At the end of a workers’ comp policy, the insurer performs an audit to see if they charged you the correct amount. Your annual premium charges are based on payroll for the previous year, which can change significantly. While some variation is normal, it’s important to avoid getting a major bill from your insurance audit. Any mistakes in your audit can lead to a higher or lower bill, so it’s important to pay attention and prevent common errors.
The Top 5 Most Common Workers’ Comp Audit Issues
If your payroll costs and employee classification codes remain the same from year to year, your premium charges shouldn’t be significantly off. Sometimes, audits can uncover issues that lead to major differences and a large adjustment. From not handling 1099 employees properly to incorrect estimates of future payments, there are a number of problems you should try to avoid.
1. Not Handling 1099 Employees Properly
A mislabeled independent contractor can become an extremely expensive mistake for your business. Everyone is happy being a 1099 employee until they aren’t. If a misclassified 1099 worker becomes injured, they may go after your business for lost wages, disability, and medical costs. This process is run by the states, so the state will cover the employee’s expenses and help them pursue you for injury-related costs.
Meanwhile, federal rules determine whether someone is a 1099 worker or not based on how much control employers have over when, where, and how the worker does their job. If you mislabeled your employees as 1099 workers, you could be on the hook for extensive expenses.
2. Incorrect Employee Classifications
Your employees are given certain classification codes based on their risk levels. If you classify a high-risk worker as a low-risk worker, your insurer will find out and change your premium amount.
There are over 700 employee classification codes, so it is easy for someone to get misclassified. If you work in certain industries, you may even be able to change classification codes based on what type of work your employee is performing that day. When the job’s risk level changes, the premium adjusts as well.
3. Estimating Payments Incorrectly
One of the most common workers’ compensation mistakes involves estimating future payroll costs. Your workers’ compensation payments are based on your estimated payroll, so your payments will be incorrect if you hired or laid off workers. Raises can also impact your payroll costs, which can lead to changes in your workers’ compensation premium.
4. Not Having Workers’ Compensation Coverage
You are legally required to offer workers’ compensation coverage. If you don’t have adequate coverage, you will have to pay significant penalties. In the highest-cost state, these penalties add up to $2,000 for every 10 days of non-compliance. Beyond state-based penalties, not having coverage also puts you at risk because you will have to pay for any injuries yourself.
If you don’t pay your premium adjustment, your insurance coverage will be discontinued. Unfortunately, this occurs fairly frequently. Sometimes, companies are unable to pay the entire cost. In other cases, an employee mistakenly tossed the bill in the trash. Even though the reasons for non-payment may be understandable, forgetting to pay your premium can lead to penalties and legal risks.
5. Making an Error on Your Paperwork
Unfortunately, paperwork errors can lead to audit issues. People can make mistakes in writing down payroll figures, the number of workers, or worker classification codes. When you get audited, this can lead to differences in your premium payment.
What Happens During a Workers’ Compensation Audit?
You may end up with a premium adjustment through no fault of your own. It’s normal for a business to lay off workers during slow times and to give raises after a good year. All of these activities can end up leading to a different premium amount.
Each insurer conducts its audit in a different way. Typically, a workers’ comp audit goes through the following steps.
- Your insurer will let you know that an audit is about to occur. They may give you this notification by email, phone, or mail.
- The auditor will get in touch with you to tell you what materials they need. At the minimum, they will need your payroll information for the year. They’ll let you know how and when to submit your records.
- You will submit the requested files to the auditor.
- The auditor will complete the audit. Then, your insurance provider will tell you if there will be any changes to your premium.
Premiums can be increased, decreased, or kept the same after an audit. It all depends on what type of payroll changes your business went through during the previous year. Each year, your insurer creates a specific premium for your business based on your industry, risk factors, payroll, location, coverage limit, number of workers, and claims history.
How to Avoid Problems During a Workers’ Compensation Audit
Fortunately, there are easy ways to prevent problems with a workers’ comp audit. Creating a checklist, switching to an automated system, and focusing on classification codes can help you prepare for a future audit. With the right preparation, you can simplify your auditing process and reduce the size of any premium adjustments.
1. Use a Checklist
One way you can improve your audit experience is by using a checklist. Periodically, you should update your files with the following information.
Employee Information: Save each employee’s tax forms.
Classification Codes: Carefully track classification codes for each employee. When their job duties change, document the switch and update their classification code.
Payroll Information: To prepare for an audit, keep track of payroll wages, hours, and job titles. You should also track which state employees are working in.
Workers’ Comp Verification: All of your contractors and subcontractors should have workers’ compensation insurance. Ask for proof of coverage and document it.
2. Participate in the Audit Process
Other than preparing for your audit in advance, you should also be an active participant in the audit. When your auditor asks for documentation or has a question, provide them with the information they need. The insurer will assume the negative if you don’t provide them with documentation and a response, so it is in your company’s best interest to play an active role in the audit process.
3. Automate Your System
Some workers’ comp insurers work with payroll providers, which can make the entire process much easier. At Asure, we partner with E-COMP to integrate workers’ comp insurance into our payroll system. Because the payroll data is automatically transferred to the insurer, you don’t have to worry about a data entry mistake. Additionally, you can save money on your administrative costs.
4. Switch to a Pay-As-You-Go Workers’ Compensation Policy
Pay-as-you-go workers’ compensation policies provide workers’ comp coverage. Instead of an annual premium, you pay your premium each month. The premium is based on your monthly payroll costs, so it is more accurate than traditional workers’ comp. In addition, audits are less intensive with pay-as-you-go plans because the premium is based on your actual payroll figures instead of an estimate.
5. Classify Your Employees Properly
One of the most important things you can do to avoid a large premium adjustment is to classify your workers correctly. Each state uses different classification codes, and these are the same codes used by your insurer to determine the risk associated with each job title. For example, a clerical worker and a construction worker have different codes because they have different risk levels. If you classify these employees incorrectly, it can lead to a significant premium change during your next audit.
Learn Better Ways to Manage Your Workers’ Compensation Insurance
Workers’ comp insurance isn’t just important because it is a legal requirement. It also helps reduce your legal exposure if an employee is injured in your workplace. By preparing for your audit and preventing common workers’ comp errors, you can decrease your insurance costs.
To learn more about how to incorporate pay-as-you-go workers’ comp into your payroll, reach out to our small business payroll and HR experts today.