What is an insurance audit and why do I have to do it?
An insurance audit is the insurer's check, after your policy year ends, of the real payroll or sales your price was based on. Workers' comp and many liability policies are priced on an estimate at the start; the audit swaps in the actual figures, so you either owe more or get money back. It is routine, it is required by the policy, and ignoring it is expensive.
- The price you paid was an estimate. The audit replaces it with your real payroll or sales.
- The form is short, usually two or three pages, and most owners hand it straight to their accountant.
- Ignore it and the insurer can bill you a penalty of up to twice your estimated premium and cancel the policy.
Why does my insurer check my numbers after the year ends?
Because the price was built on numbers nobody knew yet. At the start of the year you estimate your payroll or sales; at the end, the insurer checks what they really were and adjusts the bill up or down.
That year-end check is called a premium audit. Travelers states the logic this way: premiums are charged on actual payroll or sales for the year, and the audit determines whether the premium needs to be adjusted up or down. (Source: Travelers)
Your policy tells you whether it works this way. If the declarations show a "deposit" or "estimated" premium, or say the policy is auditable, the amount you paid was a down payment. Workers' comp is almost always auditable, because it is priced on payroll. Liability policies priced on sales usually are too. If you hired more people or sold more than you estimated, expect a bill; if business shrank, expect a refund.
What does the audit form actually ask for?
Who owns the business, what everyone was paid and for what kind of work, and proof that matches your tax filings. For most small businesses it is a short questionnaire, not a visit.
A typical payroll audit form asks for:
- Owners and officers: names, titles and how ownership is split by percentage.
- Total payroll by type of work: office staff, drivers and workers on the floor are priced differently.
- Special pay: how much came as tips, commission or overtime, since some of it is counted differently.
- Head counts: how many full-time, part-time and contract workers you used.
- Proof: an employee list, or instead the quarterly payroll tax return you file with the IRS (Form 941).
Westfield's audit checklist asks for owners' and officers' names, titles and percentage of ownership, and names the quarterly federal tax return as a payroll check. (Source: Westfield Insurance) Utica National tells policyholders to report total overtime and tips separately and lets the auditor do the math, and asks for proof of insurance from any contractor. (Source: Utica National Insurance Group) Contractors without their own coverage can be counted as your payroll; the guide to hiring and your insurance explains why.
What if my policy is priced on sales instead of payroll?
Then the audit asks for your sales, not your payroll. Expect to send your profit-and-loss statement, your sales figures for the policy year, and a signed statement that they are accurate.
Travelers' guide for sales-based liability audits says the auditor may ask for your sales journal, income statements or profit-and-loss statements, and will check them against sales tax returns or federal tax returns. (Source: Travelers) Use the same figures your accountant filed. Numbers that do not match your tax returns are what turn a mail-in form into a phone call or a visit.
What happens if I ignore the audit?
The insurer will not wait. It can bill you an estimated audit at a steep markup, add a penalty charge, and cancel the policy.
Missouri Employers Mutual explains that, under the national workers' comp rating bureau's rules, an insurer can charge up to two times the originally estimated premium when a policyholder does not complete the audit, and the policy may be cancelled. (Source: Missouri Employers Mutual) Travelers lists the same three outcomes: a noncompliance charge, an estimated audit, or cancellation, with the charge set by state. (Source: Travelers)
The charge can usually be reversed once you send the records. A cancellation for an ignored audit is harder to undo, and the next insurer will ask about it. Every policyholder pays for the audit by answering it.
How do I make the audit painless?
Give it to your accountant the day it arrives, keep your payroll split by type of work all year, and collect proof of insurance from every contractor before they start.
- Use your payroll report: most payroll services print a workers' comp report that already splits pay by job. Travelers accepts payroll records rounded to the first of the month, up to 30 days off the policy dates. (Source: Travelers)
- Describe real duties: an employee who splits time between the office and deliveries is priced on what they do, not their job title.
- Keep contractor certificates: one per contractor, covering the dates they worked.
- Update your estimate mid-year: if payroll or sales jump, tell your agent so the year-end bill is not a surprise.
If the result looks wrong, you can dispute it: ask for the auditor's worksheet, compare the job types to what your staff actually did, and send corrections through your agent. A clean audit also makes next year's quote easier, which the guide to preparing for a quote covers.
Frequently asked questions about insurance audits
Yes. The insurer audits the months the policy was in force, and the result can still be a bill or a refund. Answer it even after you have moved to a new insurer.
Often, yes. Many insurers will agree to a payment plan if you ask before the due date. Ask your agent to request one, and to raise the estimate on your current policy so the same gap does not repeat.
It depends on how your business is set up and whether you chose to be covered by workers' comp. Many states let owners and officers opt out, and some count owner pay at a set minimum or maximum. Your agent can tell you which applies to you.
Got an audit bill that does not look right?
Send us the audit result and your payroll or sales figures, and we will help you check the job types and the math.