Jun 20, 2019

What to Look for in a Workers’ Compensation Audit

At some point, business owners will have to go through a workers’ compensation audit process. This can cause plenty of unwanted stress for a business looking to avoid controversy and penalties while trying to keep business as usual going. Some businesses may try to avoid an audit altogether, which can trigger even more stress.

Penalties for not complying with a workers’ compensation audit vary state by state. In North Carolina, for instance, failure of the policyholder to allow an audit to be completed and to cooperate may result in an insurance company calculating the final premium using up to three times the estimated payroll. So, in this case, it’s best to comply and go through with an audit, but to be as prepared as possible. Here are some tips on what to look for in a workers’ compensation audit.

Scheduling and Records

Businesses are notified by letter, telephone, or email when it comes to an audit request following the expiration of a workers’ compensation policy. Whether it’s an artisan contractor workers’ compensation plan, like from Tangram Insurance Services, or covering for subcontractors, there is still the need to prepare for an audit. It’s important to work hand-in-hand between parties to finalize a date and time when the audit will be conducted.

Auditors need financial data for the time period covered by a previous workers’ compensation policy that’s being audited. Here is what will be needed for an audit:

  • Accounting ledger
  • Records of cash disbursements
  • Tax forms
  • Payments for services provided by subcontractors
  • Payments for services provided by independent contractors
  • W-2 and 1099 forms
  • Description of business operations
  • Payroll records for the term of the policy
  • Payroll limitations that apply to executive officers, partners or other principals

Included in Payroll

Workers’ compensation premiums are based on payroll, or the monetary value of the services employees provide to a company. An insurer calculates the premium by multiplying a rate times remuneration (payroll) and cutting that result by 100. This usually includes gross salaries and wages, total commissions received by a worker, bonuses including stock bonus plans, vacation, holiday, and sick pay, overtime pay, and more.

Excluded from Payroll

Exclusions may vary state by state, just like penalties. Most states exclude tips, payments by the employer to group insurance plans, severance pay, discounts on goods purchased from the employer, uniform allowances, and pay for active military duty.


A primary task for an auditor is to make sure that a company is properly classified. An auditor will review a company’s operations and then determine whether the classifications on a policy are correct.

There are different classifications that give the auditors the correct understanding of what to look for in a business during a workers’ compensation audit. Typically, auditors begin by evaluating a basic classification that describes the overall business. Workers’ compensation classification systems are based on complex rules that can be hard to understand. If an auditor classifies a business or calculates a premium in a way that is not understood, it should be encouraged to explain what this classification means in detail.

About Tangram Insurance Services

Located across the Golden Gate Bridge, just outside of San Francisco, Tangram Insurance Services is a full-service Managing General Underwriter and Program Manager offering specialty programs. We focus on industry-relevant coverage, competitive pricing, and practical business and risk management solutions for your clients. Since we are not all things to all people, we make sure to create outstanding custom-built solutions that matter to those businesses, and the brokers who serve those industries. Contact us at (888) 744-9810.