Workers compensation insurance protects employees who get injured or become ill because of their job. It covers medical expenses, a portion of lost wages during recovery, rehabilitation costs, and death benefits if the worst happens. In exchange for this coverage, employees generally give up the right to sue their employer for workplace injuries.

In California, workers comp is required for nearly every employer with at least one employee. This includes part-time workers, family members on payroll, and seasonal staff. There’s no minimum number of hours or payroll threshold that exempts you. If you have employees, you need coverage. Operating without it is a criminal offense in California and can result in fines up to $100,000 plus civil penalties.

Premiums are calculated based on two main factors: your total payroll and your industry classification code. Every job type has a classification code that reflects its risk level. Office workers might have a rate around $0.50 per $100 of payroll. Construction laborers could be $15 or more per $100 of payroll. The difference reflects how likely injuries are in each role.

Insurance companies audit your policy annually to verify your actual payroll matched your estimates. If you paid employees more than you estimated at the start of the policy, you owe additional premium. If payroll was lower, you get a credit. This is why keeping accurate payroll records matters. Sloppy record-keeping leads to audit disputes and potentially higher premiums.

From a bookkeeping perspective, workers comp premiums are a business expense that needs proper tracking. You typically pay an estimated premium when the policy starts and then receive an audit adjustment at renewal. If you have employees in different classification codes, your books should separate payroll by job type so audits go smoothly. A small business bookkeeper can help structure your records so premium audits don’t become a headache.

Workers comp is separate from general liability insurance and health insurance. General liability covers third parties like customers who get injured on your property. Health insurance is a benefit you offer employees for non-work-related medical care. Workers comp specifically covers injuries and illnesses that happen because of the job.