Workers' Comp Audits: What to Expect, and Why You Still Owe One If You're Closing

Workers' compensation audits generate more questions than almost any other part of a policy, and lately we have been fielding a lot of them. One of the most common, and most misunderstood, comes from owners who are closing their doors: if I am going out of business, do I still have to do the audit? The short answer is yes. This post walks through why, along with what a workers' comp audit actually is, what the auditor checks, and how to keep one from turning into an expensive surprise.

What’s a workers' comp audit?

Your workers' comp premium is based on an estimate of your payroll at the start of the policy, because no one knows exactly what you will pay in wages over the coming year. At the end of the term, the carrier performs a premium audit to compare that estimate against your actual payroll.

If you paid more in wages than estimated, you owe additional premium. If you paid less, you get money back. The audit is simply the true-up. It also confirms your job classifications, or class codes, which drive your rates. Payroll sitting in the wrong class code can swing your premium significantly.

What the auditor looks at

A premium audit is a records review. Expect the auditor to ask for:

Your payroll records for the policy period, broken out by class code and employee.
Overtime. In most states only the straight-time portion of overtime counts toward premium, so clean records can save you money.
Your Profit & Loss statement to verify payments to Subcontractors and 1099 workers, and whether they carried their own workers' comp.
Officer and owner payroll, which is often subject to state minimums and maximums, or can be excluded if you opted out.
Certificates of insurance for any subcontractors you paid.

The two most common surprises

Uninsured subcontractors are the big one. If you paid a subcontractor who did not carry their own workers' comp, the insurance company can add what you paid them to your payroll and charge you premium for it. The fix is simple but has to happen year-round: collect a certificate of insurance from every sub before they start, and keep it on file.

Misclassification is the other. If your employees are in the wrong class code, your premium can be well off in either direction. An audit is where that gets corrected, sometimes with a bill attached.

What happens if you ignore the audit

Skipping the audit is the worst thing you can do. Carriers do not simply drop it. Depending on your state and carrier, you can face:

An estimated or noncompliance audit, where the carrier assumes your payroll and bills you. This penalty can run two or three times the estimated premium.
The unpaid balance sent to collections, which can reach the owner's personal credit, especially for a sole proprietor.
Trouble buying coverage later. An open or unpaid audit follows you, and carriers are reluctant to write a business that has one hanging over it.

But I am going out of business

This is exactly the situation we have been helping a client through, and the rules do not change when you close:

The carrier still conducts a final audit for the period your policy was in force. You were covered during that time, your premium was based on an estimate, and the carrier is entitled to reconcile it to your actual payroll.
Ignoring it because you are closed is how a wound-down business ends up with a surprise collections notice months later, tied to the owner personally.
Here is the part people miss: the final audit can go in your favor. If your actual payroll came in below the estimate, the carrier owes you a return premium. Skip the audit and you forfeit that refund.

So even if you are shutting down, complete the final audit. Pull together the payroll for the time you were open, gather your subcontractor certificates, and respond. It protects you from a penalty, and it may put money back in your pocket.

How to make audits painless

Set an accurate payroll estimate at the start of the policy. A number that is too low feels good until the audit bill arrives.
Keep clean payroll records all year, separated by class code, with overtime tracked.
Collect a certificate of insurance from every subcontractor, every time.
Have your agent review the audit before you pay it. Audits contain errors more often than you would think, in class codes, subcontractor charges, and overtime, and a review can catch overcharges the auditor missed. This is a service we provide.

The bottom line

A workers' comp audit is just a true-up between what you estimated and what you actually paid in wages. Handled well, it is routine, and it can even mean a refund. Handled poorly, or ignored, it becomes a penalty, a collections problem, and a barrier to future coverage. That is true whether your business is growing or closing.

If you have an audit coming, an audit that does not look right, or you are winding down and not sure what to do, reach out. We will walk you through it and make sure you are not paying a dollar more than you owe.