Workers' Comp Premium Audits: Why You Owe Money And How To Prevent It

A workers' compensation policy starts with an estimated premium, and the audit after the policy ends is where that estimate is corrected. When actual payroll and subcontractor costs come in higher than the estimate, the carrier bills the difference. For a controller, the problem is usually less the amount than the timing, because the bill often arrives months after the policy year has closed. Most audit bills trace back to three causes: payroll growth, payroll in the wrong classification, and payments to subcontractors without proof of their own coverage.

How does a premium audit work?

Workers' compensation premium is calculated from payroll in each classification code, multiplied by that code's rate, then adjusted by the experience mod and any credits. Because payroll is unknown when the policy starts, the carrier charges a deposit based on an estimate. After the policy expires, an auditor reviews payroll records, tax filings, subcontractor payments and job descriptions. The state insurance department's business guide describes the result plainly: the estimated premium is adjusted, and the carrier either collects additional premium or issues a refund.

Why do companies owe money after an audit?

1. Payroll grew. New hires, raises, overtime and bonuses all add to payroll. If the estimate was set at the start of the year and never updated, the audit catches up.
2. Payroll landed in the wrong class. Classification codes describe types of work and carry very different rates. Clerical staff, outside sales, drivers and field employees should each be classified correctly, and records should support the split. Without supporting records, an auditor may place payroll in the highest-rated class that fits.
3. Subcontractors without proof of coverage. This is often the largest and least expected item, discussed below.
4. Owners and officers. Whether owner or officer pay is included depends on elections made on the policy. Confirm those elections match what the company intended.
5. Unexplained payments. Casual labor, temporary staff and payments to individuals without clear documentation may be treated as payroll.

Why are 1099 subcontractors charged on our audit?

The state insurance department explains that a contractor can be liable for workers' compensation to the injured employees of an uninsured subcontractor, and that at audit, a carrier without evidence of the subcontractor's coverage will charge for that subcontractor based on the work performed. The department recommends verifying certificates, not simply collecting them. A certificate on file is a starting point, not proof by itself; see a certificate of insurance is not coverage. Whether a worker is properly treated as an independent subcontractor is a separate question that should be reviewed with qualified legal counsel.

How should controllers account for audits?

Treat the audit as a known liability, not a surprise. Compare actual payroll by class to the policy estimate each quarter. If payroll is running ahead, book an accrual for the expected additional premium rather than waiting for the invoice. If payroll is running behind, the audit may produce a return premium, which can be noted but should not be relied on until the audit is final. The same logic applies to general liability policies rated on revenue or payroll, which are often audited too.

How can controllers prevent audit surprises?

1. Update the estimate mid-year. Ask your agent to adjust the policy estimate if payroll changes materially. A higher deposit now spreads the cost rather than concentrating it later.
2. Track payroll by class. Keep job descriptions and payroll codes that support how each employee is classified, and keep them consistent with what the policy shows.
3. Collect and verify certificates before work starts. Confirm coverage dates span the work period and keep certificates organized by subcontractor, ready for the auditor.
4. Separate labor and materials on subcontractor invoices where possible, so records are clear.
5. Prepare for the audit. Gather payroll reports, quarterly tax filings, the general ledger and certificates before the auditor asks.
6. Review the audit before paying. Auditors make errors. Questions about classifications or figures should go through your agent promptly, with supporting records.

Common questions

Why did we get an audit bill when our premium was paid in full?

The paid premium was an estimate. The audit compares it to actual payroll and subcontractor costs and bills or refunds the difference.

Do we have to pay for subcontractors who had their own coverage?

Usually not, if you can show their coverage was in force while they worked for you. Without that evidence, the carrier may charge for them.

Can we dispute an audit?

Yes. If classifications or figures look wrong, raise it with your agent promptly and provide supporting records.

What clients can do

• Accrue for expected audit adjustments each quarter.
• Update payroll estimates when the business changes.
• Verify subcontractor certificates before work begins.
• Review audit worksheets before paying.
• Request a coverage review ahead of renewal.

To talk through how this applies to your business, reach out to Tyler L. Gaynes.

This article offers general professional perspective and is not legal advice or a representation of coverage for any specific policy or circumstance.