What is a Workers’ Compensation audit?

A workers’ compensation audit helps make sure that what you pay for your workers’ comp insurance coverage matches your actual payroll and employee job classifications. It’s an annual review with your insurance provider every year at the expiration of your policy. Since the cost of your workers’ comp insurance is based on an estimate, most states require a workers’ compensation audit each year to make a final, numbers-backed assessment of your policy and its price.

When you buy workers’ comp coverage, you estimate your annual payroll and the primary type of work employees will do while the policy is active. Your insurance company uses this estimate to help determine your policy’s initial cost (known as the premium) and the level of coverage that would serve your business best.

But a lot can change in a year:

• Your number of employees can grow or shrink.
• The type of work they do can change.
• The hours spent on each task can ebb and flow.
• Raises or pay cuts can alter salary or wages.

Since these changes are common for most businesses, your coverage estimate can drift from reality.

A workers’ comp audit helps align your estimate with your company’s actual payroll and class codes (the insurance industry’s job classifications that tie premiums to risk). Depending on the results, your premium may adjust to match your current coverage needs. And if you’ve overpaid, you may receive a refund. 

Even if your business closes or your policy is canceled, you’ll still need to complete the audit to finalize your coverage record. That ensures any past claims can still be processed correctly.

What happens during a Workers’ Comp audit?

A workers’ compensation audit usually happens after your policy term ends. Sometimes a workers’ comp audit can also be triggered midyear by big payroll changes, adding new employees or taking on higher-risk jobs.

Your insurance company reviews your business’s actual payroll, job classifications and total number of employees to make sure your premium matches your true level of risk.

Most audits can take place in one of three ways:

1. Online or virtual audit: You upload documents such as payroll reports, tax forms and subcontractor certificates to your insurance company.
2. Mail or phone audit: You submit your records through email or mail, then discuss details over the phone.
3. In-person audit: An auditor may visit your business if required by your state or if your operations are complex.

The exact method and timing of an audit can vary by state. For instance, an employer-education guide from the California State Compensation Insurance Fund says audits are often conducted virtually or on-site. The guide notes that payroll reports, tax forms, time cards, cash disbursements and cash payment records (among other documents) may be required.

Once your information is reviewed, your insurer compares your actual payroll data to the estimates you provided at the start of the policy. 

• If your payroll was lower than expected, you may receive a refund or credit. 
• If it was higher, your premium might increase to reflect the changes.

Your audit results help ensure your coverage matches your business so that you only pay for the insurance coverage that you need.

NEXT has found that about a third of our policyholders end up doing different work or paying out different payroll than expected. And about 40% of our workers’ comp policyholders end up receiving a refund.

What documents do you need for a Workers’ Compensation audit?

State requirements can vary, but your insurance company will likely want to see:

• Payroll summaries or reports
• W-2s, 1099s or tax forms
• Subcontractor certificates of insurance
• Quarterly tax filings
• Job descriptions or employee classifications

When you gather your payroll records, make sure to include all eligible payroll types — like wages, salaries, commissions and bonuses — since these are typically included in a workers’ compensation audit.

Having these records ready can make the audit faster and help avoid billing surprises. You can use this as your own workers’ compensation audit checklist — a quick way to stay organized before submitting payroll and tax documents.

While most insurers follow a similar audit process, NEXT simplifies it with online tools and guided reminders to help you finish your audit on time.

State-specific audit requirements

If you own a construction business in Florida or Oregon, there are exceptions for this workers’ comp audit process. State regulators will contact your business via phone and/or email to conduct an in-person audit.

• If your annual premium is over $10,000, your audit will be conducted in person.
• In Oregon only, if your annual premium is below $10,000, you will be randomly selected to participate in an in-person audit.

How does a Workers’ Comp audit work?

To complete your workers’ comp audit with NEXT, follow these three steps.

1. Log in to your account

NEXT will send you a reminder email when it’s time to conduct your audit.

Once you’ve been notified, log in to your customer account and follow the prompts to verify current payroll details for you, your employees, subcontractors and partners from your payroll and tax documents.

