What is a Workmen’s compensation audit?
Workers’ compensation is one of the least understood types of business insurance. It’s designed to protect businesses and employees from the expenses that arise from workplace injuries. This insurance covers medical bills, lost wages, and legal fees if someone gets hurt on the job. Business owners pay an insurance premium and the insurer pays out benefits to injured employees. When an employee suffers a work-related injury or illness, workers’ compensation insurance can help. Workers’ compensation can help provide benefits such as:
- Medical care
- Wages from lost work time
- Ongoing care
- Funeral costs
- Disability benefits
During a workers’ compensation audit, your company’s payroll will get verified. Audits look at your payroll because your workers compensation premiums are partly based on the amount of compensation paid to your employees over a policy term. The amount paid includes money and benefits your workers have received.
Your workers’ comp policy requires audits to verify your estimated payroll. These audits help make sure you’re paying the right amount for the right coverage. Depending on your state, workers’ compensation audits can also be a legal requirement.
How is it done?
Audits are very common and typically conducted after each policy period ends or the policy expires. Once the audit has been completed, the insurance carrier will send a Final Audit Statement to the policy holder. This statement will indicate if any additional premium is owed by the insured or if any credits need to be returned or applied to the next policy. Typically, these credits or debits are caused by payroll adjustments made by the auditor when conducting the year-end audit. They may also be created when the auditor believes employees were incorrectly classified.
Most states require employers to carry workers’ compensation insurance. Workers’ compensation audits are conducted annually to verify that the employer has paid the proper premium for the policy year. They’re used to make sure that payroll records accurately reflect the number of hours worked and the types of jobs performed. Auditors check to see if the insured company has properly accounted for subcontractors who perform services for them. If they haven’t, the insured company may be assessed additional premiums.
Your premium also depends on job classifications. These classifications help show the amount of risk your workers face. So, if the audit finds job roles have changed at your business, you may receive a different premium. When reporting your payroll, be sure to include any overtime payments employees receive. This will ensure your payroll record is as accurate as possible.
Audits can be done in two ways:
- Field audits are physical audits on-site at your place of business.
- Phone audits are done remotely. There’s no travel needed for these workers’ compensation audits. Once you send us your information, we’ll schedule the phone audit.
The main items you’ll need for your workers’ compensation audit are:
- An accounting ledger
- Tax forms such as W-2, 1099, Form 941, Form 944 and a federal tax return
- Certificate of insurance for every subcontractor
- Detailed descriptions of each business function
Why is it important?
Workers’ compensation auditing is important because it helps keep costs down for both employers and employees. Workers’ compensation is expensive, especially if an injury occurs outside of work. In addition, the cost of medical care and lost wages can add up quickly. By conducting a workers’ compensation audit, insurers can identify potential problems before they occur and help prevent costly mistakes. One of the main benefits to a workers’ comp audit is that it makes sure your coverage and premium match. This is important because it means you won’t be paying too much for your workers’ compensation coverage.
Key things to keep in mind
Providing your workers’ compensation insurer with the information they’ve requested is important. It’s also important that the information you send is accurate.
In fact, there are penalties for providing false information, including policy cancellation or fines. Some examples of fraudulent actions include:
- Underreporting payroll to reduce a workers’ comp premium.
- Supplying inaccurate job descriptions to represent lower risk for reduced workers’ compensation premiums.
- Providing false financial documents, such as fake tax returns.
- Not reporting subcontractors to lower your workers’ compensation premium. Make sure you check your state’s laws to see if you need to report independent contractors.
The best way to be ready for an audit is to always be prepared. You can do this by:
- Organizing all your documents
- Collecting information you need consistently
- Documenting any changes to job descriptions and other business functions as they happen
If you keep these tips in mind, you won’t have to scramble to find key information for your workers’ compensation audit.
Auditors need financial information for the period covered by your workers’ compensation policy.
To prepare for your workers’ compensation audit, consider creating a workers’ compensation audit checklist to help keep track of:
- Employee information including Form 941 for policies with employee payroll. For policies without employee payroll, you’ll need the Schedule C Tax Form or other Income Tax Forms, along with other payroll report records.
- Owners, officers and partners information, including payroll information like:
- Their name
- The state where they work
- Their corporate title
- The percentage of stock they own
- How long they’ve been employed
- Their total earnings
- Payment and certificate verification, including:
- 1099 Forms
- Certificates of insurance for each leased employee or subcontractor
- Your business’s information, including:
- Your general ledger
- Sales journal
- Cash receipts
- Sales tax records
It is always a good idea to engage the auditor during the audit process and review any worksheets they prepare. Do not sign off on incomplete audit worksheets. Ask questions about anything that may not make sense to you. Finally, ask to make a copy of the audit worksheet they prepare. It is not uncommon for auditors to make mistakes on the audit worksheets. Remember, they work for the carrier and most mistakes are in favor of the insurance companies. Audits are a contractual obligation within the workers compensation insurance policy. It is common practice for carriers to add an additional 25% to all estimated payroll figures when businesses fail to comply during the audit process. It is in your best interest to have a reasonable understanding of your work comp class codes, payroll, and subcontractor payments prior to any physical or voluntary audit.
Conclusion
An audit is required under the terms of a policy. Therefore, it’s a violation of the agreement to avoid an audit. The policy will generally outline the penalties associated with a businesses failure to respond to an audit request. Insurance companies often charge an additional premium of 25% – 50% of the original policy premium. This charge is knows a workers’ compensation audit non-compliance charge. Audits can be disputed for up to the past 3 years, or policy periods. In some cases, business owners may get a refund based on the audit results. This commonly happens when the estimated payroll is lower than the actual payroll. Finally, it’s always good to engage the auditor throughout the process and review any documents they prepare. Do not sign off on incomplete audit documents, and ask questions about anything that doesn’t make sense to you. Always review documents carefully.
If you have any questions about our auditing process in particular, please connect with us!
