What is a Workers’ Compensation Audit?

December 21, 2022

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Free Audit Checklist available to download below!

Your company's payroll will be reviewed and verified during a workers' compensation audit. Since the payroll paid to your employees over the course of a policy term directly  affects the workers’ compensation premiums, auditors look at your payroll at expiration or cancellation of every workers' comp policy. The annual premium is adjusted based on the results of the audit.

What should you know about audits?

An insurance company may seek a review of documents every year for a workers' compensation audit. Depending on the designated auditor, it could be done via the phone, by mail, or in person. 

Work comp auditors check to see if the class codes and payroll quoted at the policy's inception accurately represent the actual payroll and range of work done during that time. 

Audits also confirm the presence of subcontractors' own insurance. If not, you can be billed during your audit for payments made to uninsured subcontractors listed on your policy. There are different types of audits, which we will discuss next.

Types of Workers’ Compensation Audits

Physical Audits

Physical audits 

You're subject to a physical audit at your place of business. Normally, it must be requested within 60 days of your workers' compensation policy's expiration. The auditor will call or mail you a notification and set up an appointment for the audit. 

Remember that the auditor has a timeline to follow. Most insurance companies demand that once an audit has been assigned, it be finished and returned within 30 days.

Failure to comply with the audit can be very costly. The auditor must provide the audit to the insurance provider with a note of delinquency if it is not finished in the allotted period. 

As a result, the carrier may issue an audit bill that is bigger than necessary and not based on accurate data because insurance providers will increase the original payroll by an additional 25% or more thereby charging an additional premium.

Mail Audits

Mail audits

Mail is used to complete the work comp audit. Within 60 days of your insurance policy's expiration, your insurance company will mail the audit form to you. As soon as you can, fill out this form and send it back to the insurance provider. 

The form often requires you to confirm the actual payroll figures for each class code while displaying the classification codes as they appear on your policy.

Although these forms are straightforward, they can be challenging for someone who has never carried out an audit. Along with the audit form, the form could also ask you to send other tax reports or relevant paperwork.

What mistakes might be discovered during an audit?

Make sure your payroll projections are as accurate as you can. A smooth auditing procedure is made possible by accurate estimations. They also assist you in avoiding a large audit-related bill.

Work with an insurance team who is familiar with your company's activities and is aware of potential changes during the policy's term. Transparency might make the auditing process easier.

As a business owner, you must also confirm that the payroll on hand matches the payroll that has been audited. To accomplish this, make sure the data you give the auditor is accurate and that you check their work.

Your workers' compensation insurance premiums are determined using class codes which in turn describe the kind of work an employee is performing. That is why these codes are also reviewed for accuracy during an audit, to make certain that the correct codes are applied to the kind of work your employees are performing.

The wrong class code may result in an additional  premium payment required by you at the end of the process.

The secret to a good workers' compensation audit is staying organized. Keeping all payroll records and other paperwork organized and filed over the course of your policy's term helps simplify things.

Please keep in mind the following elements are required for your audit:

  • Payroll documents such as payroll summaries and journals, overtime payments, state tax returns, federal tax returns from the IRS, and state unemployment tax reports
  • Insurance certificates for builders and subcontractors
  • Employee records, including Form 941 and information on each employee's jobs, hours worked, and overall employee count
  • Payments made in cash for materials, labor, and payments to subcontractors
  • An explanation of the business operations

You might need to provide your insurance company with your checkbook or bank statements in lieu of tax documents  if that's how you store your records. 

How can a bad audit affect your policy?

Bad workers' compensation audits can affect your policy in several ways. Your workers' comp premium may increase or, you might find that you aren't eligible for certain types of claims or coverage.

In addition to these financial consequences, a bad audit can also affect your reputation as an employer. If your policy is audited and found to be lacking, it could appear that you don't care about your employees' well-being and are unwilling to provide them with the resources they need to stay safe on the job. 

While this isn't always true — sometimes there are extenuating circumstances — it's important to be aware of how a bad audit could impact your reputation as a business owner.

How should you prepare for your workers’ compensation audit?

Financial data for the time period covered by your workers' compensation policy is required for audits.

To prepare, consider making a workers' compensation audit checklist to help keep track of what you will need as you get ready for your audit:

1. Employee information, including payroll forms and reports.

2. Owners, officers, and partners’ information, including payroll information like:

  • Their name
  • The state where they work
  • Their corporate title
  • The percentage of stock they own
  • How long they’ve been employed
  • Their total earnings

3. Payment and certificate verification, including:

  • 1099 Forms
  • Certificates of insurance for all employees or subcontractors

4. Your business’s information, including:

  • Your general ledger
  • Sales journal
  • Cash receipts
  • Sales tax records
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A workers’ compensation audit is a normal process of the workers’ compensation protocol. Understanding why they happen and what to expect is important. At Kickstand Insurance, we are always available during the life of your policy to help you prepare for the audit and answer any questions you have. 

Not working with us yet? Start your instant workers' comp quote or call us at 866-338-8823 for more information.

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