Last updated on September 26th, 2022

The best time to prepare for a Workers’ Compensation audit is at the start of a new policy year.

Setting up all processes and recordkeeping properly and keeping them updated throughout the year can help ensure you’ll be ready for an audit and help protect your company from penalties for violations.

According to the New York Workers’ Compensation and Employers’ Liability Manual, if your organization’s premium is:

• $10,000 or over, it will be subject to a physical (a.k.a. on-site) audit once a year.
• Within the $5,000 to $10,000 range, an audit will be conducted the first year a carrier offers the policy and at least once every three years thereafter (a signed payroll statement must be provided any year a physical audit is not conducted).

If an audit is impracticable, a signed payroll statement may be accepted.

At the start of a policy year, you provide your carrier with estimated payroll and the type of work your employees do. In turn, they assess the risk involved to calculate your annual premium. Since the number of employees you have, the work they do, how much you pay, and other factors can change during the year, an audit is conducted at the end of the policy year. As a result, you may get a refund; you may be charged more; or you may come out even.

Typically, your policy will contain a provision stating you agree to be audited. So, you are legally obligated to comply in a timely manner. For a physical audit, you’ll generally receive notice within 60 days of the end of the policy year. For a voluntary audit, within 30 days of a policy year, you may be asked to complete and submit forms related to payroll. If you don’t comply, you risk giving the carrier latitude to estimate audit figures (which are likely to be higher than the actuals you can provide) and apply penalties equal to 25% to 50% of your premium.

What You’ll Need

To prepare, your organization must keep good records and documentation for the policy period:

• General information including a description of your operations; names and titles of owners and officers; number of employees at each location; and a description of work performed by contractors or subcontractors.
• Job classifications and descriptions providing detailed information about what employees do.
• Payroll records including payroll register; checkbook (if that serves a recordkeeping purpose); accounting ledger; Form 941, Form 944, W-2, 1099 and other tax forms; state unemployment insurance tax reports; hours, days and weeks worked annually; individual earnings, overtime and bonus records; salaries, wages and commissions. (TIP: Separate earnings and overtime for each employee classification, as they impact the premium differently.)
• Financial data including payments to independent contractors and subcontractors, as well as casual laborers, and receipts for materials purchased.
• Insurance certificates for every contractors’ and subcontractors’ Workers’ Compensation coverage.

Take Control

The word “audit” itself is unnerving; however, there are steps that can help you control the process and promote a positive outcome:

• Designate one person to make sure everything is prepared on time for the audit; answer auditor questions; and get answers to any questions he/she may have.
• Be prepared. Auditors work under tight deadlines. Help them move through the audit quickly by having all requested documentation and records accessible and organized. Keep all contractor/subcontractor documentation and information together.
• Do not provide any information, documentation, or records that were not requested.
• Review audit documents carefully. Focus on how the auditor classified employees and the audit’s impact on your business.
• Do not sign anything until you have completed your review. Never sign if the audit documentation is not complete, even if the auditor says he/she will fill it in later.
• Request and keep a copy of any audit documents for your files.

For additional information, refer to the New York Workers’ Compensation Rating Board manual, overview for employers,  employer rights and responsibilities, and website. RBT CPAs’ Visions Human Resource Services affiliate is available to provide advice regarding Workers’ Compensation. What’s more, RBT CPAs, a leading accounting firm in the Hudson Valley and beyond, is ready to take on your accounting, tax, and audit needs with the highest levels of professionalism and ethics. When you engage us to do what we do best, you’re freed up to focus on what you do best – running your business.