Workers’ compensation premiums, or the amount an employer pays to an insurance company in exchange for the carrier providing medical treatment and compensation to employees in the event of workplace accidents, are audited at the end of the policy term. Before the policy becomes effective, workers’ comp insurance companies prepare an initial estimate of premiums, based on the amount of payroll and the type of work the employer does, known as the “classification code”. Once the policy term ends, a premium audit is performed to account for any differences from the initial estimates. For example, if several employees left the company during the policy term and were not replaced, payroll would decrease and the amount the employer would pay to the insurance company would need to be adjusted. Also, if the type of work changed during the year, different classification codes may be utilized.
How is payroll used in workers comp insurance?
Payroll is used to calculate workers’ compensation premiums, so keeping accurate records is critical. There are several documents and types of information an employer should collect to ensure the premium audit goes smoothly. Key documents include:
– check registers
– cash payments (such as to subcontractors or for certain types of labor)
– certificates of insurance
Auditors can conduct audits of payroll in-person or electronically, depending on the format of records. At a minimum, the auditor will need to examine:
– each employee’s name and the state where work was performed;
– description of work performed;
– total gross wages (separated out by total overtime wages and double time wages; total severance; total tips);
– documents related to the hiring of contractors or subcontractors, including names, description of work performed, where work was performed, when work was performed, total amount paid, whether the hired contractor or subcontractor had employees, and the cost of materials supplied.
The appropriate time period for these documents is the duration of the workers’ compensation policy. The auditor will review tax records, but those tax records will be kept confidential during the audit process. The auditor compares information in payroll reports with information reported on tax forms. The tax forms are known as “verification documents,” used to verify the source of payroll information.
Once the auditor has competed her review, she may provide, upon request, copies of the auditor’s worksheets. These documents show how the audit was conducted, the payroll numbers, and what codes were used. The audit billing statement should be compared with the original policy, because this will help determine whether adjustments should be made. Ideally, there should be no significant changes from the total audited payroll figures. Further, there should be no significant changes to the classification codes.
For more information on the workers comp auditing process, contact attorney Drew E. Pomerance today.