The Workers Compensation Insurance Audits
Workers compensation insurance audit is interesting,and in this article we’re going to tell you exactly what it is, we’re gonna explore why it’s important for you, and then we’re gonna give you some tips and tricks to make sure you’re ready for your next audit.
And we’ll look at all of that coming up next. (logo reverberates) (rocks clatter) Hey folks, Jack Wingate here, and on this channel we help individuals, families, and businesses save money on your insurance, help you understand insurance a little bit better, and let you know what’s going on in the insurance industry. And on this video we’re gonna look at the workers compensation insurance audit.
For most business owners the audit is complex, or it seems complex. And sometimes it can be overwhelming. So today we’re gonna look at what it is, we’re gonna discuss why it’s important, and if you’ll stick around ’til the end, we’re gonna give you some tips and tricks to make sure you can comply with your next audit.
Okay, so what is the workers’ compensation insurance audit? Well, workers’ compensation, like some other commercial lines of business, is auditable. That means that when you start your policy period, you’re starting with basically an estimate because the workers’ compensation policy is based on or rated on your actual payroll.
And even if a business has been around forever, it is nearly impossible for you to pinpoint exactly what your payroll is going to be for the upcoming 12 months. There’s just too many variables.
There’s pay raises, there are hirings and firings, people retiring. So the workers’ compensation audit is simply a way for the carrier to look back at your last policy period and get the exact amount of payroll that you had. Now that we know what the workers’ compensation audit is, why is it important? Well, workers’ compensation is a crucial coverage for most every business, as well as the employees or workers that you have.
So instead of you having to worry about notifying your carrier or your agent every single time you adjust payroll, every single time you hire and fire, the carriers came up with a way that you can use an estimate of payroll for the upcoming 12 months, and then at the end of it you settle up.
If you overestimated your payroll, then at the end of the year the insurance carrier’s gonna go in and send you a check back for the difference. Likewise, if you underestimated your payroll, at the end of your policy period you’re gonna have to write a check to the insurance carrier for a little bit of money, whatever the difference is. Now there are some carriers now that use a pay-as-you-go or reporting form style of workers’ compensation auditing, which is basically auditing yourself as you go.
So every month you would complete a worksheet, send it to the agent, send it to the carrier, that spelled out the payroll for that month. Some businesses love this. Some seasonal businesses this is really good for when it comes to payroll and cashflow. But it’s not for everyone and not every carrier offers it.
So making sure that you’re able to use an estimate up front and that you can settle up with the insurance carrier at the end saves you a load of time and worry over the policy period. Now that we know what a workers’ compensation audit is and why it’s important, we need to talk about compliance with your audit. Now some people may not care about complying with their audit and they don’t think there’s any ramifications.
In fact, I’ve had businesses and business owners come to me after they go out of business and say, well there’s no need for me to even worry about this, or why should I worry about it? I don’t need workers’ compensation insurance again. Well the fact of the matter is every state can levy or allow the insurance carriers to levy a multiplier onto what your estimated payroll was.
In the state of North Carolina, the statute states that the carrier can charge you 200 percent over and above what you originally estimated for your payroll. So that could come into big amounts of money if you’re not in compliance. And yes, they will turn you over to collections, so you have that whole nightmare to work with.
It’s best just to make sure that you’re in compliance regardless of whether you’re gonna continue your business or not. So let’s talk about the real reason that you’ve stuck around all the way to this point in time, and that is for the tips and tricks to make sure you can stay in compliance with your audit.
First things first, let’s talk about the documents that you’re gonna need when it’s time for your audit. And yes, it’s gonna take a little leg work on your part.
If you’ve got a bookkeeper, great, but most small business owners don’t really have that and they’re doing everything themselves. So let’s make it simple. First things first, we’re gonna need your QuickBooks journal, your journal that you keep your profit and losses on. And if you have not got one of those, you really should.
That’s a different discussion for a different day, but we’re gonna need a list of all the financial transactions that you’ve had over the course of the year that deal with payroll or paying any subcontractors. Now to verify these amounts, these transactions that you’re showing, most of the time your auditor’s going to request some forms like your federal 941 forms, your state unemployment records, sometimes your 1040-Cs. But they’re gonna wanna make sure that what you say you’ve paid to your employees or your subcontractors is actually what you’re paying.
And in addition you’re going to want to make sure that you give them your 1099s. And for any subcontractors or your 1099 workers, make sure that you have certificates of insurance for those subcontractors because if you don’t, then you’re gonna be charged for every amount of money you paid to them during that policy period.
All right, tip number two. Most of the time your workers’ compensation insurance policy period does not run on an annual basis, meaning January 1st to January 1st. It just doesn’t happen often. So a lot of times you’re gonna have a policy period that doesn’t exactly match up or makes things easy for your bookkeeping.
So what do we do then? Well let’s assume that your policy period is February 4th to February 4th. Well then when you pull your records, you should be able to pull out records or a QuickBook report that details just that time period. But your tax records might not line up for that because that doesn’t really go in your quarterly 940s or whatever.
What you need to do then is just get the tax records that are close to that day. You can even give one before the period starts and one after, and make sure you get all of ’em in between. But make sure you cover that period of time. Okay, so we’ve discussed what you need in order to comply with your audit, and realistically it should not be that hard.
Just make sure you have those records. Have yourself a checklist. But here are two crucial things that I see all the time that mess people up when it comes to their audits. First things first, you’re not collecting certificates of insurance for subcontractors that do work for you. And then when it comes to the audit, the auditors there, they’re gonna charge you all this extra money because you didn’t collect the certificate of insurance. So then you’re gonna scramble and you’re having to contact that subcontractor to get the certificates.
Trust me, we have to do this all the time. But as a simple rule of thumb, before you write any check to any subcontractor, make sure that they give you a certificate of insurance. Make sure that certificate of insurance, when you sign that check over to them, is actually for the policy period that you have.
That will alleviate a ton of legwork and headaches at the time of audit. And then secondly, and this one’s a little bit harder to do, but if you organize your financial records in this fashion, I promise you it will make your workers compensation insurance audit easier. It’ll also save you some money at the same time. Most businesses don’t have workers that fall into just one particular class or line of business or line of operation.
Meaning if you have a plumbing business, then you have the workers who actually do the plumbing. They will be rated under a class code for plumbers.
But you might also have a bookkeeper. Well that bookkeeper, the payroll you have for her or him is completely in a different risk class than your plumber’s, so you’re charged a different premium for that job. So make sure you have it split out. Well, what about an outside salesperson that you might have? Same thing, you need to spell that out completely on its own because it is a different rating factor than any of the other two.
So making sure that your payroll records are accurate and that they spell out what type of work that particular employee or employee class does will end up saving you money in the long-term and make your audit really, really easy. Hey, I believe this article has been helpful for you.
In workers Compensation Insurance , audits do not have to be complicated, they don’t have to be confusing. If you’ll follow the tips and tricks that we give you and have a general understanding about why it’s important for you to comply, then everything else’ll be easy. And until next time, we’ll see ya.
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