How to Prepare for Workers’ Comp Audits in 4 Steps [+Checklist]

Insurers issue workers’ compensation audit policies once they expire. they are doing this because initial premiums are usually supported an estimate of the policyholder’s payroll, and that they need the particular payroll to charge the proper amount. As a result, workers’ comp audits are often stressful for business owners because they’ll find yourself owing money.

Preparing for a workers’ comp audit is a method to attenuate your stress and, while we can’t list the precise rules for each carrier, we will offer you a general idea of what to expect. the subsequent steps can assist you to prepare , plus you’ll download a checklist to use when your audit rolls around.

1. Schedule Your Workers’ Comp Audit

The first step is to schedule your audit. Typically, your insurer notifies you that it’s time for an audit about six to eight weeks before your policy’s expiration date. the sort of audit you’ve got to schedule varies by insurer and state, but there are generally two main types:

Physical audit: because the name suggests, a physical audit is when your insurer sends an auditor to your business to review records, observe operations, and interview employees. The auditor typically has about 30 days to schedule, complete, and submit your paperwork.

Voluntary audit: nobody involves your office for a voluntary audit. Instead, the review is conducted by mail and phone. The insurer sends a form for you to fill out and return within a particular time, often 60 days.

If you’re required to possess a physical audit, schedule it so you’re available to answer any questions that the auditor may need. That way, you’ll confirm the auditor understands your operations in order that they will classify your business accurately.

Other Types of Workers’ Comp Audits

Not all workers’ compensation audits occur when policies are set to expire. counting on their situation, some business owners may have a:

Preliminary audit: Your insurer may conduct an on-site preliminary audit once you first apply for workers’ compensation insurance to work out your initial premium. this might be trickier to schedule if you would like to urge covered quickly to be in compliance.

Interim audits: Insurers may require an audit during the lifetime of your workers’ comp policy, particularly if you’ve changed operations. Additionally, employers might invite interim audits if they need to pay their workers’ comp quarterly. Interim audits are usually done by mail.

For both sorts of audits, you ought to still receive some kind of notification from your insurer in order that you’ll set time aside for the audit.

2. Gather Your Records

Workers’ compensation costs are supported by your payroll, risk, and claims history, therefore the auditor needs information about each of those aspects. Typically, audit notifications spell out the documents the auditor can use to verify the knowledge. This list is often specific to the carrier, but many insurers want some or all of the documents mentioned below.

General Information

• Description of company operations
• Job descriptions for each employee
• Number of employees at each location
• Owners/officers names and titles
• Description of work performed by contractors and subcontractors

Payroll Records

• Accounting ledger
• Payroll journal or register
• Business checkbook
• Federal Profit and Loss From Business Schedule C (Form 1040)*
• Federal Employer’s Quarterly Tax Return (Form 941)
• Federal Employer’s Annual Tax Return (Form 944)
• Federal Employer’s Annual Unemployment (FUTA) Tax Return (Form 940)
• Federal 1099, W-2, and W-3 transmittals
• State unemployment insurance tax reports (forms vary by state)
• Time cards or number of hours, days, and weeks worked annually
• Overtime payroll records

*For individuals and sole proprietors

Cash Disbursements Records

• Payments made to subcontractors
• Payments made to independent contractors
• Payments made to casual laborers
• Receipts for materials purchased

Insurance Records

• Subcontractors’ certificates of insurance
• Business’ experience modification worksheet

What Is Included in Payroll

Your payroll, also mentioned as remuneration, is that the start line for your workers’ comp premium, so you would like to urge that number right when preparing for an audit. However, it’s not always clear what counts as payroll. Each state has its own definition but, generally, remuneration includes:

• Gross wages and salaries
• Total commissions
• Bonuses
• Pay for overtime, holiday, vacation, and sick days
• Employee contributions to 401(k)s, savings plans, and individual retirement accounts (IRAs)
• Payments based on something other than time worked
• Payments you make that would otherwise be the responsibility of the employee like Social Security
• Payments or allowances for hand tools or power tools employees use for work
• Lodging and meals included as part of an employee’s pay

What Is Excluded From Payroll

Conversely, employee paychecks may include payments that aren’t usually counted as payroll in workers’ comp premium calculations. For example, many states exclude:

• Tips and gratuities
• Employer payments to group insurance
• Severance pay
• Reimbursed business expenses
• Special rewards for individual invention or discovery
• Active military duty pay
• Uniform allowances
• Employee discounts on goods and services

Make sure to identify these to the auditor, so they are not inadvertently included in your total payroll.

Are All Salaries Included in a Workers’ Comp Audit?

In general, business owners don’t need to carry workers’ compensation insurance for themselves, so their salaries aren’t considered during a workers’ comp audit. However, some states give sole proprietors, corporate officers, partners, and indebtedness company (LLC) members the choice of getting coverage. once they do, their salaries are treated differently because their pay is usually significantly quite regular employees.

Most states set an annual wage for sole proprietors and partners that are different from their regular salaries. Somewhat similarly, corporate officers who opt-in on workers’ comp receive a weekly salary that falls somewhere between a maximum and minimum salary determined by the state. LLC members get one or the opposite, counting on the state’s workers’ compensation rules.

