Workers' compensation premium is calculated from payroll, but payroll for a year that hasn't happened yet can only be estimated. The policy is issued on that estimate, and the audit is where the estimate gets replaced with fact.
The result can go either direction. A business that grew during the year usually owes additional premium; one that staffed up more slowly than planned often receives a credit. Neither outcome is a penalty. The premium is simply catching up to the business that was actually run.
An auditor reviews three things: how much payroll was paid, which class codes that payroll belongs in, and whether any subcontractors without their own coverage should be added to the policy. The payroll figure is reconciled against records filed with someone other than the carrier (usually the quarterly Form 941 and state unemployment returns), so it can be verified rather than taken on trust.
Audits are performed in person at the business, virtually with documents uploaded online, by telephone, or by a self-audit form the policyholder completes and returns. Which one a policy gets usually depends on its size and the carrier's program, not on any suspicion about the business.
The audit sets the final premium for the expired term and usually informs the estimate for the renewal, so an error carries forward into the next policy period.
Frequently asked questions
Why do insurance companies do premium audits?
Workers' compensation premium is priced on estimated payroll before the policy year starts. The audit replaces that estimate with actual payroll and confirms the class codes, so the premium charged matches the exposure the carrier really covered.
Is a premium audit mandatory?
Cooperating with the audit is a condition of the policy. A business that does not provide records can be charged an estimated or non-compliance premium under its state's rules, and the carrier may decline to renew.
Does a premium audit mean I did something wrong?
No. Workers' compensation policies are routinely audited at the end of every term because the premium was based on an estimate. It is a standard reconciliation, not an investigation.
What records does a premium audit need?
Typically payroll summaries by employee, the quarterly Form 941 returns, state unemployment filings, general ledger or cash disbursements, and certificates of insurance for any subcontractors used during the policy period.