Understanding the Process of a Workers' Comp Audit

Did you know that as many as 70% of companies overpay their workers' compensation insurance premiums due to misclassifications and other errors?

With that concern, a workers' comp audit is how insurance companies verify that your payroll, job classifications, and risk levels match with what was initially reported when you got your policy. If there are discrepancies, you could be facing a hefty bill—or, in some cases, a refund.

But don't worry—understanding the audit process can help you stay ahead, avoid common pitfalls, and ensure you're paying exactly what you should (nothing more, nothing less). Let's break down why these audits happen, how they work, and what you can do to be fully prepared.

What Is a Workers' Comp Audit?

A workers' comp audit is a review of a business's payroll and classification data to determine the correct workers' compensation insurance premium. It compares estimated payroll figures provided at the start of the policy period with actual payroll records at the end of the term. The audit helps adjust premiums accordingly, ensuring fair and accurate coverage.

Purpose of a Workers' Comp Audit

So why do insurance companies go through the trouble of auditing your workers' comp policy? Simple—it’s all about fairness and accuracy. Here’s what the audit aims to achieve:

• Ensuring Accurate Premium Payment – Workers' comp premiums are based on payroll estimates, but an audit confirms what you actually paid employees. This prevents underpayments that could leave insurers short or overpayments that cost you more than necessary.
• Verifying Payroll and Job Classifications – Not all jobs carry the same level of risk. A receptionist and a construction worker don’t have the same exposure to workplace injuries. Audits check that your employees are classified correctly so your premiums reflect the true risk of your workforce.
• Adjusting Coverage Based on Business Changes – Your business isn’t static. If you’ve expanded, downsized, or changed operations, an audit ensures your policy matches those changes, keeping your coverage in line with your actual needs.
• Preventing Fraud and Compliance Issues – Some businesses intentionally misclassify employees or underreport payroll to lower premiums. Insurance providers conduct audits to catch these discrepancies and ensure compliance with labor laws and industry standards.

A workers' comp audit isn’t meant to be a very difficult task—it’s a way to keep your coverage fair, your costs accurate, and your business protected. The more prepared you are, the smoother the process will be.

Types of Workers’ Comp Audits

Workers’ comp audits aren’t one-size-fits-all. Insurance companies use different methods depending on the size of your business, the complexity of your payroll, and the industry you’re in. There are three main types of audits: Mail Audit, Phone Audit, and Physical Audit. Each has its process, benefits, and level of detail. 

Here’s what you need to know:

1. Mail Audit

What It Is:
A mail audit is a straightforward process where your insurance company, TWFG Khan Insurance asks you to submit payroll and classification details via a form. This method is typically used for small businesses with predictable payrolls.

How It Works:

• The insurance company sends you an audit form by mail or email.
• You fill out the form with details about your payroll and employee classifications.
• You attach supporting documents such as payroll reports, tax filings, and subcontractor records.
• Once submitted, the insurer reviews the information and updates your premium if needed.

Benefits:

• Simple and easy to complete at your convenience.
• No direct interaction with an auditor.
• Ideal for small businesses with stable payroll numbers.

Example:
A small law firm with 10 employees receives a mail audit request. They submit payroll records and confirm that their estimates are accurate. Their premium stays the same.

2. Phone Audit

What It Is:
A phone audit is a step up from a mail audit. Instead of just submitting paperwork, you speak with an auditor over the phone to review your payroll, classifications, and any business changes.

How It Works:

• The insurer schedules a call with a company representative, usually from HR or finance.
• During the call, the auditor asks about payroll, employee roles, and any changes in business operations.
• The auditor may request additional payroll reports or financial documents for verification.
• After reviewing the records and the conversation, the insurer adjusts the premium if necessary.

Benefits:

• Allows for clarification if there are any discrepancies in payroll or classifications.
• Faster than an in-person audit while still offering a more thorough review than a mail audit.
• Ideal for businesses with growing or changing workforces.

Example:
A construction company with 50 employees has a phone audit. During the call, the auditor found that some office staff were incorrectly classified under high-risk labor categories, causing an inflated premium. After corrections, the business receives a refund.

