Audits typically have a negative connotation. But they don’t have to be a negative experience or cause a huge headache at audit time. People incorrectly view the audit period as a time when a carrier comes in to extensively scrutinize your payrolls and charge more money. This isn’t the case at all, in fact, most of the time, the auditor brought in is a third party contractor. They are brought in by the carrier and have absolutely no skin in the game, they are not earning anything extra if they discover your audit to have a balance. You want to work with a good insurance agent that has a solid understanding of the process and what goes into the audit calculations – they can often times help answer questions if you feel like the auditor isn’t coming up with an appropriate answer.
Understanding the Logistics of a Workers Compensation Policy
A workers compensation policy is to cover your employees if they are injured during their job duties. When the policy is issued, everyone is attempting to place a “projected” payroll on that policy that is reasonably expected over the next 12 months. The projection will obviously be adjusted based on changes in payroll, business operations, layoffs, or growth. So when the policy year concludes, the policy needs to be reconciled so that actual payroll is accounted for, not “projected”.
Audits are performed at the end of a policy term to determine the accurate wages of each type of employee, this includes salaried wages as well as hourly wages. They can be conducted in person or over the phone. Your worker’s compensation carrier will notify you either by letter or by phone of the upcoming audit. You will be able to schedule the appointment with the auditor at a time that is convenient for you. The auditor will review your financial information for the policy term. Be sure to give yourself adequate preparation time. It will also help if you ask the auditor for a summary of the supporting documents they will need.
Commonly used documents include but are not limited to the following:
- Tax forms like forms 941 and 944, or Employer’s Federal Tax Return
- Payments to independent contractors and subcontractors
- Certificate of insurance for all subcontractors hired by you
- W-2 and 1099 forms
- Job descriptions accurately describing each job duty
- Clear description of your business operations
- Payroll information for the policy term. The auditor will verify all sources of pay including salary and bonuses provided to each worker.
- Payroll limitations applicable to executive officers, partners, sole proprietors, etc. that are covered under the policy
Choosing a Workers Comp Carrier that is Right for You
We work with a variety of workers compensation carriers, and some of those carriers offer Pay As You Go workers comp policies. With Pay As You Go, it may reduce premium because you are reporting payrolls on a monthly basis instead of guessing and having to pay for the difference at the end of the policy period. Some carriers have the ability to integrate with your payroll provider altogether, the initial setup process may require a few extra steps, but then this ensures the most accurate way of reporting payrolls each pay period. Finally, you can also choose to simply pay fixed installments each month, and then just deal with the audit balance at the end. Regardless of which reporting plan you choose, providing the most accurate estimate of future payrolls will allow for the policy to run smoothly and minimize hiccups at the end.