2. Email your documentation

After you complete the questions online, email copies of your documents to us at wc_auditors@next-insurance.com. Please include all of the following:

• Payroll reports from a payroll processing system
• Federal 1099, W-2 and W-3
• Federal Profit and Loss From Business Schedule C (Form 1040)
• Federal Employer’s Annual and Quarterly Tax Returns (Form 944 and 941)
• Federal Employer’s Annual Unemployment (FUTA) Tax Return (Form 940)
• COIs for subcontractors

Note that you should already have certificates of insurance for all subcontractors who worked for you to verify their own workers’ compensation insurance.

We only ask for COIs for subcontractors who were marked as insured in the audit questionnaire. If your subcontractors don’t have their own workers’ comp insurance, their compensation will be included in your payroll.

3. Wait for your audit review and results

NEXT’s auditors will verify the information you provide and determine if a premium adjustment or refund are needed.

You should receive an audit summary within about a week. The results are usually one of three scenarios:

1. If the payroll estimate was the same as your actual payroll, no further action is necessary.
2. If the actual payroll is less than the estimate, your insurance costs decrease and we’ll issue a refund to the credit card we have on file within 30 days of sending the audit summary.
3. If the actual payroll is greater than the estimate, we will change your policy to make sure you’re adequately covered for the year. You will be notified of the correct premium for the policy, and your business will have 30 days to review the additional cost for coverage. At the end of 30 days, we’ll charge the credit card we have on file for your account.

Updates on adjustments or refunds will also be available for your review if you log in to your customer account.

If there are no changes — congratulations! — you’re finished with your workers’ compensation audit until next year.

No matter the outcome, 30 days after the completion of the audit you will receive an email notification that the audit is complete. We’ll also provide updated policy documents for your records.

3 tips to simplify your annual Workers’ Compensation insurance audit

If you already have workers’ comp with NEXT, there are a few ways to make your workers’ comp audit even smoother:

1. Keep your payroll estimate current. You don’t have to wait for audit season — you can  log in to your online NEXT account anytime to update payroll or employee information during your policy term. This helps keep your premium accurate and up to date.
2. Consider NEXT Pay-As-You-Go workers’ comp. With pay-as-you-go (PayGo) workers’ compensation, available only through our network of over 100 partners, including Intuit’s Quickbooks, Square, Gusto, Toast, Rippling, Patriot, OnPay, Homebase and more, your premium automatically adjusts based on your real payroll instead of estimates. That means fewer surprises during your annual audit — and payments that stay in sync with your business throughout the year.
3. Review your audit summary early. After your audit is complete, review your summary as soon as it arrives. If you have any questions about premium adjustments or next steps, contact our support team at 855.222.5919 within 30 days of receiving your audit summary email.

Our team is here to help you understand your results and resolve any issues before any charges or refunds are applied.

What happens if you don’t do a Workers’ Comp audit?

Workers’ compensation audits are a required part of maintaining accurate coverage for your business. But as any business owner knows, calendars get crunched, to-do lists grow long and tasks can slip through the cracks.

If you don’t complete your workers’ comp audit, here’s what could happen:

• A non-compliance charge could be added to your policy. In some states, insurers may charge an additional non-compliance fee or estimate your premium based on higher payroll.
• Your active workers’ compensation policy could be canceled. This leaves your business potentially out of compliance with state laws.
• Your business could be reported as non-compliant to relevant state agencies. That can make it harder to secure workers’ comp coverage later or delay new policy approvals.

Complete your workers’ comp audit on time to keep your policy in good standing and help ensure your business is properly protected.

How to get Workers’ Compensation insurance coverage

If you’re looking for workers’ comp insurance for your business, NEXT is dedicated to helping small business owners and self-employed professionals find the right policy to protect their business affordably.

Our online application makes it easy to get a quote, choose the policy that’s right for you and get your sharable certificate of insurance in about 10 minutes. You can modify your policy 24/7 via web or mobile app.

And if you have questions, our U.S.-based insurance advisors are standing by to help.

Start a free quote with NEXT today.