Workers’ Compensation Audits…Who’s in Charge?

Workers’ Compensation Audits…Who’s in Charge?

In a not so sophisticated study, I have found workers’ compensation audits and trips to the dentist run neck and neck on the ‘list of least favorite things’ for business owners, CFO’s and anyone else left to handle this.

Workers’ Compensation Audits…Who’s in Charge

For many, they just want the process to be over; and nobody likes to receive notification they owe additional money.  While the audit process itself often cannot be eliminated, how it goes is up to you.  This is your audit, so be actively involved and make sure you understand exactly what is happening.  If you know the rules, you can take control of the process by anticipating and preparing the exact information your insurance company needs to prevent inadvertent overcharges.

Prepare Your Paperwork

-        Payroll records (employee specific)

-        Unemployment tax return

-        Federal and state payroll tax reports (940s and 941s)

-        1099's

-        Certificates of insurance from subcontractors – Start this early as there may be   delays here.

-        Your workers’ compensation insurance package

Properly Classify Employees

Your business should have one primary classification. Outside sales, clerical employees and, in some states, drivers need to be classified with a separate code. Any items the auditor cannot classify quickly with a lower-rated code may remain in the governing code. This may result in charges due to the improper classification of employees who should be in standard class exemption groups (clerical, outside sales) common to all industries. This may also affect employees who could be considered for a lower industry code (manufacturing, retail and wholesale are examples of industries with multiple class codes). Auditors may also accidentally include corporate officers, who should be excluded, or may not remove excluded remunerations that should be deducted from payroll before calculating your premium liability.

Excluded Remunerations

Certain forms of compensation are not used to determine workers’ compensation premium.   Allowable exclusions differ from state to state, but typically fall within 18-20 categories. Once you’ve added up all the excluded remunerations (by employee code), make sure to deduct them from your reported payroll.


It is recommended you only use employee-insured subcontractors, requiring them to present certificates of insurance before commencing work.  If you do utilize uninsured subcontractors, they must be treated like employees for workers’ compensation purposes. In these cases be sure you report only their payroll to the auditor (excluding the cost of materials or other supplies that a contractor may be charging to you).  Finally, the issues of sole proprietors come into play.  While individual states have requirements here, more and more insurance companies are requiring coverage upon audit, regardless.  Know your insurance carrier’s rules on this ahead of time.

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