies that use estimated premiums.
How long does it take to set up pay-as-you-go workers' comp?
It takes a few weeks to set up once your carrier connects with your payroll provider. Most work happens automatically without extra paperwork. Your payroll system starts sharing employee wage and job information with your insurance carrier.
Can I switch from traditional to pay-as-you-go workers' comp mid-policy?
Switching depends on your carrier's options and policy terms. Since this requires payroll integration, you need a participating carrier. Many businesses switch at renewal when they can compare options and ensure payroll provider compatibility.
About Mark Fitzpatrick
Mark Fitzpatrick, a Licensed Property and Casualty Insurance Producer, is MoneyGeek's resident Personal Finance Expert. With over five years of experience analyzing the insurance market, he conducts original research and creates tailored content for all types of buyers. His insights have been featured in publications like CNBC, NBC News and Mashable.
Fitzpatrick holds a master’s degree in economics and international relations from Johns Hopkins University and a bachelor’s degree from Boston College. He's also a five-time Jeopardy champion!
Passionate about economics and insurance, he aims to promote transparency in financial topics and empower others to make confident money decisions.