What is a Workers’ Compensation Audit?
A workers’ compensation audit is an annual review conducted by your insurance provider to ensure that your business has paid the correct premium for workers’ compensation insurance. The audit verifies that your reported payroll and other records accurately reflect the actual payroll and scope of work performed during the policy period. If discrepancies are found, the premium for the workers’ comp insurance may be adjusted accordingly.
Why Does My Business Need a Workers’ Compensation Audit?
Workers’ compensation policy premiums are based on several factors, primarily the size of your total payroll. When you apply for a workers’ comp insurance policy, you estimate how much you expect to pay your employees during the upcoming year and what kinds of jobs they’ll be doing. However, these estimates may not always be accurate. The audit is designed to reconcile these estimates with the actual figures to determine whether you’ve overpaid or underpaid for your workers’ comp insurance.
Common Mistakes to Avoid During a Workers’ Compensation Audit
Misclassification of Employees
Classification codes are used to calculate workers’ compensation insurance premiums. Employees with a higher risk of injury on the job are assigned class codes and insurance rates that reflect that risk. Incorrect job classification can lead to significant audit bills due to overpayment or underpayment of insurance premiums.
Paperwork Errors
Organizing and properly filing payroll records is crucial during an audit. Failure to do so can lead to the assumption of underreporting payroll, which can result in increased premiums. Accurate records and regular communication with insurance providers are key to avoiding such issues.
Not Reporting Subcontractors
Uninsured subcontractors can cause significant premium increases during an audit. Auditors consider subcontractors as potential employees of your business, leading to higher premiums. Ensuring that subcontractors have their own valid insurance certificates is essential to avoid these penalties.
Not Reporting Deductions
Certain deductions from payroll, such as overtime payments or severance, can affect workers’ comp premiums. Businesses must report these deductions accurately to reflect the true payroll amount. Familiarizing oneself with the state’s workers’ comp regulations regarding deductions is essential.
Lack of Proper Documentation
Every deduction from payroll must be accompanied by proper documentation. Failing to provide sufficient evidence can lead to audit challenges and potential penalties. Businesses should ensure that all relevant documents are readily available and accurately reflect the deductions made.
Changes in Workers’ Compensation Rates
Rates for workers’ comp insurance can change, and businesses must stay informed about these changes to avoid penalties for failing to adjust premiums accordingly. Regular communication with insurance providers and staying up-to-date with industry news is vital.
How Can Businesses Prepare for a Workers’ Compensation Audit?
Engage with the Auditor
Being cooperative and providing accurate information during the audit is critical. Don’t sign off on incomplete audit documents and ask for clarification on anything unclear. This engagement can save both time and potential misunderstandings.
Separate Payroll by Class Code
Documenting your payroll by classification codes can help reflect the accurate payment distributions for the work performed. This can involve keeping a payroll journal or similar system to categorize employees.
Review Subcontractors
Ensure that subcontractors and independent contractors have their own workers’ comp policies during the time they work for your business. Obtain Certificates of Insurance (COIs) from them to verify their coverage.
Prepare Necessary Documents
Compile all necessary documents for the audit, such as payroll reports, lists of owners and officers, and Certificates of Insurance for all subcontracted labor.
Partner with a Payroll Provider
Consider partnering with a payroll provider who can assist with workers’ comp audits. They can help manage workers’ comp, understand local regulations, and guide you through the audit process.
Penalties for Ignoring a Workers’ Compensation Audit
Ignoring a workers’ comp audit can lead to serious consequences, including failure to respond to an audit request charges, extra paperwork, and underpayment penalties. To avoid these issues, it’s essential to respond promptly to audit requests and maintain accurate records.
By understanding the importance of workers’ compensation audits and preparing adequately, businesses can navigate the audit process smoothly and minimize the potential for penalties or premium adjustments.
Unsure About Audits?
Deerfield Advisors handles audits on a regular basis. (We are an independent insurance agency, after all.) When you work with Deerfield you can rest assured that the audit process will be well-defined. You will have support through every step. Contact us today for a quote.