3. Physical Audit

What It Is:
A physical audit is the most detailed type. It involves an in-person visit from an auditor who reviews financial records, employee classifications, and worksite conditions. These audits are more common for businesses with high-risk jobs or large payrolls.

How It Works:

• The insurer assigns an auditor to visit your business location.
• The auditor reviews payroll records, tax documents, and job classifications.
• They may interview HR staff or managers to understand job roles and risk levels.
• After the review, the insurer adjusts the premium based on the findings.

Benefits:

• Provides the most accurate premium calculation by eliminating errors in payroll and classification.
• Ensures businesses in high-risk industries, like construction or manufacturing, have the correct coverage.
• Can uncover past mistakes that could result in savings.

Example:
A manufacturing company with 200 employees has a physical audit. The auditor finds that several machine operators were mistakenly classified under a lower-risk category. Their premium increases to reflect the actual risk.

Also, read our guide on Understanding Workers' Compensation Insurance Laws and Requirements.

‍How to Prepare and Navigate a Workers' Comp Audit

A workers' comp audit doesn’t have to be stressful if you know what to expect and prepare in advance. The process is designed to ensure that your premium is based on actual payroll and employee classifications—not just estimates. 

Here’s a step-by-step guide on what happens during the audit, how you can be ready for it, and the penalties for non-compliance.

1. Gather and Organize Payroll Records

The first thing auditors review is your payroll records. Keeping these documents organized will make the process easier and help ensure accuracy.

• Maintain detailed payroll summaries and employee earnings reports.
• Have tax documents, such as 941s (quarterly tax returns) and state unemployment reports, ready.
• Double-check that payroll figures match what was reported to your insurer.

2. Verify Employee Job Classifications

One of the biggest reasons businesses end up paying more after an audit is employee misclassification. Workers' comp rates vary based on job risk levels, so each employee must be classified correctly.

• Review job descriptions and confirm they match the correct classification codes.
• Ensure office staff and high-risk laborers are clearly separated in payroll records.
• Update records if job roles have changed during the policy period.

3. Include Subcontractor and Independent Contractor Documentation

If you work with subcontractors, your insurance company needs proof that they have their own workers' comp coverage. Otherwise, their payroll may be added to your total, increasing your premium.

• Keep certificates of insurance (COIs) for all subcontractors.
• Make sure these documents are valid for the entire policy period.
• If a subcontractor doesn’t have coverage, be prepared for their wages to be included in your audit.

4. Submit Required Documents for Review

Once your records are organized, you’ll need to provide them to the auditor. Depending on the type of audit (mail, phone, or physical), this could mean sending documents electronically, discussing details over the phone, or having an auditor visit your office.

• Mail Audit: Complete the form and submit payroll documents as instructed.
• Phone Audit: Be ready to explain any changes in payroll or employee classifications.
• Physical Audit: Have an HR or finance representative present to walk the auditor through records and answer questions.

5. Understand the Impact on Your Premium

After reviewing your records, the insurance company will adjust your premium based on actual payroll and risk levels. This could result in:

• No change if your estimated payroll was accurate.
• An increase in payroll was higher than expected or employees were misclassified.
• A refund or credit if payroll was lower than estimated.

6. Review the Audit Summary and Dispute Errors If Needed

Once the audit is complete, you’ll receive an audit summary outlining the findings. Carefully review this document to make sure everything is correct.

• Check that employee classifications are accurate.
• Verify that subcontractors weren’t incorrectly included in your payroll total.
• If you find errors, contact your insurance provider to dispute them with supporting documents.

7. Penalties for Non-Compliance After a Workers’ Comp Audit

Failing to comply with a workers' comp audit or providing inaccurate information can result in serious consequences. Penalties may include:

• Increased Premiums – If the insurer cannot verify payroll, they may assume the highest-risk classification and charge you more.
• Fines and Legal Action – Some states impose fines for failing to complete the audit, and in extreme cases, businesses may face legal action.
• Policy Cancellation – If an employer refuses to cooperate with an audit, the insurance provider may cancel the policy, leaving the business uninsured.
• Back Payments with Interest – If discrepancies are found, you may be required to pay backdated premiums with interest.

With the right preparation, you can ensure the audit process is smooth and that your premium reflects the true cost of covering your employees.

