Premium Audit Preparation: A Guide

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GOALS OF THIS GUIDE

The audit is an important step in the workers' compensation insurance process. It provides an opportunity for the insurance carrier to understand your business operations so that you are charged the correct premium. Additionally, the audit may help identify gaps in coverage or discounts and credits that apply to your policy. 


To that end, the audit experience gives you an opportunity to work together with your carrier to build a relationship, which helps foster mutual trust. When performed properly, an audit can be a positive experience. Below you’ll find helpful information about what to expect and how to prepare so that your audit runs quickly and smoothly.


Will You Be Audited?

Depending upon your policy’s premium size and class of business, audits may be performed annually, every other year, or every three years, as needed. Audits may be conducted physically at your place of business, by telephone, or by mail.


Who Will Conduct the Audit?

Audits are performed by one of LWCC’s staff auditors or an auditor from a firm with whom LWCC contracts services. Please note that you may work with a different auditor each time you are audited.


Preparing for Your Audit

As part of its policy contract, LWCC conducts periodic premium audits of its policyholders to identify changes in operations and to obtain documentation needed to ensure policyholders are being charged fair and accurate premiums. The better prepared you are, the quicker and easier your audit will be. Please have two prior years’ worth of the following records available as well as someone who understands the documents and the company's business operations to answer audit-related questions:


  • Federal tax return and supporting schedules (1040, 1120, 1065 and/or Schedule C)
  • Quarterly payroll reports—federal 941s and state unemployment tax account reports (SUTAs)
  • 1096 and corresponding 1099s
  • Payroll records for each employee reflecting gross wages and overtime
  • List of owners, percent ownership and duties
  • List of employees with description of duties
  • List of contract employees and/or subcontractors, reflecting amounts paid and work performed
  • Time records separating state and federal wages if you have USL&H exposure
  • Copies of certificates of insurance showing workers’ comp coverage for contract employees and subcontractors
  • Cash payment journal reflecting recipients' names, SSNs, amounts paid, payment dates and work performed
  • Additional records that may be needed to complete the audit include the following:
  1. Company financial statements, invoices, bank statements, trial balance, general ledger, cash disbursements (check register), etc.
  2. Other financial-related documents as needed for verification


It’s also important to verify worker’s comp coverage is still valid for all contractors/subcontractors during the policy period. Click here


Types of Audits

  • Test audits are conducted shortly after the insurance policy is issued to verify payroll information and to ensure business operations match those identified during the underwriting process.
  • Interim audits may be performed periodically to address significant mid-term changes in payroll and/or changes in business operations.
  • Anniversary audits are conducted to obtain actual payroll at the end of your policy year and to verify your business operations.
  • Cancellation audits are conducted upon policy cancellation to obtain actual payroll and to verify your business operations for the period your policy was in effect. 


Audit Results

Upon completion of your audit, both you and your agent will receive a payroll audit statement outlining any premium changes that have occurred as a result of the audit. The payroll audit statement is not a bill. Your invoice will reflect any additional premium charges or premium credits resulting from the audit.


Avoiding Additional Premium

There are several things you can do during the policy year to minimize the chance of owning additional premiums following an audit. When submitting payroll reports to LWCC, please observe the following:

  • Submit payroll reports in a timely manner
  • Include all payroll during the period for which you are reporting
  • Include all payments (checks, cash, etc.) made to employees
  • Include all payments (checks, cash, etc.) made to uninsured labor or uninsured subcontractors. 


It’s also important to notify your agent of any changes in business operations or significant changes in payroll or labor costs.

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Frequently asked questions

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How do I register as a policyholder?

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