Which Wages Are Excluded From Workers' Comp Benefits
Published: October 1, 2026
In workers’ compensation, not every dollar you pay an employee counts toward the benefits base. The wages that are excluded are typically overtime premium pay, bonuses, commissions, shift differentials, and certain types of fringe benefits that are not considered regular compensation.
Why Wage Exclusions Matter to Employers
Workers’ comp premiums are calculated by multiplying your payroll (the "exposure base") by the class‑code rate set by the rating bureau. When a wage is excluded, it does not increase the exposure base, which can lower your premium. Understanding the exclusions helps you structure pay in a way that complies with the law while managing costs.
Common Wage Exclusions
The following categories are most frequently excluded, but always verify with your broker because rates vary by state and class code — verify current loss costs with your broker.
- Overtime premium pay – The extra amount paid for hours worked beyond the standard workweek is usually excluded from the base.
- Bonuses and incentive pay – Performance bonuses, safety awards, and other discretionary payments are not counted.
- Commissions – Sales commissions are treated as variable compensation and are excluded.
- Shift differentials – Extra pay for night or weekend shifts is excluded unless the state specifically includes it.
- Holiday pay – Fixed holiday wages are generally excluded.
- Paid time off (PTO) accruals – Vacation, sick leave, and paid personal days are not part of the exposure base.
- Fringe benefits – Health insurance, retirement contributions, and other non‑cash benefits are excluded.
Exclusions That Vary By State
Each state’s workers’ comp board may treat certain wages differently. For example, Kentucky includes some shift differentials in the base, while Texas excludes most overtime premium pay. Check the specific guidance for your state on the state department of insurance site or ask your broker.
For Kentucky‑specific rules, visit /workers-comp/kentucky. If you operate in multiple states, a multi‑state audit can keep you consistent.
How Exclusions Impact Your Premium
When a wage is excluded, it reduces the total payroll used to calculate the premium. However, the exclusion does not affect the benefits an employee receives if a claim occurs; the employee’s lost wages are still covered based on the statutory benefit formula.
Premiums are also influenced by the experience modification factor (E‑Mod). The E‑Mod reflects your claim history compared to industry averages. Excluding wages that are not required by law can improve your loss cost ratio, potentially resulting in a lower E‑Mod.
Steps Employers Can Take
- Review your payroll classifications. Make sure each employee is assigned the correct NCCI class code (the code that describes the type of work performed).
- Identify which of the above wages you currently pay and confirm whether they are excluded in your state.
- Work with your broker to adjust payroll reporting if you have eligible exclusions. This may involve separating overtime or bonus pay into separate accounting lines.
- Maintain accurate records. The rating bureau may audit your payroll, and you’ll need documentation to support any exclusions.
- Consider an /performancebond if you are a contractor; bond requirements often reference workers’ comp coverage and payroll accuracy.
Frequently Asked Questions
Do I have to exclude overtime if I pay time‑and‑a‑half?
Most states treat overtime premium pay as an exclusion, but you must still report the regular hourly rate. Verify with your broker because some states (e.g., California) include a portion of overtime in the base.
What if a bonus is guaranteed, like a yearly performance bonus?
Even guaranteed bonuses are typically excluded because they are not part of regular wages. Document the bonus policy and confirm the exclusion with your rating bureau.
Are commission‑based sales employees’ wages excluded?
Yes, commissions are generally excluded. However, if the commission is a fixed salary component, it may be treated as regular wages. Clarify the structure with your broker.
How do fringe benefits affect my workers’ comp premium?
Health, dental, vision, retirement, and other non‑cash benefits are excluded from the exposure base. They do not increase your premium.
Can I retroactively apply wage exclusions to past payroll?
Only if a rating bureau audit determines the previous reporting was inaccurate. Your broker can help you file an amendment, but it must be supported by proper documentation.
Bottom Line for Employers
Knowing which wages are excluded helps you keep workers’ comp premiums as low as legally possible while staying compliant. Regular payroll audits, clear classification, and a partnership with an experienced broker are the best ways to manage exposure.
Joe Baxter, Licensed Insurance Agent, The Workers' Comp Experts
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