Common Mistakes During a Workers' Comp Audit

Even small errors in a workers' comp audit can lead to increased premiums, penalties, or compliance issues. Many businesses make avoidable mistakes, often due to misclassification, missing paperwork, or incorrect payroll reporting. Understanding these common challenges can help you prepare better and avoid unnecessary costs.

Mistakes to Watch Out For:

• Misclassifying Employees – Assigning employees to the wrong classification code can result in higher premiums. High-risk jobs should not be grouped with lower-risk office roles.
• Incorrect Payroll Reporting – Underreporting or overreporting payroll can cause major discrepancies in your premium calculations. Ensure payroll figures match tax documents and financial reports.
• Failure to Provide Subcontractor Insurance Certificates – If subcontractors do not have their own workers' comp coverage, their payroll may be added to yours, increasing your premium.
• Incomplete or Disorganized Records – Missing or inaccurate records can cause delays and force insurers to make assumptions about your payroll, often leading to increased costs.
• Ignoring Audit Requests or Deadlines – Failing to submit required documents on time can result in estimated premiums, fines, or policy cancellation.
• Not Accounting for Overtime Pay Properly – Workers' comp calculations use gross payroll, but overtime pay should be adjusted to straight-time equivalents. Misreporting can lead to higher premiums.
• Misclassifying Independent Contractors – If an independent contractor is considered an employee under state laws, you could be responsible for their workers' comp coverage.

Avoiding these mistakes starts with keeping detailed and organized records. For more insights on securing the right coverage, check out Workers' Compensation Insurance for Self-Employed and Independent Contractors to ensure you're fully protected.

What to Expect After a Workers’ Compensation Premium Audit

Once your workers' comp audit is complete, your insurance provider will review the findings and adjust your premium based on actual payroll and job classifications. The outcome of the audit can lead to different scenarios, and it’s important to understand what to expect next.

Possible Post-Audit Outcomes:

• No Change in Premium – If your payroll and employee classifications match your original estimate, your premium will remain the same.
• Premium Increase – If your actual payroll was higher than estimated or if employees were misclassified into lower-risk categories, you may owe additional premium payments.
• Premium Refund or Credit – If your payroll was lower than estimated or if employees were misclassified into higher-risk categories, you might receive a refund or credit on your account.
• Receiving an Audit Summary – Your insurance provider will send a detailed report outlining how your premium was adjusted, including any additional amounts owed or credits applied.
• Making Additional Payments – If the audit determines that you owe more, the insurance company will issue a billing statement with payment instructions and deadlines.
• Filing a Dispute If You Disagree – If you find errors in the audit summary, you can dispute the findings by providing supporting documents. It’s important to act quickly, as insurers have specific deadlines for audit disputes.

Staying on top of your payroll records and job classifications throughout the year can help prevent surprises in future audits.

We’ve covered why workers' compensation audits matter and how to ensure accurate coverage. Now, let’s walk you through the process so you can stay prepared and keep your business protected.

The Coverage and The Support You Deserve with TWFG Khan Insurance

Workers’ compensation isn’t just another expense—it’s essential protection for your business and employees. At TWFG Khan Insurance, we help businesses secure the right workers’ comp coverage to stay financially protected and compliant with Texas regulations.

With access to top-rated insurance providers, we make it easy to find the best coverage at a competitive price. Here’s how we help:

• Compare and secure the best rates – We shop multiple insurance carriers to find you the right coverage at the best price so you don’t overpay for protection.
• Tailor policies to fit your business – Whether you’re in construction, manufacturing, oil & gas, or retail, we customize coverage based on the specific risks of your industry.
• Reduce costs with smart risk management – Our team helps you implement workplace safety programs and claims prevention strategies that can lower your premium over time.
• Stay compliant with Texas laws – Whether you opt into Texas workers’ comp or operate as a non-subscriber, we ensure your business meets all state requirements and avoids penalties.
• Simplify claims with expert support – If an employee gets injured, we guide you through the claims process, ensuring everything is handled efficiently, and your business stays protected.

Protect your employees and your bottom line. Get a quote today and find the best workers’ comp insurance for your business with TWFG Khan Insurance.