Workers compensation covers an employee injured doing their job: their medical costs and a share of lost wages. In exchange, it generally limits your exposure to being sued over the injury.
It is legally required almost everywhere once you have employees, and the penalties for not carrying it are severe — often far larger than the premium.
What drives the cost
Payroll, because premiums are calculated per hundred of wages.
Trade classification. A roofer and an office administrator are rated very differently, and getting people classified correctly matters. Paying a roofing rate on office wages is a common and expensive error.
Claims history, through an experience rating that follows the business for years. One serious claim raises premiums well beyond its own cost.
Contractors are not automatically excluded
Whether somebody counts as an employee for this purpose is decided by how they work, not by what the paperwork calls them. A contractor who works only for you, on your schedule, with your equipment may well be your employee in the eyes of the scheme.
Uninsured subcontractors are a common route to an unexpected claim — many businesses require a certificate from every sub before they start. See employee or contractor.
Where it appears
Under insurance and compliance in your accounts, and it moves with payroll rather than being purely fixed.
The audit
Insurers typically audit at year end and adjust the premium against actual payroll. A business that grew during the year should expect a bill, and one that shrank should expect a refund it will not receive unless it asks.
Injury at work is covered here. A claim about how someone was treated is a different policy — see employment practices liability.
Preventing the injury in the first place, and the records that demonstrate it was taken seriously, is a safety program.
The experience modifier
A multiplier applied to premium based on the business's own claim history against others in the same trade. Above one it raises premium, below one it lowers it, and a claim affects it for years rather than months.
That delay is what makes a safety program an investment rather than a cost: the saving arrives long after the spend.
Premium is also trued up at an audit after the period, against actual payroll and against subcontractors who could not evidence their own cover — see certificates of insurance.