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What is a workers’ compensation audit, and what do I need to know?

As a business owner, you may be asked by an insurance company to review your company’s payroll documents. This is called a workers’ compensation premium audit. If you’ve been contacted by an insurance company or anticipate being contacted by an insurance company for a workers’ compensation audit, the following will help guide you through the process, from the starting line to the finish line.

What is a workers’ compensation audit?

A workers’ comp audit is an end-of-year process that ensures your business paid the right amount for workers’ compensation insurance. During an audit, your business insurance provider will double-check your payroll and other records and, if necessary, adjust the price of your workers’ comp for the previous year.

Why will my business undergo a workers’ comp audit?

Workers’ compensation policy premiums are based on several factors, but the biggest is the size of your total payroll. When you apply for a workers’ comp insurance policy, you tell the insurer how much you expect to pay your employees during the upcoming year and what kinds of jobs you think they’ll be doing.

The problem is: Those estimates aren’t always accurate. Let’s look at an example:

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 you would pay $200,000 in payroll for the year. You then paid a workers’ compensation premium based on those estimated numbers.

What actually happened for you is the year was a bit slow (bummer), and you didn’t hire as many pancake-makers as you thought you would. When your insurance company conducts its audit, it will see that you paid only $160,000 in actual payroll over the policy period. The insurance company will then cut you a check because you overpaid for the insurance premium on your workers’ compensation policy.

Of course, the audit can go the other way. If pancake sales went through the roof and you had to hire twice the staff you expected, you’ll need to pay extra at the end of your workers’ compensation contract.

What do I need to know about the workers’ comp audit process?

A few things.

1) Audits are mandated by law.

You’re not being audited because you’re suspected of fraud. You’re being audited because every business gets audited to determine if your payroll and class codes quoted at the beginning of your insurance policy match the numbers at the end of your policy and that any subcontractors you’ve hired had their own insurance.

2) If you’re a small business, your audit probably won’t be a huge hassle.

There are three main types of workers’ comp audits your small business might encounter. The following describes what they are and what you’ll need to do to comply with them:

  • Mail Audit: Also known as a voluntary audit, the mail audit is when your insurance company sends you a workers’ comp audit form by mail. All you have to do is fill out the workers’ comp audit worksheet and send it back to them, along with any other paperwork the insurance company requests. If you’re a small company, this is the most likely scenario for your workers’ comp audit since your online insurance company is mostly interested in getting accurate payroll information from the past year.
  • Phone Audit: With this kind of workers’ comp audit, you’ll still submit payroll information and receive some forms to fill out, but the difference is a representative from the insurance company will call you on the phone to talk through your paperwork. The phone audit is usually given to medium-sized businesses.
  • Physical Audit: The physical workers’ comp audit usually only happens if you’re a very large company or your company is suspected of conducting major fraud. With the physical audit, your insurance company will send a representative to your place of business to have some conversations, review your payroll records, take a look around the premises, and potentially ask for additional paperwork. For a physical workers’ comp audit, you may want to enlist the services of a workers’ comp audit attorney to ensure you’re legally complying with all aspects of the audit while at the same time not overexposing your business to a potential lawsuit.

3) If you choose a pay-as-you-go option for your workers’ compensation insurance, your audit will be even more seamless.

With pay-as-you-go, your monthly workers’ comp payment will automatically rise and lower as your payroll fluctuates.

Because payroll is the single most significant factor in how much you pay for workers’ compensation insurance, you’ll always have a general idea of how much you’ll owe and can eliminate most audit surprises simply by looking at your payroll cost. Regardless, you’ll still be audited (sorry, it’s the law), but the process should be easier if you’re enrolled in a pay-as-you-go plan.

Frequently asked questions: Workers’ compensation audit

At first glance, a request from your insurance carrier for a workers’ compensation premium audit can be scary and intimidating. But it doesn’t have to be. The following are answers to some of the most common questions that will help you prepare for your workers’ comp audit:

How do I prepare for a workers’ comp audit?

Here are some tips to prepare for your first worker’s comp premium audit:

  • Help auditors help you: Engage with your insurance auditor and be pleasant and courteous when answering any questions or providing any information, and remember to be direct, precise, and knowledgeable about your business. Review any workers’ comp audit worksheets they prepare and do not sign off on any incomplete worksheets. This will save the auditor time (and save you time) from going back and forth filling in the blanks. It’s also a good idea to make a copy of the final workers’ comp audit worksheet for your own records.
  • Separate your payroll by class code: Most of your employees can be separated by different classification codes depending on their job duties, job classifications, or job descriptions at your company. If you have a lot of employees, it’s even more crucial you document your payroll class separation to better reflect the accurate payment distributions for the work you’ve hired. Some business owners keep a payroll journal to organize the payroll class codes come audit time.
  • Review your subcontractors: As part of the workers’ comp audit, subcontractors and independent contractors are also reviewed by your insurance provider to make sure they carried their own insurance policies when they worked for your company. It’s good practice to secure Certificates of Insurance (COI) from all of your subcontractors that prove they had their own workers’ comp policy during the time period they were conducting work for your business.

Don’t let your first workers’ comp audit frighten you. Just keep detailed and honest company records, stay organized, and your workers’ comp premium audit will be a piece of cake.

What penalties can I face after a workers’ comp audit?

Ignoring a workers’ comp audit is a big problem because it’s stated it will occur in the terms of your insurance policy and is, therefore, a violation of your policy. Should you ignore your workers’ comp premium audit, you may face the following:

  • Extra charges: The main penalty you’ll face for ignoring a workers’ comp audit is a “failure to respond to an audit request charge,” commonly referred to as a workers’ compensation audit non-compliance charge. The fee for the non-compliance charge is typically 25% to 50% of your original policy premium.
  • Extra paperwork: Extra paperwork stinks, but if you ignore your workers’ compensation audit, that’s what you’ll have to look forward to.
  • Underpayment penalties: If your estimated payroll is higher by year’s end, you’ll owe the insurance company money. Ignoring your audit will delay the insurance provider from receiving their owed fees, which could end up costing you more time, money, and more paperwork.

No one likes being audited, but to avoid the additional charges and additional paperwork, you must respond to your workers’ compensation premium audit request promptly.

Can I dispute the outcome of my workers’ comp audit?

Depending on if you owe money to your insurance company or are owed money from your insurance company, your workers’ comp premium audit might provide you with a refund. Either way, you can dispute workers’ compensation premium audits for up to the past 3 years or the past 3 policy term periods.

If you want to dispute a workers’ comp premium audit, it might be helpful for you to hire an audit specialist who can walk you through the formal audit dispute process. Having a specialist review your audit can help you catch potential mistakes made by the insurance company, which may end up working in your favor so that you end up receiving more of a refund, owing less, or owing nothing at all. The auditing specialist’s work can be especially beneficial come tax time because the amount you’re paying in workers’ comp coverage will directly impact your federal tax return and other tax reports.

You can also consult with the insurance agent providing your workers’ compensation policy to discuss best dispute practices.

Secure workers’ compensation insurance for your business with Huckleberry

Running any small business is a challenge, and that challenge is magnified when you have to pay and manage employees. Regardless of your business operations, most states require workers’ compensation insurance, so the burden also falls on you, the small business owner, to make sure your employees are protected. That’s where Huckleberry can help.

Huckleberry’s workers' comp calculator can provide you with an online business insurance estimate in minutes, saving you time and money when securing your company’s workers’ compensation policy.

Check out Huckleberry today for your workers’ compensation coverage and all other small business insurance needs.

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