Like many business owners, you'll dread the thought of a physical workers compensation audit. The prospect of an audit could seem less daunting if you recognize what records the insurer will need and organize them before time. Some advanced preparation on your part will help make sure the audit goes quickly and smoothly.
Scheduling the Audit
Like many business owners, you'll dread the thought of a physical workers compensation audit. The prospect of an audit could seem less daunting if you recognize what records the insurer will need and organize them before time. Some advanced preparation on your part will help make sure the audit goes quickly and smoothly.
Note that your assigned auditor may or may not be an employee of the insurer. Some insurers maintain an in-house audit department staffed with their employees. Others outsource the audit function to an independent auditing firm. The process should be an equivalent, whether an insurer employee or a contractor perform the audit.
Records You Will Need
The auditor will need financial data for the time period covered by the policy being audited. Here is the type of information you may be asked to provide:
- Accounting ledger
- Tax forms, particularly form 941 and 944, Employers Federal Tax Return (quarterly and annual, respectively)
- Records of cash disbursements
- Payments for services provided by independent contractors. The auditor will need to verify that these workers are not your employees.
- Payments for services provided by subcontractors
- Certificate of insurance for each subcontractor you hired
- W-2 and 1099 forms
- Job description for each worker. Make sure it accurately describes the worker's duties.
- Description of your business operations
- Payroll records for the term of the policy. The auditor will need to verify all sources of pay provided to each worker (salary, bonuses, etc.).
- Payroll limitations applicable to executive officers, partners, sole proprietors or other principals covered under the policy
- Your experience rating worksheet
Once you've got collected the required data, you will need to arrange it. Put all of your payroll records (such as W-2 forms, pay stubs, and overtime records) together in order that the knowledge is definitely accessible. Likewise, place all information related to subcontractors, including payment amounts and certificates of insurance, in one place. Your efforts can pay off, making the audit easier and faster.
Meeting With the Auditor
When the auditor arrives, direct him or her to a quiet location where the individual can work without being disturbed. Try to be cooperative and answer the auditor's questions as well as you can. If you ask a trusted employee to satisfy with the auditor on your behalf, make certain he or she:
- knows your business well
- understands all phases of your firm's operations
- knows what tasks are performed by each employee
- understands your company's workers compensation policy, including the classifications it contains
- understands your firm's financial records, including payroll data, so that he or she can answer questions from the auditor
If your company utilizes an offsite bookkeeping firm to handle your accounting and payroll functions, can you send the auditor to your bookkeeper's office? No! Your bookkeeper can provide the financial records the auditor needs, but a physical audit must be conducted at your premises.
What's Included in Payroll?
The basis of worker's compensation premiums is remuneration (payroll), the price of the services your employees provide to your organization. Your insurer calculates your premium by multiplying a rate times your remuneration and dividing the result by 100. The NCCI and a few state workers' compensation authorities provide a written definition of remuneration. While the definition varies from state to state, it generally includes the following:
- Gross salaries and wages, including retroactive salaries and wages
- Total commissions received by a worker including any draws against them
- Bonuses including stock bonus plans
- Vacation, holiday, and sick pay
- Overtime pay. In most states, overtime pay is calculated at the straight-time rate. For example, if a worker's hourly rate is $20, and he is paid $600 for 20 hours of overtime, only $400 of the overtime pay would be included as remuneration.
- Payments made by you that would otherwise have been withheld from employees' pay as required by law for Social Security, Medicare or a pension plan
- Payment to workers on a basis other than time worked. Examples are piecework, profit sharing, or incentive plans.
- Payment or allowances for hand tools or hand-held power tools that workers use to perform their jobs
- The rental value of an apartment or house provided to an employee. Also, the value of other lodging and meals received by a worker as part of his or her pay
- Payments deducted from workers' gross pay for retirement, cafeteria, or savings plans
- Payroll for employees of uninsured subcontractors
What's Excluded From Payroll?
The meaning of remuneration typically excludes certain costs. While the exclusions vary from one state to another, most states exclude the following:
- Tips and other gratuities received by employees
- Payments by the employer to group insurance or pension plans
- Severance pay (other than for time worked)
- Discounts on goods purchased from the employer
- Reimbursed business expenses
- Pay for active military duty
- Uniform allowances
Classifications
One of the auditor's primary tasks is to make sure your business is correctly classified. to form this assessment, the auditor will review your company's operations then determine whether the classifications on your policy are appropriate.
