How do I handle workers’ compensation premiums under accrual accounting?
In order to clearly explain how to handle worker compensation premiums under accrual accounting, we’ll work out an example with real numbers.
Let’s say that worker’s comp insurance is about 10% of wages and salaries for all employees that work on a factory floor. That might be a little high, but it makes the math easier. If a company’s wages and salaries for factory floor workers are $100,000, then $10,000 of the worker’s comp costs should be included as factory floor workers’ wages and salaries line item.
General office workers or anyone not working out on the factory floor are much less likely to be hurt in a general office setting, so the worker comp rates are going to be much lower than for factory floor workers; let’s say the workers’ compensation rate for general office employees is 1% of general office employees, again to make the math easier. 1% of January’s general office employees’ wages and salary would be expensed as a worker’s comp insurance expense.
Basically, if you pay the workers’ compensation premium every month then it’s always up to date and you never have an asset or a liability. If you’re paying premiums in advance, then you’re going to track that asset in a new workers’ comp prepaid insurance account. If you’re paying workers’ compensation insurance premiums in arrears, then you’ll start track the credit balance in an account under current liabilities.