3. Update Your Job Descriptions

The risk your employees face in their jobs is another a part of calculating your workers’ comp costs in order that the auditor will investigate everyone’s duties and your business’s general operations. this might involve reviewing job descriptions you have already got, or it could mean completing a form that lists what each employee does. Either way, you ought to have a robust understanding of what the people that work for you are doing . an honest thanks to accomplishing that’s to update your job descriptions — or create them if you haven’t already.

Why Job Descriptions Matter in a Workers’ Comp Audit

You might be tempted to skip this step, but detailed job descriptions are often an enormous help during a workers’ comp audit. Accurate job descriptions help your auditor determine the acceptable governing class code for your business. That class code features a corresponding interest rate that’s utilized in a formula to work out your costs. Using the incorrect class code could mean you’re paying the incorrect premium.

The basic formula for calculating workers’ compensation insurance costs factors in three numbers: the speed assigned to your class code, your experience modification rate, and your payroll divided by $100.

Let’s say, for instance, you run a craft beer brewery in Wisconsin with a payroll of $100,000. The auditor assigns your business the category code 2121, which suggests your interest rate is $3.11. to stay things simple, let’s also assume your experience modifier is one, so it doesn’t impact your rate which there are not any other fees or discounts. If all of that’s true, then your workers’ comp costs $3,110 per year:

When you rate the office employee differently than the remainder of the staff, your overall insurance costs go down. Having this information available during your audit helps the auditor assess your premium accurately.

4. Review the Auditor’s Work

Once your audit is complete, review the auditor’s work to form sure his information matches your understanding of your business’s payroll and operations. Essential information to review includes:

Payroll data: make sure your audited payroll matches the payroll from your accountant or accounting department.
Governing Classification: Unless your operations have skilled a huge overhaul, your governing classification should match the one on your original workers’ comp policy.
Any additional classifications: If your state allows them, check whether standard exception classes are noted. an equivalent goes for construction businesses that get to use multiple class codes for individual workers.
Experience modifier: Most states prohibit insurers from changing your experience modification rate during the policy term. If the auditor changes yours, you ought to ask why.

Once you review the auditor’s work, sign any paperwork the auditor requires to point you’ve taken part and understand the results. This step might not be available to you if you completed the audit remotely, but your insurer should send you a summary of the auditor’s findings. If those results seem out of whack, you’ll request more information from your insurer.

How to Dispute a Workers’ Comp Audit

If you don’t need to pay any additional premium―or maybe even received a refund―you can relax until next year’s audit. However, your insurer might decide you paid insufficiently and send you a bill. therein case, you either got to write a check or dispute the audit.

Each carrier has its own rules for disputing a workers’ compensation audit. However, most insurers expect employers to file a dispute in writing within a group time, so you ought to contact your carrier immediately. presumably, your carrier will want details on why you think that your bill is wrong and an estimate of what you think it should be. You won’t need to pay the extra premium while your insurer evaluates your complaint, but you’ll be required to pay any undisputed portion by the maturity on the audit bill.

Common Mistakes in Workers’ Compensation Audits

Being charged a further premium doesn’t automatically mean the auditor made an error. Workers’ compensation premiums are complicated things, so mistakes are pretty common. Below are a couple of of the foremost common errors:

• Including items in payroll that shouldn’t be there
• Using the wrong class codes for employees
• Changing your experience modifier
• Charging for an insured subcontractor
• Including exempt workers in the payroll

How to Make a Workers’ Comp Audit Easier

Every company that issues workers’ compensation insurance reviews policies at the top of their terms, so you can’t avoid an audit. However, you’ll make the audit process easier if you decide on pay-as-you-go workers’ compensation.

Pay-as-you-go Workers’ comp may be a payment plan where your insurer charges you whenever you run payroll. This usually requires you to upload or enter your payroll information to the insurer’s platform manually. However, some payroll companies can integrate together with your insurer to upload your data and pay your premium automatically.

The big point here is that a pay-as-you-go plan means your workers’ compensation premium is more accurate. Your insurer still must audit your policy because there might be errors in classifications or remuneration but pay-as-you-go plans generally end in smaller premium adjustments.

Workers’ Comp Audit Frequently Asked Questions (FAQs)

The stress of a workers’ comp premium audit can create additional questions for little business owners, especially if they hope to avoid one or are concerned that they’ll be asked to pay an enormous premium one theirs is over. We answer a couple of these questions below.

Am I required to undergo a workers’ comp audit?

Almost all workers’ compensation insurance policies have language that creates the audit a requirement for the policyholder. The policy created by the National Council of Compensation Insurers (NCCI), utilized in most states, says the policyholder must allow an audit anytime within three years of the policy’s expiration date.

What happens if I don’t comply with a workers’ compensation audit?

If you select to not suits your insurer’s request for an audit, it could cancel your premium, which may make it difficult to urge a policy afterward. Moreover, state law may allow your insurer to find you — sometimes up to 300% of the first premium — and send your account to collections. Ultimately, your insurer can use to gather both the first bill and therefore the additional fines.

What if I can’t afford the retroactive premium audit bill?

Premium audit bills result from unanticipated payroll during the course of a year and usually are due upon receipt or within 30 days. If the bill is substantial, contact your insurance carrier’s billing department. Most carriers will found out a payment plan, often splitting the bill over three payments. Ask the billing department for your options.

Bottom Line

Understanding the workers’ compensation audit rules when preparing for your annual review makes the method easier and produces more accurate results. By having well-organized company files and payroll data, a little business owner helps the auditor get a transparent picture of the company’s operations while also minimizing her own stress.