Washington L&I Tax: Premiums, Wage Deductions, and Quarterly Filing

The Washington L&I tax is the workers’ compensation premium employers pay to the state Department of Labor and Industries, and unlike almost every other state, it’s charged per hour worked rather than as a percentage of payroll. Employers carry most of the cost, but they may deduct a defined slice from employee wages. For 2026, the average premium is rising about 4.9 percent over the prior year.¹

Who Has to Pay

Nearly every Washington employer with at least one employee must carry workers’ compensation coverage through the state industrial insurance fund. In exchange for paying premiums, employers are generally shielded from personal injury lawsuits by their workers.²

A few categories fall outside mandatory coverage. Domestic servants working for an employer with fewer than two household employees regularly working 40 or more hours per week are exempt, along with certain supplementary household workers and casual laborers whose work falls outside the employer’s normal trade.³ Sole proprietors, partners, corporate officers, and LLC members typically do not need coverage, but they can apply for elective coverage through L&I if they want it.⁴

Washington also presumes every worker is a covered employee unless a specific test proves otherwise, so paying someone as a “1099 contractor” does not, on its own, take them out of the L&I system.⁵ Very large employers can apply to self-insure instead of paying into the state fund, but the qualification thresholds (including a minimum $100,000 in posted security and a $500 million net worth requirement to use a letter of credit) put that route out of reach for most businesses.⁶

How the Premium Is Calculated

Washington charges premiums by the hour worked. When wages rise but hours stay flat, your premiums don’t automatically climb with them.¹ Three inputs drive the number: your risk classification, the base rates for four funds, and your experience factor.

Risk Classification and the Four Funds

L&I assigns every type of work a risk class based on historical injury frequency and severity. Office work carries a very different rate than logging or roofing. Each risk class has four base rates:

Accident Fund, which pays time-loss and disability benefits.
Medical Aid Fund, which covers medical treatment for injured workers.
Stay at Work Fund, which supports employers who offer light-duty return-to-work positions.
Supplemental Pension Fund, which funds cost-of-living adjustments for long-term disability recipients.

The first three rates are combined and then adjusted by your experience factor. The Supplemental Pension Fund rate is added on top afterward and is not experience-rated.⁷⁸

The Experience Factor

Your experience factor is a multiplier that compares your claim costs against other businesses in the same risk class. A factor below 1.0 means your workplace is safer than average and you get a discount. A factor above 1.0 means your claims have been costlier than your peers, and you pay more.⁹

Using L&I’s own worked example: if the Accident Fund rate is $0.0221, the Medical Aid rate is $0.0160, the Stay at Work rate is $0.0003, the Supplemental Pension rate is $0.1120, and the experience factor is 0.9789, the premium is 0.9789 × ($0.0221 + $0.0160 + $0.0003) + $0.1120 = $0.1496 per hour worked.⁷

What You Can Deduct From Employee Wages

An employer may deduct exactly one-half of the Medical Aid Fund premium from each employee’s wages. That is the only deduction the statute allows. Taking any other portion of the premium out of worker pay (any part of the Accident Fund, Stay at Work Fund, or Supplemental Pension Fund) is a gross misdemeanor.¹⁰

Because only half of one of the four fund components can be shared, the employee’s share of L&I is small in practice. Most of the total cost sits with the employer. The “L&I” line on a Washington pay stub represents half of the Medical Aid portion for the hours worked in that pay period.

Quarterly Reporting and Payment

Every employer files a quarterly report with L&I showing total hours worked by all employees, broken down by risk class. You can submit through the My L&I online portal or mail a paper return with a check. Reports and payments are due by the last day of the month after each quarter closes:¹¹

Quarter 1 (January–March): due April 30.
Quarter 2 (April–June): due July 31.
Quarter 3 (July–September): due October 31.
Quarter 4 (October–December): due January 31.

Report actual hours worked. Overtime hours are counted at their real clock-time value, not at the premium pay rate, so 10 overtime hours are reported as 10 hours, not 15. Holiday, vacation, and sick leave hours where no work was performed are excluded entirely.¹²

Premium rates typically adjust each January 1, so verify your current rates at the start of each year before completing your first-quarter report. L&I sends a quarterly report form specific to your account showing your assigned risk classes and current hourly rates. Cross-check those against your internal payroll before submitting, and keep the underlying time cards, hour summaries by risk class, and payroll records for at least three full calendar years after the year the work was performed.¹²

Penalties for Operating Without Coverage or Filing Late

Operating without a workers’ compensation account when you have covered workers triggers a penalty of $1,161 or twice the premiums you would have owed for four quarters, whichever is greater. If a worker gets injured during an uninsured period, the employer is personally liable for the full cost of that claim on top of the registration penalty.¹³

Late quarterly reports also carry consequences. L&I charges both a penalty and interest on unpaid balances. Employers in financial difficulty can set up a payment plan of up to 90 days that may waive penalties and interest, but the plan has to be arranged proactively; once an account is already delinquent without a plan in place, the charges start accruing.¹¹

Buying or Selling a Business

When you buy a Washington business that continues the same operations, L&I generally transfers the seller’s experience rating to you. That’s helpful if the seller ran a safe shop, because you inherit the discount. It cuts the other way if their claims history was heavy.¹⁴

A buyer can also be held liable for the seller’s unpaid L&I premiums, penalties, and interest, up to the value of the business assets acquired. Before closing, request a Certificate of Tax Status or clearance letter from L&I confirming that the seller’s account is current. In construction, prime contractors face similar exposure for a subcontractor’s unpaid premiums unless they verify the subcontractor’s L&I coverage and meet several other requirements.¹⁴

How L&I Payments and Benefits Are Taxed

Workers’ compensation benefits paid to an injured employee under a workers’ compensation act are fully exempt from federal income tax. That covers weekly disability payments, medical benefits, and approved settlements. An injured worker will not receive a W-2 or 1099 for these benefits and does not report them on a tax return.¹⁵

The exemption does not extend to retirement plan benefits, even if retirement followed a workplace injury. If a worker returns in a light-duty role and receives supplementary wages from the employer, those wages are ordinary taxable income; only the workers’ compensation portion stays tax-free.

1
Washington State Department of Labor & Industries. Washington Workers’ Comp Insurance Average Premium Will Rise About 4.9% in 2026
2
Washington Department of Revenue. Industrial Insurance
3
Washington State Legislature. RCW 51.12.020 – Employments Excluded
4
Washington State Department of Labor & Industries. How to Get a Workers’ Compensation Account
5
Washington State Department of Labor & Industries. Independent Contractors
6
FindLaw. Washington Revised Code Title 51 Industrial Insurance 51.14.020
7
Washington State Department of Labor & Industries. Calculating Premium Rates
8
Washington State Department of Labor & Industries. Unique Premium Rating Features in Washington
9
Washington State Department of Labor & Industries. Calculations for Experience Factors
10
Washington State Legislature. RCW 51.16.140 – Deductions From Workers Pay
11
Washington State Department of Labor & Industries. File Quarterly Reports
12
Washington State Department of Labor & Industries. Workers’ Compensation Recordkeeping and Reporting Guides
13
Washington State Department of Labor & Industries. Penalty Increases for Violations of Workers’ Compensation Laws
14
Washington State Department of Labor & Industries. Employers’ Guide to Workers’ Compensation Insurance
15
Internal Revenue Service. Publication 525 – Taxable and Nontaxable Income