In a workers comp payroll audit, “payroll” usually includes gross wages, salaries, commissions, bonuses, and holiday or vacation pay — and often payments to uninsured subcontractors — while overtime is frequently counted at straight-time and certain items like tips and severance may be excluded. The audit reconciles the payroll you estimated at the start of the policy against what you actually paid, then adjusts your premium up or down. Knowing what counts (and what doesn’t) is how you avoid a surprise bill.
This guide focuses specifically on what is and isn’t considered payroll. For the full audit process, see our guide on everything you need to know about a workers comp audit.
Why the Audit Exists
Workers comp premiums are based on payroll, but at policy start that payroll is an estimate. The annual audit compares your estimate to actual wages and recalculates the premium. If you paid more than estimated, you owe additional premium; if less, you may get a refund. That’s why what counts as payroll matters so much.
What Typically Counts as Payroll
- Gross wages and salaries
- Commissions and bonuses
- Holiday, vacation, and sick pay
- Overtime — usually counted at the straight-time portion only, not the premium portion
- Payments to subcontractors who don’t carry their own workers comp
- The value of certain non-cash compensation, depending on the state
The subcontractor piece catches many businesses off guard: if a sub can’t show their own coverage, their payments often get added to your payroll basis at audit. Our guide on what wages are covered by workers comp goes deeper.
What’s Often Excluded or Limited
- Tips and gratuities (in many states)
- Severance pay
- The premium (extra) portion of overtime, in most states
- Certain reimbursements and third-party sick pay
- Owner/officer payroll above or below state-set min/max amounts
Exclusions vary by state, so confirm your state’s rules before the audit.
How to Prepare for the Audit
- Keep clean, organized payroll records all year
- Maintain certificates of insurance for every subcontractor
- Separate overtime so the premium portion can be excluded
- Confirm each employee’s correct class code by actual duties
- Reconcile your payroll-to-premium reports quarterly to avoid year-end surprises
If you want to see how accurate payroll reporting and workers comp fit together — and avoid audit surprises — this baseline tool can serve as a starting reference: https://peopaygo.com/get-rate-exchange-blogs/u/step-1.
How Pay-As-You-Go Reduces Audit Surprises
Because pay-as-you-go workers comp calculates premium on actual payroll each pay period rather than an upfront estimate, it sharply reduces the gap the audit has to reconcile — which means fewer large year-end bills. Integrating payroll and workers comp on one platform keeps the numbers aligned all year.
Frequently Asked Questions
What is included in payroll for a workers comp audit?
Generally gross wages, salaries, commissions, bonuses, and holiday/vacation pay, plus payments to uninsured subcontractors. Overtime is usually counted at straight-time only.
Is overtime counted in a workers comp audit?
Yes, but in most states only the straight-time portion counts — the premium (extra) portion of overtime is typically excluded. Keep overtime separated in your records.
Are subcontractor payments included?
Often, if the subcontractor doesn’t carry their own workers comp. Keeping current certificates of insurance for every sub is the best way to avoid having their payments added to your payroll.
What’s excluded from workers comp payroll?
Commonly tips, severance, the premium portion of overtime, and certain reimbursements — though exclusions vary by state. Confirm your state’s specific rules.
The Bottom Line
A workers comp payroll audit counts most forms of compensation — wages, commissions, bonuses, and uninsured-subcontractor payments — while typically excluding the premium portion of overtime and items like tips and severance. The two biggest surprise drivers are uninsured subs and miscounted overtime. Keep clean records, collect subcontractor certificates, and consider pay-as-you-go to shrink the year-end gap.
If you want to see how bundling accurate payroll reporting with workers comp through a single integrated provider prevents audit surprises, this baseline tool can serve as a starting reference: https://peopaygo.com/get-rate-exchange-blogs/u/step-1.
Facing a workers comp audit? Organize your payroll records, gather subcontractor certificates, and separate overtime so you’re not overcharged.
This article is for informational purposes only and does not constitute legal or insurance advice. What counts as payroll for workers comp audits varies by state and carrier and changes frequently. Consult a qualified insurance broker for guidance specific to your business.
