The question is often asked, “What is a premium audit” and “can I go with a carrier that won’t do this audit.” This is a common question I get from contractors getting a workers compensation policy for the first time. A premium audit is done by every workers compensation carrier. It’s done to verify your total payroll and classifications each year after the policy expiration/cancellation. It compares the payroll estimates you provided at the start of the policy to your final payroll. If you underestimated your payroll you will be billed for any excess premium you owe and if you over estimated your payroll you will be refunded for any excess premium you paid.
The premium audit is also an examination of your records to make sure you were properly classified(plumbing, electrical, carpentry, painting) and to determine your total payroll for each classification that applies. So, if you are a painter and estimate a total payroll of $45,000 for the year and at the time audit it comes out to $50,000, you will be billed for the premium based on that extra $5,000 of payroll that wasn’t calculated during the policy term. Likewise, if your total payroll turnout to be $40,000 then you would receive a refund based on that $5,000 of extra payroll you paid for during the policy term.
In the construction industry you can have dual wages and multiple classifications. For example, the dual wage for a plumber is broken up into two classifications. One being employees making under $26 an hour and one class for employees making equal to or greater than $26 an hour. The employees making under $26 an hour have a higher rate because these are usually employees with less experience and therefore more prone to an injury on the jobsite. A plumber making over $26 an hour probably has more experience in the field and is familiar with safety protocols (such as proper lifting techniques or handling of tools) and are less likely to sustain an injury.
In regard to having multiple classifications, a general contractor may have an employee that performs multiple job task that fall under several workers compensation classifications such as wallboard application, painting and carpentry. Each of these classifications have separate rates based on exposure to injury. You would need to keep time cards separating out these classifications and present them at the time of the audit so that it’s clear how much payroll falls under each classification. It you can’t show how much payroll is under each class, then the auditor will place all your payroll into the highest rated class. For example, you’re a contractor and estimate your employees payroll will be $15,000 for painting (rate of $10 per $100 of payroll for this example) and $15,000 payroll under carpentry (rate of $20 per $100 of payroll). Based off this, your estimated premium is $4,500 for the year ($1,500 premium for painting & $3,000 premium for carpentry). At the end of the policy and during the audit it turns out your total payroll ended up being exactly $30,000, but you didn’t keep any time cards and have no way of showing that $15,000 of that payroll was for painting. So now the auditor is going to take that $15,000 of payroll from painting (since you can’t prove it) and place it under carpentry, the higher rated class at $20 per $100 of payroll. With this change your premium would now go from the estimate of $4,500 to $6,000 and you would be billed for that $1,500 of unearned premium.
One of Mitchell & Mitchell’s benefits is in helping our insureds deal with a premium audit and answer any questions they may have, so please don’t hesitate to contact us.
Some information that may be required at the audit include:
1. Payroll journals that show individual employees payroll and job duties
2. General ledger, cash disbursements journal and check register
3. Federal Quarterly Tax returns for the 4 quarters
4. Income forms, 1099’2, W-2, W-3, 940,941
5. Workers Compensation Certificates of Insurance from subcontractors. You will be billed for premium based off work from uninsured subcontractors.
DJ McKenna, CLCS, CRIS, WCS