Workers' Comp and Payroll: What Employers Must Report in 2026

Workers' comp is a state program, not a federal one

The single most common misunderstanding about workers' compensation is where it comes from. It is not a federal program. The U.S. Department of Labor is explicit about this on its own workers' compensation topic page: employees injured while working for a private company, or for a state or local government, go through their state workers' compensation board, not a federal agency. The Department's own Office of Workers' Compensation Programs, OWCP, runs a separate set of federal programs, and those cover only federal employees and a short list of other named groups, longshore and harbor workers and coal miners with black lung disease among them. A private employer with a workforce spread across several states is not dealing with one national workers' comp system with minor state variations. It is dealing with up to 50 separate state systems, each with its own board, its own forms and its own rules, a distinction the Department of Labor's own workers' comp overview states directly.

Because the program sits at the state level, the Department of Labor does not publish state benefit schedules, state premium rates or a single national coverage rule. What it does publish is a directory: the OWCP's list of state workers' compensation officials and agencies, which routes an employer or a payroll team to the actual state board that regulates coverage, benefits and disputes in each state where they run payroll. That distinction, a federal directory rather than a federal rulebook, is why this page links out to state authorities rather than trying to reproduce state-by-state benefit amounts or premium tables that a national article cannot keep current across 50 jurisdictions.

Premiums, class codes and coverage triggers: not a federal number

Three pieces of workers' comp come up constantly in payroll conversations, and none of them have a federal source, because none of them are set federally. Premium rates, the class codes assigned to each job, and the experience modifier that adjusts a policy up or down based on claims history are all set by the insurance carrier and the state's own rating bureau, not by Washington. There is no DOL fact sheet or IRS publication that quotes a rate or a premium formula, because the rate a specific employer pays depends on its state, its industry classification, its payroll broken out by class code, and its own claims history. Any number quoted online as a national average or a flat percentage should be treated as a marketing estimate, not a sourced figure, and checked against the actual policy and the carrier's own rating.

The same is true of the coverage trigger, the point at which an employer is legally required to carry workers' comp insurance at all. Some states require coverage starting with the very first employee. Others set a headcount threshold before coverage becomes mandatory, and that threshold is not uniform from state to state. The employer-size trigger, and the penalty for operating without required coverage, both vary by state and are set by the state board linked above, not by a single federal rule. An employer opening payroll in a new state should treat the coverage trigger as a fresh lookup against that state's own board every time, rather than assuming the rule from the last state carries over.

Where the real exposure sits: tax treatment and garnishment

Because the missing-coverage penalty is itself a state-by-state figure with no federal number to cite, the more useful way to think about workers' comp payroll exposure is the two places it actually touches a payroll run that already has coverage in place: taxation and garnishment.

On the tax side, the IRS draws a sharp line. Under IRS Publication 525, amounts an injured employee receives as workers' compensation benefits under a workers' compensation act are fully exempt from federal income tax. That exemption stops, however, the moment the employee is back on the payroll performing light or restricted duty. Salary paid for that light-duty work is ordinary taxable wages, withheld and reported exactly like any other paycheck, even though the employee is technically still connected to an open workers' comp claim. A payroll system that treats every payment touching a comp claim as tax-exempt will under-withhold on light-duty wages, an error that surfaces at year end and is expensive to unwind.

On the garnishment side, the Department of Labor's Wage and Hour Division is equally direct. Under its Fact Sheet #30 on the Consumer Credit Protection Act, workers' compensation wage-replacement payments, whether paid periodically or as a lump sum, count as earnings for CCPA garnishment purposes. A garnishment order already in place against an employee does not pause simply because that employee moves onto workers' comp wage-replacement. Payroll has to keep calculating the withholding against those payments the same way it would against a regular paycheck, which is easy to miss if a comp claim is handled entirely outside the normal payroll workflow.

What a 25 to 100 employee employer gets wrong on workers' comp payroll

Companies in the 25 to 100 employee range tend to repeat the same handful of mistakes, usually because workers' comp is owned by whoever manages the insurance relationship rather than by payroll, and the two sides do not always compare notes.

• Assuming it is a federal program with a federal rulebook. It is not. Every coverage question, every benefit question and every dispute runs through the state board where the employee works, not a DOL office.
• Leaving light-duty pay coded as non-taxable because it is comp-related. Only the benefit paid under the comp act is exempt. Wages paid for actual work performed, light duty included, are taxable like any other paycheck.
• Letting a garnishment order go quiet once an employee moves to comp wage-replacement. The CCPA still treats that payment as earnings, and the withholding obligation does not pause with it.
• Quoting a premium rate or a coverage threshold as if it were a national number. Both are state and carrier specific, and the only reliable source is the state board itself, not a blog post or a competitor's marketing page.

What this means for payroll operations

• Route every coverage and rate question to the state board. Use the DOL's own officials directory as the starting point rather than a generalized national figure.
• Code light-duty wages as taxable, always. Only the benefit payment itself carries the federal income tax exemption.
• Keep garnishment calculations running on comp wage-replacement. Periodic and lump sum payments both count as earnings under the CCPA.
• Track gross payroll by employee and by class code. That is the data a carrier's premium audit will ask for, and it is far easier to produce from clean, ongoing payroll records than to reconstruct after the fact.
• Separate the insurance decision from the payroll decision. Choosing a carrier, a policy and a class code structure is a broker and underwriting conversation; reporting the payroll data correctly once coverage exists is a payroll operations conversation.

That data-reporting side is exactly where BEG managed payroll sits. BEG tracks and reports gross payroll by employee and by pay type in the format a client's carrier asks for at premium audit time, keeps light-duty pay coded as taxable wages inside the payroll system, and keeps garnishment withholding running on workers' comp wage-replacement that flows through payroll. Choosing coverage, selecting class codes, negotiating the policy itself and disputing the results of an audit stay with the client's broker, carrier and CPA. BEG does not make those calls; it makes sure the payroll numbers behind them are accurate and ready when the carrier asks.

Frequently Asked Questions

Sources: U.S. Department of Labor, workers' compensation topic page; U.S. Department of Labor OWCP, state workers' compensation officials; IRS Publication 525, taxable and nontaxable income; U.S. Department of Labor, Fact Sheet #30, Consumer Credit Protection Act. This is general payroll and tax information, not legal or accounting advice.