What Is A Workers’ Compensation Payroll Audit?

March 13, 2023 | Workers' Compensation

This article was originally published September 20, 2021

Workers’ compensation insurance is a type of insurance that is generally required by state law for any company that has employees, and in some states, for those who use independent contractors. It provides financial protection for workers who are injured or become ill on the job. It also protects businesses from the high cost of workplace injuries.

Submitting information on your payroll in a workers’ comp audit is required to be covered by workers’ comp insurance. That’s true because the cost of workers’ compensation insurance is quoted based on your estimate of your company’s payroll. A workers’ compensation payroll audit is performed annually after your policy expires, according to terms in your policy, to determine actual payroll and modify the amount paid for coverage as needed.

Construction workers reviewing work

What Happens in a Workers’ Comp Audit?

Workers’ compensation insurance is also referred to as workers’ comp insurance or workman’s comp insurance. In a workman’s comp insurance audit, an auditor reviews your records to calculate your total payroll for the policy period. Some individuals’ pay may be exempt or subject to payroll minimums and maximums if they are owners or officers.

A workers' comp audit doesn’t change the rate in your original policy. It simply determines the actual payroll to which the rate is applied.

The auditor also checks to see if any independent contractors you used during the policy period had their own coverage in place. If not, your premium may be changed based on any payments made to them.

A workers' comp audit is a very straightforward process. However, you can contact a licensed insurance expert about your workman’s comp insurance audit if you have questions about what will take place.

How Should I Prepare for a Workers’ Comp Insurance Coverage Audit?

Preparing for a workers’ comp insurance coverage audit involves gathering the information that the auditor will need. Your workers’ compensation insurance company will tell you specifically what is needed, but you should plan on providing: 

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    Detailed business description. The type of work you do affects the workers’ compensation classification codes that are used for your business and the associated rates. More-hazardous work has higher rates, and less-hazardous work has lower rates. The auditor will want to have an in-depth understanding of your operations.
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    Employee records. These should include detailed information on the duties of each employee, if available, and on the amount of hours worked annually.
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    Payroll records. Documents like a payroll journal, federal tax reports, individual earnings records, and overtime payroll records are needed.
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    Payments. Information on payments to independent contractors and subcontractors, as well as casual labor payments and materials purchases are needed. 
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    Certificates of Insurance. You should be able to show the auditor any Certificates of Insurance provided to you by independent contractors or subcontractors you used during the policy period. 
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    Experience modification worksheets if applicable. Often referred to as XMods, an experience modification is a rating related to workplace injury claims that you have filed in the past. This rating impacts the rate and premium you pay on your current policy.

Creating a Workers’ Compensation Audit Checklist

A good way to prepare for a workers’ compensation audit is to create a checklist of the items you’ll need as soon as you buy your policy. Your checklist should also indicate where to find the information. That way, when you’re contacted to schedule your workers’ comp payroll audit, you can find the information the auditor will need quickly and efficiently.

Different Types of Workers’ Compensation Audits

There are two main types of workers’ compensation audits. A voluntary workers’ comp audit is done by mail. Your insurance company sends you an audit form within 60 days of the policy expiration. You then complete the form promptly and return it. The form typically includes the classification codes shown on your policy and requests payroll information for each classification. In a voluntary audit, you are also asked to return tax reports and other documentation to support the payroll figures you provide. 

The second type of workers’ compensation audit is called a physical audit or field audit. In that scenario, an auditor contacts you to schedule a time to visit your place of business. It’s important that you get the audit scheduled soon after being contacted. In a physical audit, the same type of examination of your payroll information is performed. 

The type of audit conducted for your policy depends on factors like the nature of your business and the size of your premium. It’s important to comply with an audit request as soon as you receive it. Failing to have an audit conducted in a timely manner is a violation of your insurance agreement and will result in a higher premium and/or penalties being charged.

Workers' Comp Audit FAQ

Some of the questions business owners frequently ask about a workman’s comp insurance audit include:

Why is a workman’s comp insurance audit important?

It’s important for a few reasons. First, most states require insurance companies to audit a majority, if not all, of their policies. Also, an audit is important because it means you won’t be paying too much for your workman’s comp coverage.

When does a workman’s comp insurance audit happen?

It generally occurs 30 to 90 days after your policy ends even if you cancel. So this means you could owe money for past coverage if your actual payroll was higher than your estimate for that policy period.

What payroll is included in a workers’ compensation audit?

A workers’ comp audit includes salary and wages. In other words, total earnings paid to employees, including bonuses and overtime pay.

Is my workers' comp premium based on gross or net wages?

Premiums are based on gross wages paid to W-2 and 1099 employees.

Do I have to provide information on overtime pay in a workers’ comp audit?

Yes, you should provide evidence of overtime wages for covered employees on a valid payroll report.

Are tips considered part of payroll in a workers' comp audit?

No, they are not.

What is the definition of an independent contractor?

An independent contractor is typically defined as someone who provides services to customers based on a predetermined fee. They generally have multiple customers and work without direct supervision by the customer. 

How do I prove an independent contractor has their own workers’ compensation insurance?

The contractor should provide you with a valid Certificate of Insurance for their workers’ comp policy. It will show them as the insured and your company as a certificate holder. 

Can my company’s officers be excluded from workers’ compensation coverage?

Most states allow companies to exclude business owners and officers from coverage.

What happens if you ignore a workers’ comp audit?

In buying your policy, you agreed to a workers' comp payroll audit. If you refuse to provide the necessary information, you will be charged a higher premium and/or a penalty. This penalty is sometimes called an audit noncompliance charge.