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What is a workers comp audit?
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A work comp audit is the examination of a policyholder financial and payroll records after the expiration of a
policy. This process is done to determine the accuracy of the estimated premium when the policy was started. The
actual premium basis and class code exposures are reconciled after the policy expiration and measured against the
used to establish the original earned premium for the policy. A year-end final audit
is really a verification of the payroll and subcontractor exposure to determine the final
premium to be charged since the original quote was based on estimated payroll only.
Pay As You Go
Workers' Compensation policies help reduce exposure to large audit
balances because the premiums are based on actual payroll and they are reported/paid in
verses traditional estimated direct bill programs used.
Audits are very common and typically conducted after each policy period ends or
the policy expires. Once the audit has been completed, the insurance carrier will send a Final
Audit Statement to the policy holder. This statement will indicate
if any additional premium is owed by the insured or if any credits need to be
returned or applied to the next policy. Typically, these credits or debits are
caused by payroll adjustments made by the auditor when conducting
the year-end audit. They may also be created when the auditor believes employees were incorrectly classified.
When preparing for your workers' compensation audit you should plan to provide the auditor with only those items
they ask for. There is no reason to give them any more information than they ask for. Remember,
the quicker an auditor can finish his job and move onto another audit, the better it
is for you and for them. Here's some of the common reports and documents employers
might need for a fast and smooth premium audit:
Payments and Cash Disbursement Records
Certificates of Insurance
Detailed Description of Your Business Operation
Experience Modification Worksheets
There are two types of workers compensation audits. A physical audit and a
voluntary audit. Whether an insurance company performs a physical or voluntary
workers compensation audit will depend upon the type and nature of your business
operations and the size of the premium. More complicated businesses and larger premium sizes
will usually require a physical audit rather than a voluntary audit:
A physical audit is performed at your place of business. It is typically requested within 60 days
after the expiration of your workers compensation policy. The auditor will notify
you by mail or by phone and schedule the audit appointment. Keep in mind that the
is on a time schedule. Most insurance carriers require them to return the completed
audit within a 30 day time period once its been assigned. If the audit is not completed
within the required time frame, the auditor must return
it to the insurance company marked delinquent. This may result in a larger than
necessary audit bill by the carrier and may not be based on accurate data because insurance companies will add and
additional 25%, or more, to the original payroll.
A voluntary work comp audit is done by mail. The audit form is mailed by your insurance company within 60 days
after the expiration of your insurance policy. This form should be completed and
returned to the insurance company as soon as possible. The form usually shows the
classification codes as shown on your policy and asks you to verify the actual payroll exposures for each class.
These forms are basic but they can be confusing for someone who has never completed an audit. The form may also
request that you return other tax reports or related documents along with the audit form.
If you have questions about an audit form, it is best to
contact the insurance company or agent for help. The
information you provide to the insurance company will be use for finalizing your audit bill.
It is important that you understand how the information you send back will affect
the audit outcome and the final policy premium.
Separate and summarize employee overtime paid to employees by job classification or
It is always a good idea to engage the auditor during the audit process
and review any worksheets they prepare. Do not sign off on incomplete audit worksheets. Ask
questions about anything that may not make sense to you.
Finally, ask to make a copy of the audit worksheet they prepare. It is not uncommon
for auditors to make mistakes on the audit worksheets. Remember, they work for the
carrier and most mistakes are in favor of the insurance
companies. Audits are a contractual obligation within the workers compensation
insurance policy. It is common practice for carriers to add an additional 25% to all
estimated payroll figures when businesses fail to comply
during the audit process. It is in your best interest to have a reasonable
understanding of your work comp class codes, payroll, and subcontractor payments
prior to any physical or voluntary audit.
What is Included in Workers' Compensation Wages?
Wages used to conduct an audit include hourly payroll, employee salaries, bonuses, commission, vacation pay,
holiday pay, sick pay. Housing and tool allowances given as part of employee compensation are supposed to be
included as wages but most auditors have no way of really knowing when and if a business uses allowances. Overtime
wages ar included but they may be capped at a certain percentage depending on the state.
Tips are not included as wages under workers' compensation insurance. Severance pay can
also be excluded from audit calculations except accrued payments for commission, bonuses, vacation and sick pay.
An owners' draw is not used during a workers comp audit.
Is overtime pay included in workers' compensation payroll?
