Workers comp audit: How it works & how to prep

Workers' compensation insurance safeguards both employees who suffer work-related injuries and businesses who employ them. It covers critical expenses like medical care, lost wages, and ongoing treatment, while protecting employers from potential lawsuits. 

When your insurance provider calls to schedule a workers' comp audit, it's normal to feel a bit apprehensive. These audits can seem complex and time-consuming, but with the right approach, you can navigate them with confidence. 

This piece breaks down the ins and outs of workers' comp audits, providing you with practical tips and insights to help you stay on top of your game.

What is a workers' comp audit?

A workers' compensation audit is a regular check-up performed by your insurance provider. It usually happens at the end of each policy term, so think of it as an annual event. The main purpose of the audit is to take a closer look at your company's payroll records and employee classifications. This helps the insurer figure out if you're paying the right amount for your workers comp insurance coverage based on your actual payroll and risk factors.

Why are workers' comp audits important?

There are a few key reasons why workers' comp audits are a big deal for employers:

1. Keeping your premiums in check

Workers' comp audits are like a balancing act. They help ensure that you're not overpaying or underpaying for your insurance coverage. By providing accurate information about your payroll and employee classifications, you can avoid any surprises when it comes to your workers compensation policy premiums.

2. Steering clear of over and underpayment

Imagine a scenario where your business has been underpaying workers' comp premiums without realizing it. During an audit, the insurance provider discovers the discrepancy. Suddenly, you're looking at a bill for the additional amount owed. On the flip side, if you've been overpaying, you might be eligible for a refund. Regular audits help keep things balanced and prevent any significant discrepancies from sneaking up on you.

3. Staying on the right side of the law

Participating in workers' comp audits isn't just a good idea—it's a way to show that your business is committed to following state and federal regulations. Failing to comply with workers' compensation requirements can lead to some serious consequences, like fines, penalties, and even legal trouble. No one wants that kind of headache. By staying on top of your audits, you're sending a clear message that you're running a tight ship and taking your responsibilities as an employer seriously.

What to expect from a workers' comp audit: 4 common steps

So, what exactly happens during a workers' comp audit? Let's break it down into four key steps:

Step 1: The information gathering phase

Your insurance provider will kick things off by requesting a variety of documents and records related to your payroll, employees, and subcontractors. They might send you a questionnaire or some forms to fill out, or they might want to schedule a meeting to discuss the information they need. In this step, the insurer is trying to get a clear picture of your business operations and make sure they have all the pieces of the puzzle.

Step 2: The audit itself (on-site or virtual)

Once the information gathering phase is complete, it's time for the actual audit. Depending on your insurer's preferences and the situation, the audit might take place on-site at your business location or virtually.

If it's an on-site audit, an auditor will pay you a visit to review records and take a look at your operations firsthand. They might want to tour your facilities, observe your employees in action, and ask questions about your business processes.

Virtual audits, on the other hand, are conducted remotely. This might involve video conferences, phone calls, and sharing documents electronically. The auditor will still be digging into the details, but they'll be doing it from afar. Regardless of the format, the auditor's goal is to get a comprehensive understanding of your business and verify the information you've provided.

Step 3: The auditor's review

Once the auditor has all the information they need, they'll start examining the documents and records you've provided. They'll be looking closely at your actual payroll, employee classifications, and other factors that can impact your workers' comp premiums.

If anything is unclear or they need more information, the auditor might reach out for additional clarification or documentation. This is why it's so important to have your records organized and easily accessible.

Step 4: Audit results and adjustments

After the auditor has finished their review, they'll share the results with you, which will include any adjustments that need to be made to your premiums based on their findings.

If it turns out that you've underpaid, you'll receive a bill for the additional amount owed. 

This can be a tough pill to swallow, but it's important to remember that the audit is designed to ensure fairness and accuracy. On the other hand, if you've overpaid, you might be in for a pleasant surprise. The auditor will let you know if you're due for a refund or a credit toward future premiums.

Your workers' compensation audit checklist

To make sure you're prepared for a workers' comp audit, it's a good idea to gather and organize the following documents:

1. Payroll records (including overtime, bonuses, and commissions)

Make sure you have detailed payroll records for the period being audited. This should include regular wages, overtime pay, bonuses, and commissions for all your employees, including part-time and seasonal workers.

2. Tax forms (e.g., 941, W-2, or 1099)

Have your quarterly and annual tax reports and forms on hand, such as Form 941 (Employer's Quarterly Federal Tax Return), W-2s for your employees, and 1099s for any independent contractors you work with.

