When your insurance company issued your Workers Compensation policy, you paid an estimated premium for the term of the policy. This rate was based on the nature of your business and your estimated payroll. Once the policy term ends, the insurer conducts a premium audit to determine actual payroll and exposures; if the actual premium is higher than the estimate, you are responsible for the difference between the original estimate and the actual premium. For more on handling premium differences, see Workers' Compensation Premium Recovery.
Naturally, you want to keep the difference between the estimated and actual premium as low as possible. Consider the following list of tips. If your business is trade-focused, you may also find Artisan Contractors Workers' Compensation useful for trade-specific considerations.
Audit preparation tips
- Have all necessary records available for the auditor.
- Break down your payroll by classification code so the auditor doesn't have to classify any unexplained payroll. Leaving classification to the auditor can result in payroll being placed in a higher-rated class.
- Separate overtime wages from regular wages so the auditor can discount overtime back to regular wages where allowed.
- Exclude tips, severance pay, meal and travel advances, and bonuses paid for inventions, because these items are typically not included in Workers Compensation premium calculations.
- Divide uninsured subcontractor billings into material and labor costs since premiums apply only to labor. If you don't have an actual split, use 50% for each. One important exception is heavy equipment operators billed as subcontractors: use one-third of their total billings as reportable labor costs.
- Don't include short- or long-term disability payments in the data given to the auditor because these are excluded from premium calculations.
- Cap covered officers' payroll at your state's maximum when applicable.
- Exclude wages paid to employees who are on active military duty because their wages typically aren't included in premium calculations.
- Provide the auditor with Certificates of Insurance for covered subcontractors so you aren't charged for their payroll.
- When unsure about classification, place employees in the lower-rated payroll classifications, but never deliberately misclassify an employee.
- Identify employees who perform only clerical work and who are physically separate from the shop floor; these employees often qualify for lower-rated clerical codes. If clerical staff work in the shop area, consider changing their work location to reflect their duties accurately.
If you have questions about specific items in your audit or the records you should keep, you can talk to an agent.
Frequently Asked Questions
What is a workers' compensation premium audit?
A premium audit is a review of a policyholder's payroll and exposure for the policy term to determine the actual premium owed; the auditor reconciles estimated premiums with actual figures.
What records should I prepare for the auditor?
Prepare payroll registers, tax filings (such as Forms 941), subcontractor invoices, and any Certificates of Insurance for subs; having organized records speeds the audit and reduces misclassification.
How should I handle subcontractor invoices?
Separate material and labor on subcontractor invoices since only labor is subject to premium; if you lack a split, use a reasonable estimate and document your method.
Can I change employee classifications during the audit?
Yes, discuss classifications with the auditor and provide supporting job descriptions; always classify accurately and avoid intentional misclassification.