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What is a Workers' Comp Audit and How Do You Prepare For It

May 17th, 2024 | 4 min. read

By TJ Noa

Just like unexpected questions about your past can surface when applying for a loan, a workers' comp audit can feel surprisingly intrusive as it digs into all the financial and operational details of your business. While the thought of an audit may seem daunting, a thorough understanding of this process will keep your business operating within legal standards and save you from potential financial repercussions. Many businesses struggle with the required meticulous record-keeping, worried about the consequences of discrepancies between reported data and actual operations.

At Whirks, we recognize the anxiety that the word "audit" can cause which is why our mission is to simplify small businesses' financial complexities, including workers' comp insurance. By the end of this article, you'll understand more about workers' comp insurance, what the audit entails, why it's necessary, and how you can prepare for it with confidence. We'll also give you an alternative method to traditional workers' comp insurance that exempts you from audits altogether.

What Is Workers' Compensation? 

Workers’ compensation is a type of insurance designed to protect employees and employers from the negative consequences associated with a work-related accident. Workers' comp is typically required by law in most states and it is the responsibility of the employers to pay for this insurance and not pass the cost onto their employees.

Workers' Comp coverage helps employees who get injured at work by covering their medical bills and paying them wages if they can’t work because of their injuries. 
This insurance also protects employers by preventing employees who are receiving workers' comp benefits from suing their employers over injuries. This saves employers from costly legal battles and paying medical costs out of pocket.

How Much Does Workers' Comp Insurance Cost?

Generally, the safer the workplace, the less the insurance costs because fewer accidents mean fewer claims. In short, it works pretty similarly to your car insurance on your personal vehicle. The cost of the insurance also depends on how much the employees are paid and the type of work they do.

A lot goes into calculating the rate and the premiums, but the general idea behind calculating workers’ comp premiums is the rate multiplied by the total payroll dollars.  Again, it’s cheaper to insure a Honda Civic than it is to insure a Corvette!

What Is a Workers' Comp Audit?

A workers' comp audit is conducted annually by your insurance provider. Its purpose is to verify that the payroll and risk classifications you've reported over the past year accurately reflect your actual business operations. This assessment is important because it determines how much you should be paying for your insurance premium.

During the audit, the insurer examines your business records, payroll details, and other relevant documentation to verify that the coverage you're paying for matches your operational reality and staff risk levels for that year.

Why Do You Need a Workers' Comp Audit?

Workers' comp audits are essential for adjusting any discrepancies between the estimated and actual payroll figures that are used to calculate your insurance premiums. At the start of each insurance period, you provide an estimate of your total payroll, however, predicting these exact amounts can be tricky and often don’t quite match up by the year's end.

To find out the exact amount that your total payroll ended up being, the insurance company conducts a workers' comp audit. 

What Does a Workers' Comp Audit Involve?

The audit looks at all of the wages that you paid your employees and calculates what the premium should have been.
If the audit finds that your payroll was higher than estimated, you'll need to pay the additional amount. If it was lower, you might receive a refund or a credit toward future payments. 
This can create cash flow issues in companies with seasonal influxes of business. If a construction company had an unexpectedly great summer, they may end up owing a good deal of money come the end of the plan year, which often coincides with slower, winter months.

It may not be the most ideal solution, but the audit is how an insurance company knows they’re getting paid what they’re due.

How To Prepare for a Workers' Comp Audit

It's important to note that each auditor may ask for different information based on what they deem necessary to verify your payroll and classification details.
Sometimes they're happy with less, and sometimes they will ask to see more, but in general, there are a few things you should have ready to hand the auditor when they come. 

Payroll Reports

Start by retrieving reports from your payroll software. You'll need to provide a detailed breakdown of total wages paid throughout the plan year, ideally itemized by each employee. This helps auditors verify the total amount disbursed in wages. Sometimes, you might need to generate multiple reports to compile this data comprehensively, but the goal is to present an accurate record of the wages paid.

Quarterly Tax Returns

Alongside payroll reports, your quarterly tax returns, specifically Form 941s, are essential. You should have these forms for each of the four quarters of your plan year. These forms reflect the payroll taxes paid and are often crucial for auditors to cross-reference with your payroll data.

Bank Statements

Finally, make sure to have bank statements from your payroll account ready. These should show transactions that match the payments recorded in your payroll software and reported on your 941s. The consistency between your reported wages, the tax filings, and the actual bank withdrawals helps verify that the financial information you've provided is accurate and complete.
Having these documents organized and accessible can significantly facilitate a smoother, more straightforward audit experience.

Can You Skip a Workers' Comp Audit? 

You might wonder if there’s a way to skip the hassle of annual workers' comp audits. Good news, there is!   A pay-as-you-go workers’ comp plan is an ideal solution for most businesses. Instead of guessing your yearly payroll at the start and adjusting later, pay-as-you-go workers' comp lets you pay your premiums based on the actual payroll data every time you run payroll.

How Does Pay-As-You-Go Work?

Each payroll period, you pay a portion of the premium that matches exactly what you owe for that period based on real numbers, not estimates. This method keeps your payments accurate and up-to-date. Because payments are made in real-time, there’s less need for those big end-of-year audits to adjust payments or correct mistakes.
This pay-as-you-go approach helps smooth out your cash flow too. Instead of big, unpredictable payments, you make smaller, consistent ones that fit better with your actual payroll costs. This can be a big relief, especially for businesses where cash flow is tight or highly variable.

Take the Work Out of Workers' Comp

We at Whirks really like the pay-as-you-go system. It modernizes an old-fashioned process, making it easier and more practical for today's businesses. If you're interested in seeing how this could work for you, check out "What is Pay-As-You-Go Workers' Compensation Insurance?" This might just be what you need to simplify your business expenses and make your life a little easier.