A workers’ compensation audit might sound intimidating, but with the right preparation, it can be a straightforward process. If you own a business and aren’t deeply involved in payroll or finance, this guide will help you understand what to expect and how to prepare so you can avoid surprises.
What Is Workers’ Compensation Insurance?
Workers’ compensation insurance is a type of coverage that protects your business and employees if someone gets hurt on the job. It helps pay for medical expenses, lost wages, and rehabilitation costs, while also shielding your business from lawsuits related to workplace injuries.
If you hire employees in the United States for your business, workers’ compensation insurance is mandatory in almost all 50 states. Depending on the nature of the tasks your employees are performing in the business, insurance companies will charge different rates based on the risk of death or injury that could happen in the course of their work.
Why do audits happen?
Because your workers’ compensation premium is based on your payroll and employee job classifications, insurance companies conduct audits to ensure that the correct amounts are reported. During an audit, an insurance auditor reviews your payroll records, tax filings, and subcontractor payments to verify that your business paid the appropriate premium.
Sometimes an auditor finds discrepancies, such as misclassified workers, unreported payroll, or missing subcontractor insurance coverage. In those instances, you could owe additional premium payments. On the flip side, if you overpaid, you may be eligible for a refund.
What Documents Are Typically Requested?
An auditor will ask for records to verify employee wages, job duties, and payments to subcontractors. Here’s a list of the most commonly requested documents:
Payroll Records:
- Payroll reports (quarterly and year-end)
- Employee earnings reports
- Overtime records (some states allow deductions for excess overtime)
Tax Documents:
- Quarterly payroll tax filings (Form 941)
- Annual tax reports (W-2s, W-3s, and 1099s)
- State unemployment tax filings
Employee & Job Classification Records:
- Employee job descriptions
- List of employees and their job classifications
- Records of changes in job roles during the year
Subcontractor Records:
- Certificates of insurance (COIs) for subcontractors
- 1099 forms for independent contractors
- Contracts or invoices showing work performed
General Business Records:
- General ledger or profit & loss statement
- Workers’ compensation insurance policy details
Best Practices to Prepare for Your Audit
1. Keep Payroll & Classification Records Organized
Make sure your payroll system tracks employee wages and job classifications accurately. Separate wages for employees who do different types of work. For example, if you have an employee who does both office work and fieldwork, you should have separate payroll classifications for those hours. Misclassifying workers can lead to higher premiums and penalties, so be as accurate as possible.
2. Verify Subcontractor Documentation
If you hire subcontractors, always collect a certificate of insurance (COI) and a W-9 form before they start working. Why is collecting their COI so important? If a subcontractor doesn’t have valid workers’ compensation coverage, your insurance provider may charge you as if they were your employee. Keeping detailed records of subcontractor payments can prove they weren’t on your payroll.
3. Conduct an Internal Review Before the Audit
A month before your audit, review your payroll records, tax filings, and subcontractor COIs to ensure you have everything in order. Compare your reported payroll numbers to what’s in your accounting system to catch any discrepancies before the auditor does. Verify that you have complete and accurate financial records for the period the auditor is requesting. Often auditors request information on company financials in addition to payroll details.
5. Work with Your Bookkeeper or Accountant
Having a bookkeeper or accountant (like us) review your documents before the audit can save you from potential issues. We can collect and prepare the necessary documents requested for your audit, correct classification errors, and ensure everything is properly reported. Even if you have prepared for audits on your own in the past, it never hurts to have a second set of eyes for review.
6. Be Prepared to Answer Questions
The auditor may ask about specific employees, job roles, and changes in business operations. If you’re unsure about anything, it’s okay to ask for clarification or have your bookkeeper assist during the audit. As you complete subsequent audits, take note of the type of questions the auditor asks. That way you can anticipate his questions and include them in your audit prep.
What Happens After the Audit?
Once the auditor reviews your records, they’ll determine if you owe additional premium payments or if you overpaid and are due a refund. You’ll receive a report detailing their findings, and if you disagree with the results, you may be able to dispute them.
Stay Ready, Avoid Stress
Workers’ compensation audits don’t have to be stressful if you stay organized throughout the year. Keeping accurate payroll records, properly classifying employees, and ensuring subcontractors have valid insurance will make the process much smoother.
If bookkeeping and payroll aren’t your strong suits, consider working with a professional who can help keep things in order year-round. Learn how our insurance management service can save you headaches—and extra costs—down the road.