Workers Compensation and General Liability Insurance Audits

A workers’ comp audit checks all of your current business metrics and compares them to your estimates (or the results of last year’s audit). Your insurance company uses this audit to adjust your premium for the previous policy term based on your actual payroll to make sure you’re paying for all the coverage you need.

Washington working 3

When it comes to audits, our team has the capability of representing you in every situation. Just because last year’s insurance policy expired and paid for, another bill may still be owed for it. This is normal for auditable insurance policies which are billed weeks after a policy is over and a renewed policy is in effect. General liability and work comp audits are the most common as those policies work on an audit basis. You should expect a sudot every year right after the renewal period for each policy.

The cost of workers compensation is based on payroll and general liability can be based on multiple factors such as sales, payroll, building size, and even flat charges. This is why audits are necessary for both parties, the business and the insurance company, because these factors vary from year-to-year. The more sales or payroll, the more risk the insurance company shoulders, therefore the higher the cost of the policy for the insured. This means that each business’s insurance costs proportional to their size.

The General Liability/Work Comp Audit Cycle

An auditable policy begins based upon an estimate of sales/payroll/other factor and everyone settles up at the end. Soon after the policy is over, the insurance company requests actual figures for the time the policy was in effect and issues a bill or refund check as appropriate. The audit request may come by letter, email, phone call, or an on-site visit. Auditors often request accounting records as backup for the information supplied. Tax returns may be requested as well. Auditors may also inspect business operations or work areas. Complying with these requests is essential to remain in good standing, even if you no longer carry the coverage or if you moved the policy to a different insurance company. Here at Alek Tax and More we will help you in this process and keep you in compliance and good standing with your insurance company.

How to Prepare:

1. Track Sales and Payroll by Classification

Businesses should prepare for audits by keeping detailed and accurate accounting records throughout the year. Remember this is a service that here at Alek tax and More we offer to every one of our clients. This means tracking sales, payroll, and other expenses by policy classification. For example, one client is a contractor that periodically performs roofing jobs and their workers compensation policy includes classifications for roofing, masonry, painting, interior carpentry, and others. For workers compensation, roofing is much riskier than interior carpentry and therefore insurance for that classification costs more. Our client records payroll for roofing jobs separately, ensuring they are not overcharged for insurance. If payroll is not tracked by classification in the accounting system, the auditor is required to charge everything against the highest cost policy classification. The same principle applies for sales and other expenses with general liability.

Work comp audits are based upon gross payroll including wages, salaries, commissions, bonuses, holiday pay…just about everything. Severance pay is not included. Ask your auditor any questions regarding what should be included in payroll reports.

2. Breakout Labor and Materials

Recording expenses by labor and materials is crucial not only within your own accounting records, but from subcontractor invoices, as they are needed for audits and for claims (if any). You should require all subcontractors to always break out all invoices by labor and materials and track them in your accounting system as such. In this manner, where appropriate, only labor costs will be charged against your policy. If not separated by labor and materials, all subcontractor expenses will be charged as labor which will increase the audit.

3. Obtain Certificates of Insurance from Subcontractors Before Work Begins

One of the most crucial steps is obtaining the correct certificates of insurance needed. Subcontractors affect both general liability and work comp audits, and are a common source of misunderstanding with insurance policies or audits. If a subcontractor does not maintain their own workers compensation policy, their payroll will be charged against your company’s work comp audit since they performed the work on your behalf. For general liability, work performed by uninsured subcontractors is also charged against your policy, often with a surcharge. In either case, if the subcontractor provides a certificate of insurance before they begin work, your business will not be penalized. In addition you should also make your subcontractor sign a subcontractor agreement protecting your company from any losses should a subcontractor claim or lawsuit be filed against your company.

How Alek Tax & More helps

  • Track sales, payroll, and subcontractor labor costs by policy classification.
  • Require certificates of insurance from subcontractors before they begin work. If uninsured, expect them to be charged against your policy.
  • Breakout expenses between labor and materials.
  • Require subcontractor invoices be broken out by labor and materials.

For other services, please head out to our Services Page.

Send a Message to Schedule Your Free Consultation

What can we help you with today?

  • Business Formation (LLC, S-Corp, C-Corp)
  • Business Taxes
  • Personal Taxes
  • Back Taxes
  • IRS Audit
  • Workers Compensation Audit
  • General Liability Audit
  • Income Verification Letter

Contact Us

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.