What is a Workers’ Compensation audit?

Workers’ comp audits are integral to the insurance process to get you the right coverage.

Siva Mohan
By Siva Mohan
Published Oct 16, 2023
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Each state has different requirements for workers’ compensation insurance, but many of them have at least one thing in common: A workers’ compensation audit is required to make sure you get the right coverage for your business and your team.

Workers’ compensation is designed to protect you and your employees from the expense of workplace injuries. It’s also proof that you, the business owner, care about the well-being of your workers.

Coverage is often mandatory if a business owner has employees, and an audit is simply a part of the insurance process.

Jump ahead to learn:

What is a Workers’ Compensation audit?

A workers’ compensation audit is a necessary and mandatory part of the insurance process to generate your final premium and ensure you have the right coverage. It’s an annual ritual that happens each year at the expiration of your policy.

When you purchase workers’ comp for the year, you estimate your annual payroll and the primary type of work employees will do while the policy is active. We use this estimate to help determine workers’ comp policy cost and level of coverage.

But a lot can change in a year:

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

These changes are quite common.

We’ve found that about a third of our policyholders end up doing different work or paying out different payroll than expected. Since workers’ comp insurance premiums are based on estimates, most state regulators require an audit of your policy every year to make a final, numbers-backed assessment of your policy and its cost.

A workers’ comp audit makes your estimate accurate with your company’s actual (rather than best guess) payroll and class codes (an insurance industry term that classifies different job duties and their exposure to risk).

It’s your chance to participate in the process and complete it. It’s possible you will need to pay more to secure the right amount of coverage. In the event of an overpayment — which is the case for about 40% of our customers — a refund will be issued.

EDU 40 percent WC audit graphic article

And get this: Even if you cancel your policy or your business folds, you still need to do a workers’ compensation audit to keep the policy intact.

Why? Let’s say your former employee develops a work-related injury or illness related to the job they did for you several months after you cancel your policy. They’re still able to make a claim on previous coverage.

What are the steps of a Workers’ Comp audit at NEXT Insurance?

We know the word “audit” can spark fear, but we do everything we can to make the process simple, straightforward and painless for you.

These are the three steps you’ll need to take to complete your audit:

1. Log into your account

NEXT will send an email once your policy expires or it’s been canceled.

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 online process, email copies of your payroll and tax 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

Our 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 audit can lead to a few potential results:

  • If the payroll estimate was the same as your actual payroll, no further action is necessary.
  • 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.
  • 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.

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.

Workers’ Compensation audit tips and resources

You don’t have to wait for audit season to update your workers’ comp estimate. Log in to your online NEXT account and update your payroll estimate anytime during the policy term to keep it accurate and up to date.

Questions? We’re here to help. If you have questions about the audit summary or any premium adjustments, call us at 855.222.5919 within 30 days of receiving your audit summary email. Our team will work with you to answer questions and resolve any issues before any credit card charges or refunds are applied.

What happens if you don’t do a workers’ compensation audit?

Workers’ compensation audits are a mandatory part of securing insurance for your business.

But as any business owner knows, calendars get crunched, to-do lists grow long and on occasion, a few tasks slip through the cracks. But here’s why it’s a good idea to prioritize your annual audit for your policy: Your workers’ comp audit is your chance to participate and bring the accuracy of real numbers into your coverage.

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

  • A non-compliance charge could be added to your policy. And depending on the state, this could be as much as two or three times the normal annual cost of your premium.
  • Your active workers’ compensation policy with NEXT could be canceled, leaving your business potentially out of compliance with state laws.
  • Your business could be reported as non-compliant to relevant state agencies. If this happens, it can become much more difficult to acquire future workers’ comp coverage for your current or future business.

How NEXT helps business owners find Workers’ Comp coverage

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

Our online application process makes it easy to view, receive a quote, choose the policy that’s right for you and get your certificate of insurance. The whole process can take less than 10 minutes.

If you have questions at any time, our U.S.-based insurance advisors are standing by to help.

Get your free instant quote online today.

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