You’ve finally had a great year. It’s November, you’re finally done for the season, everything has been paid for, including all insurance policies, and it’s time to take some well-deserved R&R. Several weeks before Christmas you get a bulging envelope from your workers comp insurance company.
They want to do a Payroll Audit.
It’s a semi-surprise. You call your agent regarding the Self Audit forms. She’s not available. You play telephone tag up to Christmas Eve and eventually she simply says you need to complete the forms, sign them, and fax or mail them back to insurance company with any supporting docs the forms specify. You quickly complete the forms based on a tentative Payroll Report you produce from Quickbooks and fax it to the insurance company. The second week in January you receive another envelop from your workers’ compensation insurance company. It’s a Workers Compensation Policy Final Audit Statement, together with a Premium Invoice for an additional premium of $3,000, due on your next Premium EFT Draw Date, which is in couple of weeks on Ground Hog’s Day. Have fun living that day over and over and over again! Shock gives way to fury, as you yell at the spouse and kids, kick the dog, and start looking for what’s left of the New Year’s Eve Jack Daniels and your insurance agent’s phone number. What happened? Taking steps throughout the year can alleviate the pain of an audit at policy renewal. Here’s the nuts and bolts to help you prepare:
1) The Actual Policy: All workers comp policies, in all states, for all insurance companies, for all time have always been subject to audit. On rare occasion the insurance company will waive the audit, but they typically do not. The premium you pay is directly tied to what you pay employees and uninsured subcontractors, what the insurance companies call “remuneration,” or more commonly called payroll. Final premium due and paid is tied to ACTUAL payroll. At claim time, work loss benefits are also tied to ACTUAL payroll. Therefore, payroll is key, and ACTUAL payroll is controlling.
2) The Purpose: We still periodically run into existing businesses that are either shocked that they have received an audit request, or swear that they have never, ever had an audit request before. Even after 30 years in the business, I am still amazed to encounter new businesses, upon reaching the end of their first workers comp policy year, surprised to learn that their insurance company wants to do an audit, and that “nobody told me that would happen.” Most often these misconceptions have been the direct result of nonexistent or poor communication by or with their insurance agent. For workers comp policies, you start your policy, both for new policies and renewals, with estimated premium payments based on annual payroll estimates. The insurance company then uses the audit to determine actual payroll paid out, and then credits or debits the premium after comparing it to actual.
3) The Audit: Once upon a time, insurance companies exclusively did “no-site” audits: a company or hired third-party auditor would mail and/or call the business owner or bookkeeper, schedule an appointment, and physically show up to review payroll and tax documents (“the books”). On-site audits are still done, but insurance companies more recently have use two additional methods—Telephone Audits and Self Audits—rather than spending the time and expense to physically send someone out to check the books. In many cases insurers will arrange an appointment with the business owner or bookkeeper to speak with them and gather the actual payroll data by phone, asking them to follow up with supporting tax documents by email or fax. Finally, the Self Audit is simply a set of audit forms for the business to complete with owner, payroll, and subcontractor information. Complete it, sign it, and return to the insurance company with tax and insurance certificate records.
4) The Payroll: The best way to prep for your workers comp audit is to be accurate with your current payroll estimates. Prior to your renewal carefully review with your agent employee/sub-contractor work classifications and estimated annual payroll for each. We understand that for lawn care businesses, payroll can be volatile either up or down, especially during the spring, summer, and fall, depending on weather and other factors. But don’t forget: you may change these estimates during the course of your policy year to reflect significant increase or decrease in your actual payroll, thus changing the premium you pay during the course of your policy year, and avoiding large premium audit premium bills or refunds.
5) The W2 Employees: W2 Employees are always included for workers comp payroll exposure and premium charges. Here’s what you should have on hand and ready:
- Copies of the W2s ready (if available)
- More importantly, copies of your Quarterly 941 tax filings available to give the insurance company auditor, include as follow up to the Telephone Audit, or included with completed Audit Forms returned to the insurance company.
- Copy of Payroll Summary Report by employee for the exact dates of the policy period. You’ll need this to complete the Telephone or Self Audit anyway.
6) The Subcontractors: In our opinion subcontractors are the largest source of confusion and headaches for all parties involved—the business, the insurance company, and the insurance agent. In Michigan, subcontractors are automatically included for workers’ compensation coverage and benefits should they incur an injury on your job. Simply put, if they are working for you and get hurt, your workers comp insurance policy and company have to pay them the same benefits as W2 employees. This is why insurance companies want to include the amount you pay them in your chargeable policy payroll. The two exceptions are bone fide Sole Proprietors and INSURED subcontractors. These are sole proprietors who do not have employees of their own and work for other businesses (and can prove it) and other Subs who maintain their own workers comp policy during your policy period (and can prove it). Proving either of these parties has coverage is usually the rub with insurance companies. The following documents need to be presented at Audit to keep these out of your chargeable payroll.
For Sole Proprietors you need
- a signed form from them attesting that they are a Sole Prop
- they have no employees
- they work for other businesses or customers, together with copy of their business card, ad copy, and/or (best of all) a Certificate of Insurance attesting that they have General Liability insurance.
For Sole Props with employees, and all other business types including corps and LLC,
- you must have, retain, and submit a Certificate of Insurance attesting they have an active workers comp policy that covers YOUR policy period
Have copies of the past year’s 1099s and/or 1096 Summary available as well.