Workers' Compensation Audit

A workers compensation premium audit may be performed after each policy period in order to verify payroll, class codes, and sub-contractor exposure.

How to handle a workers compensation insurance audit.

What is a workers comp audit?

A workers comp audit is an annual review of records at the request of an insurance company. It may be done by phone, mail, or in person depending on the assigned Auditor. Work comp audits determine if the payroll and class codes quoted at inception accurately reflect the actual payroll and scope of work performed during the policy period. Audits also ensure that sub-contractors had their own coverage in place. If not, you may be charged for payments to uninsured sub-contractors on your policy on your audit.

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How Do I Prepare for a Workers' Comp Audit?

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 estimates 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 real-time, 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.

Workers' Compensation Audit Checklist

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:

Payroll Records

  • Payroll journal and summary
  • Your check book (if it's your only means of keeping records
  • Federal Tax Report- 941's that cover the period
  • State Unemployment Tax reports or individual earnings records
  • All overtime payroll records (charged at reduced rates)

Employee Records

  • Detailed explanation of job duties of each employee (if available)
  • Number of hours, days, and weeks worked annually

Payments and Cash Disbursement Records

  • Payments to sub-contractors
  • Material purchases
  • Casual labor payments

Certificates of Insurance

  • For all sub-contractors used during the policy period
  • For and independent contractors used

Detailed Description of Your Business Operation

Experience Modification Worksheets

  • Used to verify that Auditor applies correct E-MOD to policy period when applicable
Types of Workers Compensation Audits

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:

Physical Workers Compensation 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 auditor 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.

Voluntary Workers' Compensation Audit

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.

Workers Compensation Premium Audit Tips

Separate and summarize employee overtime paid to employees by job classification or class code.

  • Premium on overtime wages are charged at a reduced rate.
Get current certificates of insurance for all subcontractors you paid during the policy period.
  • Make sure each certificate proves the subcontractor had work comp coverage during the time of service to your business.
  • If you can't provide a workers' comp certificate for each sub-contractor you will be charged premium for any money paid for work.
Separate employee payroll by class code
  • Employee payroll can often be divided over different class codes if they perform multiple job duties. Accurate payroll records should be kept and reflect hours and work performed before a multi-class separation will be applied. This is called "Payroll Class Separation". Without adequate records, the entire payroll for the employee will be placed in the highest rated classification code.
Make the Auditors' job easy.
  • Be prepared and have complete and accurate records available for review.
  • Do not volunteer too much information. Just have straightforward and direct answers for the auditor's questions.
  • Make sure an owner or a person knowledgeable about the business is available to meet with the Auditor.

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.

Frequently Asked Questions- Workers' Comp Audits

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 premium audit?

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 split 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 acceptable.

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 the 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.

What Happens if You Ignore a Workers' Comp Audit?

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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Common Mistakes on Workers' Comp Audits
  • Auditor uses the wrong class codes for one or more employees.
  • Auditor applies the wrong Experience Modifier when calculating your audit premium.
  • Policy credits indicated on the workers' compensation quote not being utilized on the work comp audit.
  • Employer being charged premium for sub-contractor payments even though they have a valid certificate.
  • The original base manual rates used on work comp quote are not the same as the rates on the audit.
  • Incorrect payroll figures being used on when calculating the audit premium.
  • Auditor fails to exclude owner payroll from the audit when they were excluded under the policy.
  • Employees working in multiple workers compensation class codes, but the payroll was not separated on the audit.

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Workers' Compensation Audit Terminology

Premiums Earned

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.

Payroll Audit

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 code.

Premium Discount

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.

Help With Work Comp Audits?

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 insurance audit.

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Visit NCCI for more resources and information about workers' compensation class codes. Visit United States Department of Labor for more information about government agencies managing workers compensation insurance rates.

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