What Payroll is Included in a Workers' Compensation Audit?

an auditor reviewing payroll records
Mordechai Kamenetsky
Last Updated: 
February 23, 2024

During an audit, your insurance company will review your payroll records to make sure the premiums you've paid match the payroll your employees have received. Payroll included in a workers’ compensation audit includes wages, salaries, bonuses, commissions, and other types of employee compensation.

Understanding Payroll for Workers' Comp

What kinds of pay are included?

Generally, the following items are considered as part of your payroll for workers' comp purposes:

  • Wages and salaries: This includes retroactive pay if the employee was underpaid for some reason.
  • Overtime or double-time pay: However, in most states these are calculated at the employee’s base rate.
  • Additional pay such as bonuses: Including stock bonus plans.
  • Commissions
  • Holiday, sick leave, and vacation pay
  • Social Security and Medicare tax contributions
  • Profit sharing or other benefits
  • Prevailing wages
  • Annuity plans

What kinds of pay are not included?

On the other hand, here are certain types of pay that you don't need to worry about when calculating your payroll for workers' compensation: 

  • Tips
  • Employer contributions to group insurance or pension plan
  • Reimbursements for expenses
  • Payments for unused vacation or sick time

Employee Classification and Audits

Who counts as an Employee for Audit purposes?

When it comes to workers' compensation audits, it's important to know who counts as an employee. In general, employees include full-time, part-time, temporary and seasonal workers. 

However, there might be specific state regulations that impact the classification of certain types of workers, such as independent contractors or subcontractors

What are the common penalties for discrepancies found during a Workers' Comp Audit?

If discrepancies are found during a workers' compensation audit, you might face several penalties. Some common penalties include:

  • Increased premium costs: If your payroll was underestimated or misclassified, your workers' comp premium might be recalculated at a higher rate, resulting in increased costs.
  • Fines or penalties: Depending on the severity of the discrepancy and your state's regulations, you might face fines or other penalties for non-compliance.
  • Retroactive charges: If you've underreported payroll or misclassified employees, you could be required to pay retroactive charges for the entire policy term.
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To minimize your risk of penalties during an audit, consider implementing these best practices:

  • Keep accurate and up-to-date payroll records.
  • Regularly review and adjust employee classifications as needed.
  • Ensure subcontractors and independent contractors have their own workers' compensation coverage, when applicable.
  • Understand and follow your state's workers' compensation requirements.

Remember, staying on top of your payroll and employee classification can help reduce the chances of discrepancies during a workers' compensation audit and can ultimately save your business time and money.

Common misconceptions about payroll for Workers' Comp

Myth: You only need to include full-time employees in your payroll calculations. 

Truth: Both full-time and part-time employees should be considered when calculating your payroll for workers' comp audits.

Myth: Independent contractors don't need to be included in workers' comp payroll calculations. 

Truth: Depending on the laws in your state, independent contractors may need to be included in your workers' comp payroll calculations if they do not have their own coverage.

Myth: Payroll for workers' comp audits is only based on cash wages. 

Truth: Non-cash wages such as lodging, meals, and other forms of compensation may also need to be included in your workers' comp payroll calculations.

Myth: Payroll for workers' comp audits does not need to include seasonal workers.

Truth: Generally, temporary or seasonal workers’ need to be included in the payroll calculations for workers' comp insurance.

Myth: Family members who work for the business are not required to be included in workers' comp payroll calculations. 

The inclusion of family members in workers' comp payroll calculations varies by state and may be required in some cases.

Do you want peace of mind when dealing with workers' comp audits? 

Navigating the intricacies of workers' comp audits can be overwhelming, but with the right support, you can ensure a smooth and compliant process. 

Kickstand Insurance offers the expertise and guidance you need to navigate workers' comp audits with confidence. By partnering with us, you can have peace of mind knowing that your business is well-prepared and protected. Get an instant quote to start the process.

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Note: The information provided in this blog is intended for general informational purposes only and is not a substitute for professional legal or insurance advice. Laws and regulations regarding workers' compensation insurance are complex and vary by state and by specific circumstances. Therefore, readers are encouraged to consult with a qualified legal or insurance professional to obtain advice with respect to any particular issue or problem they might have.

Mordechai Kamenetsky

Mordechai Kamenetsky, co-founder and lead agent of Kickstand, is recognized as an expert in workers' compensation. He is passionate about helping small businesses manage risks and lower their workers' comp costs. In his articles, he educates readers and clients on the intricacies of workers' comp insurance.

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