3. Employee job descriptions and classifications

Prepare clear, up-to-date job descriptions for each position in your company, along with the corresponding employee classifications (e.g., full-time, part-time, seasonal, or independent contractor).

4. Subcontractor agreements and certificates of insurance

If your business works with subcontractors, make sure to gather their agreements and certificates of insurance. This will show that they have their own workers' comp coverage and aren't covered under your policy.

How to prepare for a workers’ comp audit: 5 tips 

Want to make sure your workers' comp audit goes off without a hitch? Consider these best practices:

1. Get to know the rules

Take some time to familiarize yourself with your state's workers' compensation insurance regulations and classification codes. Understanding the ins and outs of the system will help you properly categorize your employees and ensure you're staying compliant.

2. Keep your records in tip-top shape

One of the keys to a smooth audit is maintaining accurate and up-to-date records throughout the year. This includes payroll, employee classifications, and subcontractor agreements. Make it a habit to review and update these records regularly to avoid any discrepancies when audit time rolls around.

3. Let technology do the heavy lifting

Using a comprehensive expense tracking software can be a game-changer when it comes to streamlining your record-keeping and ensuring accuracy. Platforms like Rippling can help you manage payroll, track employee classifications, and generate necessary reports—all in one place.

4. Double-check those employee classifications

It's a good idea to regularly review your employee classifications to make sure they accurately reflect each worker's duties and responsibilities. Misclassifying employees can lead to premium discrepancies and potential penalties, so it's worth taking the time to get it right.

5. Stay organized and communicate

Preparing for a workers' comp audit can be a time-consuming process, so it's essential to stay organized and communicate with your team. Create a checklist of the documents you need to gather and assign responsibilities to ensure everything is collected on time. Keep your employees informed about the audit process and what they can expect, and be available to answer any questions or concerns they may have.

Workers’ comp audit penalties 

So, what happens if your workers' comp audit doesn't go as planned? Negative audit results can lead to a variety of consequences, depending on the severity of the issues discovered. Here are a few potential outcomes:

• Premium adjustments: If the audit reveals that you've underpaid your premiums, your business will be required to pay the difference. This can be a significant financial burden, especially if the discrepancy is large.
• Fines and penalties: Severe discrepancies or non-compliance with workers' comp regulations can result in fines and penalties from your insurance provider or state authorities. These can add up quickly and put a strain on your business's bottom line.
• Legal action: In extreme cases, such as fraud or intentional misrepresentation, your business may face legal action. This can be costly, time-consuming, and damaging to your reputation.

Streamline your workers' comp audits with Rippling

If you're looking for a way to simplify your workers' compensation compliance, tracking, and reporting, Rippling's all-in-one platform might be just what you need. With features like payroll management, compensation bands, and expense tracking, Rippling makes it easier to maintain accurate records and prepare for audits.

• Payroll: Rippling's payroll system takes the guesswork out of compliance by automatically calculating and withholding the correct taxes and insurance premiums. 
• Compensation bands: With Rippling, you can set up and manage compensation bands for each position in your company, ensuring fair and consistent pay across the board. This feature also helps maintain accurate employee classifications for workers' comp purposes. 
• Expense management: Say goodbye to the hassle of tracking and categorizing expenses. Rippling's expense management tool makes it easy to maintain accurate records of employee expenses, mileage, and other costs that can impact your workers' comp premiums.

By leveraging Rippling's comprehensive platform, HR managers can take the stress out of workers' comp audit preparation and keep their businesses compliant with insurance regulations.

FAQs on workers comp audits

How long does a typical workers' comp audit take?

The length of a workers compensation insurance audit can vary depending on factors like the size of your business, the complexity of your payroll and employee classifications, and the auditor's schedule. In general, the process can take anywhere from a few days to several weeks.

Can an audit lead to higher premiums?

Yes, if an audit uncovers that your business has underpaid premiums based on your actual payroll and risk factors, you may be required to pay additional premiums to make up the difference. This can result in higher premium costs moving forward.

Do independent contractors factor into workers' comp audits?

While independent contractors typically aren't covered under your workers' comp policy, they may still be included in the audit process. You'll need to provide documentation, such as 1099 forms and certificates of insurance, to prove that your contractors have their own coverage.

What can trigger a workers' comp audit?

Workers' comp audits are usually conducted annually, at the end of each policy term. However, audits can also be triggered by significant changes in your business, such as rapid growth, a change in ownership, or a high number of claims.

This blog is based on information available to Rippling as of February 17, 2025.

Disclaimer: Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide or be relied on for tax, accounting, or legal advice. You should consult your own tax, accounting, and legal advisors before engaging in any related activities or transactions.