How Workers' Compensation Is Calculated

Overview of the Calculation

Workers' compensation benefits are calculated by taking the employee's average weekly wage (AWW), applying a benefit percentage that varies by disability level, and capping the result at a state‑specific maximum. The formula is typically: Benefit = AWW × Percentage – Deductions, then limited by the cap.

Determining the Average Weekly Wage

The AWW is the employee's gross earnings during a reference period, usually the 52 weeks before the injury. Employers report these wages to the state insurance carrier, which then calculates the weekly average. Overtime, bonuses, and commissions that are part of regular compensation are included, while non‑regular payments such as one‑time incentives are excluded.

Benefit Percentages by Disability

States classify injuries into categories: temporary total disability (TTD), temporary partial disability (TPD), and permanent total or partial disability. Each category has a statutory percentage:

• TTD: 50% of AWW, up to the cap.
• TPD: 75% of AWW, up to the cap.
• Permanent total: 70% of AWW, up to the cap.
• Permanent partial: 25% to 40% of AWW, based on residual functional capacity.

Maximum Benefit Caps

States impose a maximum weekly benefit to prevent excessively high payouts. Caps are tied to a multiple of the state's average wage or a fixed dollar amount. If the calculated benefit exceeds the cap, the employee receives the capped amount.

Deductions and Adjustments

Certain deductions reduce the benefit:

• Employer contributions to the workers' comp fund may be deducted.
• If the employee receives a wage replacement from a private insurer, that amount can offset the benefit.
• Some states allow a "partial offset" for benefits paid on a part‑time basis.

State‑Specific Variations

While the general framework is similar, each state may alter the percentage, cap, or wage calculation method. For example, California uses a 60% base for permanent total disability, whereas New York uses a 70% base but a lower cap. Employers should consult the state's workers' compensation board or an attorney to confirm the exact rules.

Practical Example

Employee A earns $1,200 weekly. In New York, a TTD injury yields 50% of AWW: $600. The state cap is $700, so the employee receives $600. If the injury were permanent partial with a 30% benefit, the calculation would be $360, below the cap, and no deductions apply.