An annual audit is a normal part of life for small business owners who need workers’ compensation insurance. You shouldn’t worry too much about it. Every business’s workers’ comp policy includes it, regardless of size. The one requirement that most states require is for insurance providers to conduct a workers’ compensation audit to verify that businesses are paying the right amount for their coverage.
What Is A Workers' Comp Audit?
A workers’ compensation audit is a review of records at the end of the year. The purpose of this audit is to ensure you have paid the correct workers’ compensation insurance premium. The auditor may conduct the audit by mail, phone, or in-person, depending on the business type.
Audits are often conducted by your insurance provider to verify whether the payroll and other records that were quoted at the beginning of the policy reflect the actual payroll and the scope of the work done during the policy period. If the records don’t match, an adjustment is made to the workers’ comp insurance price for the policy year.
During the audit, it is also evaluated whether the subcontractors you hired are insured. The policyholder may also be charged if the subcontractor is not insured.
Why Is Workers' Comp Audit Important?
To purchase workers’ comp insurance, you must share an estimate of payroll and the types of work your employees will perform during the policy period. Your workers’ comp insurance provider uses your estimate, along with other factors, to calculate your premium.
A policy period, which is typically one year, does not always reflect the actual payroll and scope of work for your business. In addition, the amount of work you need to complete during the year may be more than expected, or something unexpected may cause your actual payroll to be lower. To make adjustments to the initial premium, most state regulators require an annual audit.
Is A Workers' Comp Audit Expensive?
You don’t have to worry about an unexpectedly high worker’s compensation insurance bill if that’s your biggest fear. In most cases, an audit will result in an adjustment to your policy premium, but normally not by a significant amount compared to the estimated premium you paid at the start of your policy term. Even if your actual premium is lower than your earlier estimates, you may receive money back!
Workers' Comp Audit: Step By Step
It is crucial to keep records properly to ensure a smooth audit process for workers’ compensation insurance. As long as you don’t have to spend time finding documents and information, you’ll be able to provide everything you need so the auditor can work efficiently. Maintaining good records will make this process much easier.
The following steps explain how you will conduct your annual workers’ compensation insurance premium audit:
Step 1: Update job descriptions
Your workers’ comp insurance premiums are determined by what types of work your employees do (specifically, how dangerous the job is), so you’ll want to be sure that your job descriptions reflect what the employees are doing. You should always have accurate job descriptions for your employees for a variety of reasons, so it’s a good idea to keep them updated during the year. This will simplify workers’ compensation audits.
Step 2: Assemble all relevant documents
You should contact your workers’ comp insurance provider for details about how to complete your audit. But generally, you should have these pieces of information handy:
- Description of your company's activities
- Detailed job descriptions
- Number of employees per location
- Information about the owners and officers of your company
- Detailed information about the contractors or subcontractors used by your company during the past year
- An employee's payroll information, including salary, bonuses, overtime, commissions, etc.
- Access to your company's bank accounts
- The accounting general ledger for your company
- All W2s and 1099s issued in the recent year
- Payment receipts for contractors, casual laborers, and materials or supplies you purchased
- Workers' compensation insurance certificates for all contractors
Step 3: Organize your records
The easiest way to ensure that your audit will run smoothly is to organize all necessary documents by type. For example, keep everything related to employee payroll together, contractor information together, and job descriptions together.
Step 4: Provide the auditor with only what they ask for
Provide your workers’ compensation auditor with only the information he/she requests. Don’t overburden your auditor with too much information. That could cause further delays and back-and-forths in the process.
It’s important to communicate with your auditor and ask questions if anything is unclear regarding your workers’ compensation audit. It could be as simple as filling out some online forms or as complex as an on-site visit. Be sure to carefully read all documents your auditor presents you with, and be careful not to sign anything incorrect or incomplete.Be sure you research state workers’ compensation laws and consult a trusted advisor, as each situation is unique.
After A Workers' Comp Audit, What Happens?
Make sure you are paying the correct amount for your workers’ compensation coverage. An audit may result in several outcomes. Some examples are:
- You may not incur a difference in costs if your actual risk exposure or payroll matches what you estimated.
- You may be entitled to a refund if your actual payroll or risk exposure is lower than what you estimated, and your insurance provider will refund you the difference.
- Depending on the risk exposure and your payroll, your premium may be more than initially paid, and you might have to pay the difference to the insurance provider.
- We cannot promise that an annual workers' compensation insurance audit will be enjoyable, but it shouldn't be too painful as long as you know what to expect and have everything you need on hand.
- Be sure you research state workers' compensation laws and consult a trusted advisor, as each situation is unique.
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