You know how important it is to have workers’ compensation insurance if you run a business. More often than not, you legally have to have this kind of insurance. But workers’ compensation is one of the hardest types of business insurance to understand and follow the rules for. Each state has its own rules about workers’ compensation insurance. Such as whether or not a business needs it and how much the payment should be. However, one thing that all states require is that insurance companies must do a workers’ compensation audit to make sure that companies are paying the right amount for their benefits.
What Exactly Is The Audit?
When you buy workers’ comp insurance, you usually have to give an estimate of how much your employees will be paid and what kinds of work they will do during the policy time. Along with other things, your estimate is used by your insurance company to figure out how much your workers’ comp insurance will cost.
You usually make estimates for one year’s worth of payroll. But sometimes those don’t match up with your actual payroll by the end of the year. There may be more work than expected during the year, or unplanned events may cause your verified payroll to be less than what was planned. Because of this, most state regulators need an audit every year so that the premium can be adjusted as needed so you’re never paying too much or not enough for your coverage.
During the audit your insurance company will check that the expected payroll and other records you supplied at the start of the policy match the confirmed payroll and work done during the policy period. If the records aren’t consistent your premium will change. If you overestimated then your policy will be cheaper and vice versa. There’s a few things you should know about the audit:
Audits are mandated by law
The word audit sometimes has a jarring reaction because we’re used to hearing it in a negative light around tax time. However, with workers’ comp you aren’t being audited because they think you’re committing fraud. They are checking to see if the payroll and class codes listed at the start of your insurance policy match the ones listed at the end, and they also want to know if any substitutes you hired had their own insurance. It’s just fact finding to not only make sure you’re paying what you should but also makes sure the insurance company isn’t charging you too much.
Types of Audits
There are three types of audits your company can go through depending on the size, the industry, and the auditor themselves.
- Preliminary Audit – When you first apply for workers’ compensation insurance, your insurer may do a preliminary audit of your business to figure out your initial rate.
- Mail Audit – The mail audit is when your insurance company gives you a workers’ comp audit form in the mail. It is also called a voluntary audit. You just need to fill out the workers’ comp audit form and send it back to the insurance company along with any other paperwork they ask for. If you run a small business, this is probably how your workers’ comp audit will go.
- Phone Audit – This type of workers’ comp audit still requires you to send in payroll information and fill out some forms. The only change is that someone from the insurance company will call you to go over your paperwork. Medium-sized businesses are most often given the phone audit.
- Physical Audit – A physical workers’ comp audit usually only happens if your business is very big or is thought to be committing major fraud. When your insurance company does a physical audit, they will send someone to your business to talk, look at your payroll records, and possibly ask for more paperwork. If you need a physical workers’ comp audit, you might want to hire a workers’ comp audit attorney to make sure you follow all the rules of the audit and don’t put your business at too much risk of being sued.
Pay-As-You-Go Workers’ Comp
“Pay as you go” workers’ comp insurance is not a new idea, but small businesses are using it a lot more now that workers’ comp prices are going up. A business typically pays a premium for normal workers’ comp insurance based on how much they expect their payroll for the upcoming year to be. Pay-as-you-go uses real-time payroll to figure out workers’ comp premiums month by month instead of an estimated yearly payroll amount. This means that premium payments are more accurate. This makes it less likely that you’ll pay too much during the year or have to pay more at the end of the insurance term because you didn’t report enough payroll.
How To Prepare
Once your insurer has contacted you and set up when and how your audit will take place it’s time to prepare for the appointment.
1.Work With The Auditor
Talk to your insurance auditor and be polite and friendly when you answer questions or give them information. Also, remember to be clear, and honest. Look over any workers’ compensation audit worksheets they make, and don’t sign off on any that aren’t finished or correct. This will keep the inspector and you from having to fill in the blanks over and over again. For your own notes, you should also make a copy of the final workers’ comp audit worksheet.
2.Collect Your Records
The cost of workers’ compensation insurance depends on your payroll, risk, and claims history. The auditor needs to know about all of these things. Most of the time, audit notices list the papers that the auditor can use to check the information. This list may be different for each insurance company, but most of them will want some or all of these things:
- Company operation description
- Employee job descriptions
- Number of employees
- Owners names and titles
- Description of any contractor or subcontractor work
- Accounting ledger
- Federal 1099, W-2, and W-3 transmittals
- Federal Profit and Loss From Business Schedule C (Form 1040)
- Payroll register
- Federal Employer’s Quarterly Tax Return (Form 941)
- Business checkbook
- Federal Employer’s Annual Tax Return (Form 944)
- Federal Employer’s Annual Unemployment (FUTA) Tax Return (Form 940)
- State unemployment insurance tax reports
- Time cards
- Overtime records
- Any payments made to independent or subcontractors and laborers
- Receipts for materials
- Subcontractors’ insurance certificates (if any subcontractors were hired)
- Business experience modification worksheet
Payroll, which is also called remuneration, is where your workers’ comp premium starts, so when you’re getting ready for an audit, you want to make sure that number is correct. Each state has its own meaning of “remuneration,” but in general, it includes:
- Gross wages and salaries
- Overtime, holiday, vacation, and sick day payments
- Employee contributions to 401ks, savings plans, or IRAs
- Any lodging or meals provided to employees
- Payment or allowances for employee tools
Alternatively, payments that aren’t normally considered salary when workers’ comp premiums are calculated may be included in an employee’s paycheck. Many states, for instance, don’t include:
- Tips and gratuities
- Employer payments to group insurance
- Severance pay
- Reimbursed business expenses
- Special rewards for individual invention or discovery
- Active military duty pay
- Uniform allowances
- Employee discounts on goods and services
In most cases, business owners don’t need to be covered by workers’ compensation insurance, so their pay isn’t looked at during a workers’ comp audit. Nevertheless, some states let sole proprietors, corporate officials, partners, and members of limited liability companies (LLCs) choose to get coverage. As a result, their pay is handled differently because it is usually a lot higher than regular workers’ pay.
The state generally sets an annual wage for sole proprietors or partners that is different from their normal salary. The rate the state sets is what goes into the workers’ comp audit paperwork. For example, corporate officers who choose to participate in workers’ compensation get a weekly salary that is between the state’s maximum and minimum wages. This depends on the workers’ compensation rules in the member’s state.
3. Update Job Descriptions
The dangers your employees face at work are also taken into account when figuring out your workers’ compensation costs. This is done so that the auditor can look into everyone’s tasks and how your business runs in general. This could mean going over the job titles you already have or filling out a form that lists what each employee does. You should know a lot about what the people who work for you do, no matter what. Job titles should be kept up to date, or they should be made from scratch if they aren’t already.
You might want to skip this step, but in the event of a workers’ comp check, having clear job descriptions can be very helpful. Your inspector can figure out the right governing class code for your business with the help of accurate job descriptions. There is a base rate for that class code that is used to help calculate your premium.
4. Review The Audit
Once the audit is over, look over the auditor’s work to make sure it matches what you know about the payroll and processes of your business. After looking over the auditor’s work, sign any papers they ask for to show you’ve done your part and understand the results. If you did the audit over the phone or mail, you might not be able to do this step, but your insurance company should send you a summary of what the inspector found. You can ask your insurance company for more details if those results don’t make sense.
Working With EZ
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