A work comp audit is the examination of a policyholder financial and payroll records after the expiration of a policy. This process is done to determine the accuracy of the estimated premium when the policy was started. The number one way to fly through an audit is to be prepared!
You should always connect with your independent insurance agent to discuss all questions you have before the audit is conducted.
Here are the first 7 of the most common workers comp audit questions, answered!
Q1: Why am I being audited?
A: Audits are routinely conducted to verify the operations of the insured and to update policy information such as changes in operations, business locations, and new ownership. Audits are conducted to determine correct premium, and to confirm information used for calculating rates. Premium, experience modification, and classification rates are affected by the results of an audit.
Q2: What if I have questions regarding my workers’ compensation classifications?
A: The audit is an excellent opportunity to review and confirm proper classifications for the policy. The auditor will speak with the person who is best able to answer questions regarding your operations. It is not recommended that you refer the auditor to your bookkeeper or CPA to finalize the audit.
Q3: What records will I be asked to provide for the audit?
A: In general, you will be asked to provide State Quarterly Wage and Withholding Reports (DE 6s), payroll journals, and the payroll reports for the period being audited.
Since the information needed for each audit may differ, you may also be asked to provide other records that relate to your workers’ compensation policy. Examples may include payroll registers, time books, time cards, individual earnings records, check registers, check stubs, check books, cash disbursement journal, cash book, petty cash book, general or subsidiary ledgers, job cost records, confidential records, bonus ledgers, commission ledgers, profit sharing reports, 941s, W-2s, W-3s, 1096s, 1099s-Misc., 540, 1040 Schedule C, certified payroll, prevailing wage determination sheets, etc.
Q4: What type of wages and benefits are subject to premium?
Subject to Premium:
A: Premium calculations are based on gross payroll, not net payroll. Gross wages include salaries, commissions, bonuses, vacation, holiday pay, sick pay, overtime base wages, the market value of gifts, all substitutes for money earned or paid during the policy period including meals and lodging in lieu of wages, automobile allowances, and some pension play payments explained below.
Not Subject to Premium:
A: Payroll for officers specifically properly excluded from coverage under the policy, overtime excess (explained later), tips, severance pay, the value of an automobile furnished to an employee, reimbursement for expenses with receipts, and salary reductions to fund the welfare or fringe benefit portion of a Section 125 cafeteria plan.
- Retirement/Pension Plans-Subject to Premium:
Any amount by which an employee’s salary is reduced to fund a pension or deferred compensation plan.
- Retirement/Pension Plans-Not Subject to Premium:
Employer contributory payments including group insurance, stock purchase plans and qualified retirement plans. The exercise of stock options and withdrawals from deferred compensation plans are also not subject to premium computation.
- What if I pay my employees in cash?
If you pay your employees in cash instead of by payroll checks, you must keep a log of the cash payments, the hours worked, the date paid, the amount paid, and the first and last name of the employee. Otherwise, all cash withdrawals on your check register will be included in computing workers’ compensation premium.
Q5: Which employees qualify as clerical (code 8810)?
A: The use of this classification is subject to specific restrictions. The clerical employees must be physically separated from all the other working areas and their duties must be confined to general office work. Payroll division with any other class is prohibited.
Q6: Which employees qualify as outside sales (code 8742)?
A: Outside sales employees may be engaged in solicitation, collection activities or meeting with clients outside the office. The balance of their time can be spent in the office performing clerical duties. If they have duties of any other nature, they would be classified accordingly. Payroll division with any other class is prohibited.
The auditor will ask for the names, job titles, and payroll for clerical and outside sales employees. Having this information available before the auditor arrives will save time.
Q7: How do I report the earnings of our corporate officers, partners, or managing members of limited liability companies?
A: Unless specifically properly excluded by endorsement, officers, partners, or member managers are covered for workers’ compensation benefits. Payroll is reported subject to a minimum and maximum for each person.
Those covered must be reported in the classification that best describes their job duties. They cannot be reported as clerical or outside sales unless their duties are confined to the work described in these classes. If they directly supervise any employee, they must be reported in the classification supervised.
Be sure to notify your independent insurance agency immediately of any changes in ownership.
If you would like to discuss any aspect that affects your Workers Comp coverage and premium, here are 4 easy ways to reach us:
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