Surviving your workers comp audit

Your workers compensation premium starts as an estimate. At the end of the policy year the carrier audits what actually happened and adjusts it — which means the audit, not the quote, decides what you pay.

Most contractors walk into it unprepared and find out afterwards that it cost them.

What the auditor is looking at

Three things, in this order.

Payroll by classification code. Every trade and job type has a code, and each code has a different rate. A roofer costs far more to insure than an office administrator. The auditor checks that the wages you reported sit in the right codes.

Subcontractors. For every sub you paid, they want proof the sub carried their own workers compensation for the period they worked for you. Without it, the sub's payments are typically added to your payroll at your rate.

Total remuneration. Not just base wages — overtime, bonuses and certain other payments may count, with specific rules about how overtime is treated.

Where the money is lost

Uninsured subcontractors. This is the big one, and it dwarfs everything else. If you paid a sub $90,000 and cannot produce a certificate of insurance covering that period, that $90,000 can be treated as your payroll at your rate. On a high-rate roofing or framing code, that single gap can be a five-figure bill.

The certificate has to cover the dates they actually worked. One that expired in June does not help for work done in September, which is why expiry tracking matters as much as collection.

Everyone in one code. If all payroll sits under a single high-rate classification because nobody separated it, you are paying the roofing rate on your office manager. Genuine clerical and outside sales roles usually have their own, much lower codes — but only if the payroll records support the split.

Overtime not broken out. Depending on the state, the premium portion of overtime may be excludable. If your records only show gross wages with no overtime split, you cannot claim it.

Owner and officer pay. Owners and officers are treated differently — sometimes excludable, sometimes subject to minimum and maximum payroll figures. It needs to be identified separately in the records rather than mixed in with staff wages.

What to have ready

Assembled through the year, not the week before:

• Payroll records by employee, by classification code, with overtime broken out separately
• Quarterly payroll tax filings, which the auditor uses to verify your totals
• Certificates of insurance for every subcontractor, covering the exact dates worked
• 1099s issued, and subcontractor payment totals by payee
• A description of what each employee actually does — the basis for the classification split
• General ledger detail for the accounts the auditor asks about

The habit that prevents all of it

Nearly every expensive audit finding traces back to the same thing: subcontractor records collected late or not at all.

The fix is a rule with no exceptions. Before a sub is paid the first dollar, you hold their W-9 and a current certificate of insurance. The certificate's expiry date goes in a place someone checks monthly, and anyone whose cover has lapsed does not get paid again until it is renewed.

That is not an accounting task so much as an operational one, but it lives or dies on someone tracking payments by payee every month — which is bookkeeping.

After the audit

Read the findings rather than filing them. If payroll was reclassified into a different code, understand why, because the same thing will happen next year unless the underlying records change.

If you disagree, there is normally a defined dispute process with a time limit. Missing that window because the paperwork sat on a desk is a common and avoidable way to accept a bill you did not owe.

Related

• 1099 or W-2? Classifying the people who work for you
• What your CPA needs from you at year end

This is general information about how workers compensation audits work. Classification rules, overtime treatment and owner exclusions vary by state and by carrier — confirm the specifics with your agent.