Since it is normal for businesses to add and lose employees, your insurance carrier needs to ensure that you have the right level of coverage for your business. Each year, your insurer will carry out a workers’ comp insurance audit to confirm that you have paid for the appropriate workers’ comp insurance over the previous year.

Why is a workers comp insurance audit necessary?

Workers’ compensation coverage is based on the number of employees, your payroll, and the level of risk associated with your day-to-day business operations.

As a small business, these metrics can constantly change—you might hire more web developers for your tech startup, or give your baristas a raise after a successful year for your coffee shop.

When you sign up for a workers’ compensation policy, you’re giving your insurance company an estimate of your payroll for the coming year. They use this to determine the cost of your employee’s company insurance. However, by the end of the policy period, your company may look different to what you expected when you entered your estimates.

An employee company audit checks all of your current business metrics and compares them to your estimates (or last year’s audit results). Your insurance company uses this audit to adjust your premium for the previous policy term based on your actual payroll to ensure you are paying for all the coverage you need.

What to expect during and after a workers comp premium audit

Typically, workers comp audits occur annually or when you cancel your workers comp policy. Most of the time, you can complete your examination over the phone and online. However, some insurance companies and states may require a physical examination instead.

The audit process usually takes 30 days to complete. Here’s what to expect when it’s time for your next annual check-up:

1. Your insurance company will let you know when it’s time for your annual checkup.
2. The auditor will contact you by phone or email with instructions on how he will carry out the audit, what records you will need, and how to submit them.
3. You will submit your payroll information and answer any questions from the auditor.
4. Your insurance company will notify you of any changes to your premium.

What happens if you skip a workers comp audit?

Ignoring an employee company audit can bring severe penalties to your business. Neglecting to participate in a workers’ comp audit violates the terms of your agreement with your insurance provider, and may result in any or all of the following actions:

• Cancel your workers comp policy coverage
• Financial penalty
• Inability to obtain insurance in the future
• Legal action

Given that the penalties for not complying with a workers’ compensation audit can be daunting for you and your business, it is important that you respond to and prepare for any audit inquiry accordingly.

How to prepare for a workers compensation audit

You can make the process for a workers comp audit much easier by being prepared. You should keep detailed and organized records that are easily accessible for the auditor. If you’re not sure what records you’ll need, you can follow this simple employee company audit checklist.

• Payroll records. You should include each employee’s compensation as well as any changes in compensation over the past year.
• Employee records. These should include the job description and class code of each employee. Insurers use these classification codes to determine each employee’s risk level based on their job duties.
• Cash expenses. Your auditor will want to see your company’s cash flow, expenses, cash disbursements and general ledger.
• Tax reports. Include employee W-2s and 1099s for all employees and independent contractors along with Form 941, Form 944, and other federal tax forms for your company.
• Certificates of insurance for any subcontractors who have worked for you over the past year. If the subcontractors do not have workers comp, they will be included as part of your payroll.

What happens after a workers compensation premium audit

Your auditor will notify you when your audit is complete. Your insurance company will use the information they gathered during the audit to update your workers’ compensation premium and coverage, should something need to change with your policy.

You will normally receive an audit summary from your insurance company explaining what the audit found and how your insurance premium will change.

If the audit found that your policy premium was too low, you will have to pay the difference in premium. It is likely that your insurance company will give you some time to make the additional premium payment.

On the other hand, if you overpaid for workers’ compensation insurance over the previous year, your insurance company will reimburse you for the difference.

The findings of the audit also determine how much you will pay for the next year.