Overtime pay often gets included at time of audit because the business does not provide clear records indicating
which portion of wages were overtime pay. However, a business only needs to include overtime wages at the
employees' regular wages. or standard rate of pay. A business needs to show proof of overtime wages
separated on a valid payroll report. In some states, overtime pay is included at two-thirds the amount
paid to employees.
What records do I need for a
Common records include payroll and disbursement journals, general ledger, cash
receipt journals, checkbooks, 941's, state unemployment wage reports, 1099's, 1040c
(Schedule C), 1120, 1065, etc.
Is workers' comp based on gross or net wages?
The payroll wages used to calculate workers comp premium due is based on gross wages paid to W-2 employee and/or 1099 employees.
Can an employee's payroll be split among two or more class codes?
Employee payroll should be assigned to the basic classification that best describes
the business of the employer. It is the overall business that is classified as
opposed to each employee or job duty. However, the payroll for an employee can be
if two or more classifications can be applied to your business/employee, and you
maintain a payroll record breakdown for the employee by job classification. The
following class codes may not be split for some industries:
8810- clerical, 8742- sales or messenger, 8748- auto sales person, and 8871-
clerical telecommuter. Estimated or percentage allocation of payroll is not
Can corporate officers be excluded from coverage?
Most states allow officers and owners to elect to be exempt from coverage. See state specific
information page or learn more about workers'
comp exemptions. Required owner inclusion or exclusion forms may need to be signed and given to
insurance company before the effective date.
What if my legal status or ownership changes during the policy term?
This will more than likely impact your work comp coverage and premium. You will need to complete an ERM-14 Form to
determine the impact. Advise your agent or insurance carrier immediately.
What qualifies as an independent contractor?
Generally speaking, an independent contractor is in the business of providing a service for a
predetermined price. They generally have more than one customer and work under their own terms and supervision.
If you utilize independent contractors you should keep copies of contracts and invoices showing a breakdown of
labor and materials. You should also keep copies of any business cards and certificates of insurance.
Will I be charged premium for independent contractors (subcontractors)?
You will be liable for premium for any money paid for labor unless you have valid certificates of workers'
compensation insurance. Always ask for a =current work comp certificate prior
to letting a sub-contractor start a job for you business.
What is a valid certificate of workers' compensation insurance?
A valid certificate or "cert" identifies a policy which is effective during your
same policy period. It shows the independent contractor or subcontractor as the
"insured" and shows your company as the Certificate Holder.
An audit is required under the terms of a policy. Therefore, it's a violation of the agreement to avoid an audit.
The policy will generally outline the penalties associated with a businesses failure to respond to an audit
request. Insurance companies often charge an additional premium of 25% - 50% of the original policy premium. This
charge is knows a workers' compensation audit non-compliance charge. Audits can be disputed for up to the
past 3 years, or policy periods. In some cases, Business owners may get a refund based on the audit results. This
commonly happens when the estimated payroll is lower than the actual payroll.
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The portion of written premiums that are applicable to the expired portion of the time
for which the insurance was in effect.
When used as an accounting term, "premiums earned" describes the premiums written
during a period plus the unearned premiums at the beginning of the period less the
unearned premiums at the end of the period.
The wages paid by an employer for a state and workers' compensation classification code.
With workers compensation insurance, an insured's exposure to a risk is usually measured in
terms of its payroll. Premium is calculated per $100.00 in wages and expressed as a percentage.
An examination of the insured's payroll and tax records by a representative of the insurance company. The audit
determines the final premium due on a policy. Payroll is the basis of the calculation for each rate and class
Refers to a percentage discount based on the size of the total insurance premium volume or amount.
Larger premiums will receive a greater percentage discount. This concept recognizes relatively less
insurer expense in issuing and servicing larger policies. The premium discount is designed to
distribute the cost of workers' compensation insurance equitably among risks of all sizes. It ensures
that larger businesses pay no more than their fair share of loss costs and insurance
company overhead expenses.
Our agency provides knowledgeable staff who assist customers with audits on a
daily basis. It's common for insurance companies and auditors to make mistakes
when conducting a workers compensation audit. We know how to fix them. Contact
one of our Audit Specialists today for a free audit review for your policy. We
understand the formal audit dispute process and will help make sure you don't pay too much on your next
compensation insurance from trusted experts
who will help you quote your coverage and manage your policy better.
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