Payroll Audit
The annual review of an insured's actual payroll records to adjust workers compensation premium based on real exposure versus estimated figures.
What It Is
A payroll audit is the annual process by which the workers compensation insurer reviews the insured's actual payroll records to determine the correct premium based on real exposure. Workers comp premiums are initially calculated using estimated payroll at policy inception. At the end of the policy term (or upon cancellation), the insurer audits the actual payroll to adjust the premium up or down.
The audit examines total payroll by classification code, verifying that employees are properly classified and that the payroll amounts are accurate. The auditor reviews payroll records, tax filings (941s), overtime records, and subcontractor payment records. If actual payroll exceeds the estimated payroll, the insured owes additional premium. If actual payroll is below the estimate, the insured receives a return premium.
Payroll audits also review subcontractor costs. If the insured uses subcontractors who do not carry their own workers comp coverage, those subcontractor costs may be added to the insured's payroll for premium calculation purposes.
Why It Matters for Brokers
Audit premium adjustments are one of the most common sources of client complaints in commercial insurance. A contractor who underestimates payroll at inception may face a five-figure audit bill at year-end. Brokers should set realistic payroll estimates at inception, educate clients about the audit process, and proactively adjust estimated payroll mid-term if the client's workforce grows significantly. Subcontractor certificate tracking is also critical — without proof of the sub's workers comp coverage, the sub's payments become auditable payroll.
Real-World Example
A landscaping company estimates $800,000 in payroll at inception for a workers comp premium of $32,000. During the year, the company wins several large contracts and hires additional crews, growing actual payroll to $1.4M. The audit produces an additional premium of $24,000 ($56,000 total - $32,000 paid = $24,000 due). Additionally, the company paid $180,000 to subcontractors who did not provide workers comp certificates, adding $7,200 more in audit premium. The total surprise audit bill is $31,200 — nearly double the original premium. The broker should have recommended a mid-term payroll adjustment and enforced subcontractor certificate requirements.
Common Mistakes
- 1Setting unrealistically low payroll estimates at inception to reduce the initial premium, only to create a large audit bill at year-end.
- 2Not tracking subcontractor workers comp certificates — subcontractor payments without proof of coverage become auditable payroll.
- 3Failing to educate clients about the audit process and their obligation to maintain accurate payroll records by classification code.
How brokerageaudit.com Handles This
Policy Checker extracts estimated payroll by classification from the workers comp policy and flags significant deviations when renewal data is compared. COI Manager tracks subcontractor workers comp certificates to ensure the client has documentation to exclude subcontractor payments from audit exposure. Submission Intake captures detailed payroll by class code and subcontractor spending to produce accurate estimates that minimize audit surprises.