Tax and License

Regarding protecting employees and staying compliant with labor laws, Workers’ Compensation Insurance is a vital safety net for businesses of all sizes. However, ensuring your workers’ comp coverage aligns with your actual payroll and staffing setup involves one critical step: the workers’ compensation audit.

Getting an audit notice might be daunting if you’re a business owner or HR professional. What does it involve? How can you prepare? And what happens after? Everything you need to know about workers’ compensation audits will be covered in this extensive book, from their goals and planning to the procedure and possible results.

You’ll understand how to breeze through your next audit with minimal stress and ensure your business remains compliant.

What is a Workers’ Comp Audit?

A workers’ comp audit requirement is a review conducted by your insurance company to verify the payroll and employee classifications you reported during your policy period. The audit ensures that you’ve paid the correct premium for your workers’ compensation insurance based on the risk associated with your workforce.

These audits serve an essential purpose. Workplaces can change quickly, and audits help reconcile discrepancies between estimated payroll figures (provided when purchasing a policy) and the actual numbers at the end of the policy period.

Why are Workers’ Comp Audits Important?

The workers’ comp audit exists for three main reasons:

• Accurate Premium Calculation

It ensures you’re paying a fair premium that reflects the actual risk level of insuring your workforce. Overestimating payroll could mean overpaying for insurance while underestimating could result in unexpected post-audit bills.

• Compliance with State Laws

Many states require businesses to maintain full workers’ comp coverage based on their workforce. An audit ensures compliance and avoids penalties or potential legal issues.

• Risk Management

Misclassifying employees or underreporting payroll can lead to significant liabilities, especially if claims arise. Proper audits help insurers manage risk and protect both parties if accidents occur.

Who Needs a Workers’ Comp Audit?

Virtually all businesses with workers’ comp insurance policies are subject to audits. The frequency depends on the insurance carrier and the business type, but most audits occur annually when a policy period ends.

Audits apply to businesses of all sizes, spanning industries like construction, retail, restaurants, and more. No matter the size of your team, if employees are covered under workers’ compensation insurance, you should prepare for the possibility of an audit.

Preparing for a Workers’ Comp Audit

Preparation is key to streamlining the audit process and avoiding surprises. Here’s how to prepare for your audit.

1. Organize Your Documentation

Having accurate and complete records is crucial to ensure the audit goes smoothly. Documents you’ll typically need include:

• Payroll Records: Detailed breakdowns of all wages (including bonuses) paid during the policy period.
• Employee Information: Job titles, classifications, and employment status (full- or part-time).
• Subcontractor Agreements: Certificates of insurance and payment records for independent contractors you’ve hired.
• Tax Documentation: Copies of IRS forms such as 941 (employer’s quarterly tax return) and 1099s for contractors.
• Profit and Loss Statements (if applicable): Summarize your company’s finances throughout the audit period.

2. Confirm Employee Classifications

One of the most common reasons for costly adjustments during audits is employee misclassification. Workers in different roles present different levels of risk. For example, a clerical worker has much less risk than a construction worker.

Ensuring all employees are correctly classified according to the applicable code beforehand will prevent costly surprises during the audit.

3. Review Your Payroll Data

Double-check that all payroll figures are accurate and reflect gross wages, tips, overtime, and bonuses. Excluding wages for uncovered positions or misreporting overtime can lead to adjustments and penalties.

Common Mistakes to Avoid

Even though most audits are straightforward, some avoidable missteps can complicate the process or result in higher premiums. Here are some pitfalls to watch out for:

• Excluded Subcontractors: Forgetting to include contractors without valid insurance in payroll records can inflate your bill.
• Misclassified Positions: Incorrectly classifying employees as low-risk workers can result in costly fines after reclassification.
• Poor Recordkeeping: Missing or incomplete documents add delays and may trigger further scrutiny.

What to Expect During the Audit

Understanding the audit process helps ease anxiety and ensures you’re ready when the time comes.

The Audit Process

• Audit Notification

Your insurer sends you a notice about the upcoming audit, detailing the documents required and how to prepare.

• Types of Audits

Audits can be conducted in several ways:

• Mail Audits: You mail your documents to the insurance company.
• Phone Audits: An auditor reviews your records via a detailed call.
• On-Site Audits: An auditor might visit your office to examine records in person for larger businesses.
• Document Review

Auditors review the payroll data and job classifications against the terms of your insurance policy. They’ll check for consistency and accuracy.

• Post-Audit Adjustment

Once the audit concludes, you’ll receive an adjustment statement. You might owe additional premiums if your reported figures were lower than the actual. If they were higher, you could receive a refund or credit.

Potential Outcomes and Consequences

The most common outcomes of an audit include:

• Premium Adjustments

Higher or lower premiums are based on actual payroll and workforce classifications.

• Penalties for Noncompliance

You could face significant penalties or legal repercussions if you fail to obtain adequate insurance or misreport data.

After the Audit

Just because the audit is over doesn’t mean your work is done. Here’s what to do next.

Appealing Audit Results

Disagree with the results? You have the right to appeal. Gather documentation supporting your case, and file an appeal with your insurer as soon as possible. Many insurers have dedicated audit dispute teams to address discrepancies.

Maintaining Compliance

To avoid complications in future audits:

• Keep accurate and organized records year-round.
• Review job classifications regularly to ensure compliance.
• Communicate changes in your workforce (like adding new roles) to your insurer promptly.

Stay Ahead of Workers’ Comp Audits

Workers’ comp audits don’t need to be stressful. By remaining organized, correctly classifying personnel, and knowing what to anticipate, you can guarantee a more seamless procedure that prevents expensive surprises.

If you have questions or concerns, don’t hesitate to contact your insurance company or consult an expert. Staying informed is the key to ensuring compliance and running your operations smoothly.