A workers’ compensation audit examines your business payroll to ensure you’re paying accurate premiums based on the actual exposure to workplace risks. Understanding which payroll components are included in this audit is critical for maintaining compliance and avoiding unexpected premium adjustments.
What Constitutes Payroll in a Workers’ Compensation Audit?
Payroll, also referred to as remuneration, includes various forms of employee compensation. The specifics may vary depending on state regulations and your insurance policy, but typically, payroll includes the following:
- Wages and Salaries: Gross wages, including regular pay, overtime, and bonuses.
- Overtime Pay: While overtime pay is included, insurers may only count the straight-time portion of overtime wages in some states.
- Commissions: Any commissions paid to employees or sales staff.
- Bonuses: Performance-based, holiday, or other types of bonuses are generally included.
- Holiday, Vacation, and Sick Pay: Pay provided for holidays, vacation time, or sick leave.
- Stock Options and Profit Sharing: The monetary value of stock options or profit-sharing plans may be considered as part of payroll.
- Fringe Benefits: Payments like housing allowances, tips, and expense reimbursements are not tied to documented expenses.
Payroll Insights for Workers’ Comp Audits
What Is Not Included in Payroll?
Certain forms of compensation and payments are typically excluded from payroll calculations:
- Severance Pay: Payments made to terminated employees as part of severance packages.
- Expense Reimbursements: Reimbursements for documented business expenses, such as travel or meals.
- Third-Party Sick Pay: Payments made by a third party, such as insurance providers, for employee disability or sick leave.
- Payments to Independent Contractors: As long as they provide proof of their own workers’ comp coverage.
- Group Insurance Payments: Employer contributions to life, health, or disability insurance.
How Subcontractors and 1099 Workers Are Treated
Payments to subcontractors or independent contractors may be included in your audit unless they provide valid certificates of insurance proving their own workers’ compensation coverage. If they lack this documentation, their wages may be added to your payroll totals.
Special Considerations
Some states and insurance policies have specific rules regarding payroll calculations. For instance:
- Executive Officers and Partners: Payroll for executives or business owners may be subject to minimum and maximum limits.
- High-Risk Employees: Payroll for employees in high-risk roles may be classified differently, impacting your premium.
How to Prepare Payroll for a Workers’ Comp Audit?
To ensure your payroll records are audit-ready:
- Maintain Accurate Records: Keep detailed and organized payroll reports, including W-2s, 1099s, and tax filings.
- Verify Classification Codes: Confirm that employees are assigned the correct workers’ comp class codes based on their job duties.
- Separate Overtime Pay: Clearly distinguish between regular pay and overtime wages in your records.
- Collect Subcontractor Documentation: Obtain certificates of insurance from all subcontractors to avoid misclassification.
How Payroll Affects Your Workers’ Comp Premium
Workers’ compensation premiums are calculated based on your total payroll, employee classification, and your Experience Modification Rate (EMR). Accurate payroll reporting during an audit ensures:
- You’re not overpaying or underpaying premiums.
- Your coverage reflects the true exposure to risk in your business.
Conclusion
Understanding what payroll is included in a workers’ compensation audit is essential for accurate premium calculations and audit preparation. By maintaining organized records, properly classifying employees, and tracking payroll components. You can navigate the audit process with confidence and avoid surprises. Stay informed and ensure your payroll is audit-ready!
Frequently Asked Questions (FAQs)
Payroll included in the audit typically includes wages, salaries, overtime, commissions, bonuses, sick pay, stock options, profit-sharing, and certain fringe benefits.
Yes, executive payroll may be subject to special rules, such as minimum or maximum limits, depending on New York State regulations.
Your total payroll and employee classifications are used to calculate your workers’ compensation premiums. Accurate payroll reporting ensures your premiums reflect the true risk exposure of your business.
High-risk employees may be classified differently in your audit, potentially affecting your premiums. Subcontractors who don’t have their own workers’ comp coverage will have their wages included in your payroll totals.
