Expert answers to all your business insurance questions.
What is a workers' comp audit and what do I need to know?
- Workers' Comp Basics
A workers’ comp audit is an end-of-year process that makes sure your business paid the correct amount for workers’ comp. During an audit, your insurance provider will double-check your payroll and other records and, if necessary, adjust the price of your workers’ comp for the previous year.
So, why a workers’ comp audit?
Workers’ compensation premiums are based on several factors, but the biggest is the size of your payroll. When you apply for a workers’ comp policy, you tell the insurer how much you expect to pay your employees during the upcoming year (and what kind of jobs you think they’ll be doing).
The problem is: those estimates aren’t always accurate. Let’s look at an example to see what we mean.
Let’s say that you’re the owner of a small breakfast restaurant. And let’s say that you’re approaching the end of your workers’ comp contract. When you first filled out your insurance forms, you estimated that you would pay $200,000 in payroll over the course of the year.
You then paid a premium based on those estimated numbers.
What actually happened, though, is that the year was a little bit slow (bummer), and you didn’t hire as many pancake-makers as you thought you would.
When your insurance company conducts their audit, they will see that you paid only $160,000 in payroll over the year. Then they’ll write you a check, because you paid too much premium.
Of course, the audit can go the other way. If your pancakes went gangbusters and you had to hire twice the staff you expected, you’ll need to pay extra at the end of your workers’ compensation contract. It’s only fair.
What do I need to know about workers’ comp audits?
A couple things.
First, you should know that audits are mandated by law.
You’re not getting an audit because you’re suspected of fraud. You’re getting an audit because, well, every business gets audited.
If you’re a small business, your audit probably won’t be a big deal.
There are three main types of audit. Let’s go through them quickly.
- A mail audit. You’ll get audit forms from your insurer. All you have to do is fill them out and send them back, along with any paperwork the insurance company requests. If you’re a small company, this is the most likely scenario. (It’s really no big deal. Your small business insurance online company is mostly interested in getting accurate payroll information from the past year.)
- A phone audit. With this kind of audit, you’ll still submit payroll information and get some forms to fill out. The difference is that a representative of the insurance company will call you on the phone to talk over your paperwork. This kind of audit is usually given to medium-sized businesses.
- A physical audit. This usually only happens if you’re a very large company (or if you’re suspected of major fraud). With this audit, your insurance company will send a representative to your physical location to have some conversations, review your paperwork and payroll records, and take a look around.
If you choose pay-as-you-go, your audit will be even less of a big deal.
With pay-as-you-go, your monthly workers’ comp payment will automatically go up or down as your payroll does. And, because payroll is the single biggest factor in how much you pay, that can eliminate most audit surprises. You’ll still be audited (sorry, it’s the law), but it should be pretty easy.
Keep in mind that you can also use our workers' comp calculator and get an online quote from Huckleberry in about five minutes.