Introduction to Workers’ Comp:
What is a Premium Audit?

What is a workers’ compensation audit?

A workers’ comp audit (formerly known as workmen’s comp audit) compares the estimated payroll provided by the business owner at the beginning of the policy period to the actual payroll at the end of the policy year, and verifies the type of work performed by the company. The audit determines how much, if anything, the premium needs to be adjusted depending on whether the actual amount is less or more than the estimate.


To avoid surprises at the end of the year, make sure to review your company’s job descriptions with your insurer when you buy your policy so that you can confirm the related class codes are correct. Class codes are used by insurance companies to identify specific categories of work. For example, the class code 8017 is used for a retail store employee.


As a business owner, your first reaction to the notification may be to wonder whether you need to agree to the audit. The short answer is “yes.” By buying your policy, you’re agreeing to comply with the audit. If you refuse, your insurer could cancel your policy or refuse to renew it.

Audit types

Your insurance company can use several different audit procedures to gather the data they need. According to the National Council on Compensation Insurance (NCCI), the most common are:


Performed at your place of business or job site.

Self or mail

You’ll complete a form giving some basic details.


Your insurer will confirm the mail-in info or conduct the audit by phone.


Actual premiums are paid throughout the year via your payroll company.

Your insurer uses several factors to determine what type of audit they’ll perform. They’ll consider the size of your business, its location(s), and the type of industry you’re involved in. Physical audits are the most common method for owners of medium to large businesses, or construction companies. But regardless of the type of audit performed, your insurance company will assess the same documents, overall. They’ll want to see payroll records, general ledgers, subcontractors’ proof of insurance, job descriptions, and verifiable overtime records.


The “hybrid” audit is when you buy your workers’ comp through a payroll provider such as Gusto. This way, your insurance payments are deducted more often and more accurately based on your continuously updated payroll data, which means you may be able to avoid a premium audit at the end of the policy term. This method is especially good for small companies with limited cashflow since it means they can avoid unexpected premium adjustments at year-end.

How to prepare for a workers’ comp audit

First, ask the auditor what documents you’ll need to provide so you can discuss the reason they’re asking for them and be prepared in advance. Then decide who’ll be the main point of contact with the auditor. This person should be very familiar with the entire company’s workings.


Keep in mind that the auditor may look at other publicly available information like your company website before the audit, so make sure everything is up-to-date and accurate. And if it’s not, make clear to the auditor what the changes are. You want to avoid any confusing or misleading information about your workplace or company that could affect your premium negatively.

Typical documents auditors request

Payroll records

Salaries, wages, commissions, overtime pay, bonuses, unemployment reports, individual earnings, tax returns, and your checkbook.

Employee records

Number of employees, hours worked, employees’ job duties, breakdown in dollars if an employee works in more than one classification code.

Cash expenses

Payments to subcontractors and independent contractors, casual labor, materials bought.

Certificates of insurance

Certificates for every subcontractor’s workers’

comp insurance coverage.

Audit info by state

The regulations around workers’ compensation insurance vary state-by-state, which means there are differences in how premiums are calculated. Many states use the manuals, classification system, and formulas developed by the NCCI, which is an independent non-profit created by the insurance industry to standardize premium calculations. Some states have their own independent rating bureaus and others, known as “monopoly fund” states, don’t use ratings bureaus and let the state agencies handle everything.