Understanding The Importance Of Workers Compensation Audits For Business Owners

As an employer, workers' compensation insurance is an important part of your operation. Unlike most forms of insurance, your premiums for workers' compensation will vary based on your payroll expenses. That means that you have to estimate your payroll costs at the start of each policy period, and you will pay an estimated premium for the year based on those figures. After each policy period, your premium will be adjusted according to the actual salary expenses as part of a workers' compensation audit. Here's what you need to know about potential workers' compensation audits and how to deal with them.

What Is A Workers' Compensation Audit?

A workers' compensation audit, conducted by a representative of your workers' comp insurance company, is a review of your salary records compared to your estimates to determine how much you actually owed in policy premiums for the period. If your salary expenses were higher than estimated, you'll be expected to pay the difference at the conclusion of your audit. If, on the other hand, your salary expenses were lower than estimated, you will receive a premium credit for the next policy period.

How Can You Prepare For A Workers' Compensation Audit?

As soon as you receive notification of an upcoming audit, you need to start preparing. The better prepared you are, the easier the process will be. You will have to gather information for the auditor so that he or she can evaluate your expenses and records.

You will need the following:

  • Tax records, including your quarterly estimated filings, W-2s, 1099s, and payroll tax filings

  • Disbursement records, including all payments made to contractors, employees, and subcontractors

  • Accounting ledger and payroll records

  • Employee and contractor job descriptions and work expectations

  • Insurance certificates for all contractors and subcontractors

Organize all of your employee records together. Create a separate folder of all of your contractor and subcontractor records. Finally, put all of the remaining information together in a third folder. This makes everything easy for your auditor to review.

Finally, appoint someone to assist the auditor with the process. You need someone who has in-depth knowledge of your business operations, such as a senior manager or another executive. That way, any questions that the auditor may have can be answered quickly and accurately. This helps to speed up the process and eliminate any potential for confusion.

What Can You Do To Save Money During A Workers' Compensation Audit?

Since a difference between your actual salary expenses and your estimated ones can result in a significant penalty on your premium, you want to do everything you can to save money through this audit.

There are a few things you can do to save your company money on a workers' compensation audit. Saving money during this audit starts with your estimates at the beginning of the policy period. Take time to review your expectations for the year carefully, and create as accurate an estimate as possible.

Make sure that you thoroughly understand the difference between employees and contractors. Remember that workers can only be classified as contractors if they have full control over how they complete the task. Your only responsibility is to determine what will be done, not how it will be completed. If you dictate work hours or steps in the process, they are employees and you must calculate their earnings as part of your compensation figures.

Don't overlook any deductions. Remember that severance pay, while part of your compensation figures, incurs no workers' compensation risk at all. As a result, you will not have to include those figures in your premium estimates. Make sure you have documents to illustrate this information, though. In addition to severance, you should also include any overtime increase that is over and above the employee's base pay. For example, if someone earns $15 an hour, and they are paid $22.50 an hour for overtime, you can deduct the $7.50 an hour from the workers' compensation calculations. It's based on their base pay only.

The best thing you can do is to not only understand your workers' compensation policies but also work with a workers' compensation attorney from a law firm like Bennett  Law Firm PC each year. Having legal support as you approach the audit may help save you money, as you may get added insight related to employee and contractor information and more.