Audits: how they work and how to avoid surprises
Workers’ compensation policies are estimated at the beginning of the term and reconciled at the end. That reconciliation is called an audit. When handled well, audits confirm accurate premiums and close cleanly. When handled poorly, they result in unexpected bills, disputes, and strained cash flow.
Most audit surprises are preventable. This guide explains what carriers review, which documents matter most, and why subcontractor certificates are often the difference between a clean audit and an expensive one.
Why workers’ compensation audits exist
Workers’ comp premiums are based on payroll estimates. Audits true those estimates to what actually happened.
- Estimated premiums: policies are issued using projected payroll and job classifications.
- Actual exposure: audits reconcile estimated payroll to actual wages paid during the policy term.
- Regulatory requirement: most states require carriers to audit to ensure fair and consistent rating.
An audit is not a penalty—it’s the mechanism that aligns premium with real exposure.
What auditors actually look at
Auditors focus on exposure, classification accuracy, and who performed the work.
- Gross payroll: wages, salaries, bonuses, commissions, overtime, and certain fringe benefits.
- Job classifications: ensuring payroll is assigned to the correct class codes based on duties performed.
- Owner/officer status: inclusion or exclusion elections and proper documentation.
- Subcontractor payments: whether subs carried their own workers’ comp coverage.
- Business operations: changes in services, scope of work, or use of labor during the term.
Auditors rate based on what happened—not what was intended at the start of the policy.
If it generated payroll or labor exposure, it belongs in the audit.
How audit adjustments are calculated
Premium changes come from payroll differences, reclassification, or uninsured subcontractor exposure.
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Payroll variance:
If actual payroll exceeds estimates, additional premium is owed; if it’s lower, a credit may apply.
Rapid growth is the most common cause of surprise balances.
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Reclassification:
Payroll moved from a low-rate class to a higher-rate class increases premium—even if total payroll didn’t change.
Clerical vs. field work distinctions are a frequent trigger.
- Subcontractor inclusion: Payments to uninsured subs are treated as payroll and rated accordingly.
The biggest bills usually come from classification changes—not payroll growth alone.
Documents that make audits smoother
Clean records reduce assumptions—and assumptions usually increase premium.
- Payroll reports: quarterly and annual summaries matching tax filings.
- Tax documents: 941s, W-3s, state filings, and owner K-1s where applicable.
- Job descriptions: written explanations of duties for each role.
- Time records: separating clerical, sales, and field labor when applicable.
- Subcontractor agreements: contracts defining scope and independent status.
When records are unclear, auditors default to broader—and more expensive—classifications.
Good documentation doesn’t just support your numbers—it protects your classifications.
Why subcontractor certificates matter
Subcontractors without valid workers’ comp coverage are treated as your employees for audit purposes.
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Certificate required:
You must obtain a valid workers’ comp COI from each subcontractor.
General liability certificates do not satisfy this requirement.
- Policy must be active: Coverage must be in force for the dates the subcontractor worked.
- Name matching matters: The insured name on the certificate must match the subcontractor you paid.
- No certificate = payroll: Without proof, the carrier includes payments to the subcontractor as your payroll.
One missing subcontractor certificate can turn a clean audit into a five-figure bill.
How audits are conducted
Audits can be quick or involved depending on business size and complexity.
- Physical audit: in-person or virtual meeting with an auditor.
- Voluntary/self-audit: documents submitted without a live interview.
- Mail audit: smaller policies with limited exposure changes.
Ignoring an audit request often results in estimated assessments—typically higher than reality.
Participating in the audit is always cheaper than avoiding it.
How to reduce audit surprises next year
Ongoing habits make audits predictable instead of painful.
- Update estimates mid-term: report payroll growth before renewal.
- Track subcontractor COIs: collect and store certificates before work begins.
- Separate duties clearly: keep clerical and field payroll distinct.
- Notify changes: new services, locations, or labor types should be reported promptly.
- Review classifications annually: confirm they still match actual operations.
The best audit outcome is built during the policy term—not after it ends.
Common questions
What happens if I disagree with an audit?
You can request a review or provide additional documentation. Deadlines apply, so respond promptly.
Can an audit reduce my premium?
Yes. If payroll was lower than estimated and classifications are correct, credits may apply.
What if I missed collecting a subcontractor COI?
The carrier will usually include those payments as payroll. Retroactive certificates are rarely accepted.
Audits reward preparation
Workers’ comp audits reconcile estimates to reality. Clear payroll records, accurate classifications, and properly documented subcontractors keep that reconciliation fair. When you track exposure throughout the year, audits become confirmations—not financial surprises.