A business insurance audit reviews your business's payroll and other business variables for the past year, including receipts and sales, to make sure your company is fully protected and the premium you were initially quoted is correct. An annual payroll audit helps verify your process is up-to-date and legally compliant.
A premium audit is conducted after the term expires in order to determine your actual business activity. There are different types of audits including general liability and workers' compensation. General liability audits review payroll and sales, while workers' comp reviews payroll. For the purposes of this article, we will only be reviewing workers' comp payroll audits.
Payroll changes — increases or decreases — are a primary reason to review your commercial insurance coverage. Whether you are increasing your payroll during your busy season to help with increased demand or downsizing during a slow season, you may need to adjust the amount of exposure. If you have increased payroll, contact us now with the new numbers so you are not hit with a surprise during the audit.
Even if the number of employees remains the same, annual raises and bonuses are taken into account during an audit. Hiring bonuses will also be reviewed as they are considered remuneration and contribute to your workers' comp premium.
Benefits of a payroll audit
It may seem like a daunting task, but an audit can actually save you money in the long run. Here are some benefits of conducting an annual payroll audit:
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Remain compliant with employment laws, including overtime pay.
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Remove employees who have retired, quit, reduced hours, or have been terminated from your payroll.
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Identify any data entry errors.
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Verify your tax withholdings are accurate.
What happens during an audit?
An auditor representing your insurance company will contact you a few weeks after your policy expires. During the audit, they will review your financial documents (listed below) and look at the job duties of your employees and independent contractors, with an eye for what has changed from the prior year. The entire process should only take an hour or two.
The goal of a premium audit is to provide you with an accurate rate for accurate exposure — think of it as a "true-up event." Based on the audit results, you may receive a refund if the premium you initially paid was higher than your current needs. If your business has been growing, you may require additional coverage, which will increase your premium.
That's why when you initially take out a workers' comp policy, the cost is listed as the "estimated" or "advance" premium. The amount was based on an estimate of what the policy would cost. Once the audit is conducted, the final adjustments are made.
How to prepare for a business insurance audit
Business insurance audits can sound intimidating, but they are common and ensure that your business was charged the right amount for your actual exposure. Audits take place at the end of the policy period to review updated information and calculate the final premium. Its primary function is for the insurance carrier to determine how much risk they actually insured over the past year.
To prepare for the audit, you will want to have the following documents available:
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Payroll Journal
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General Ledger
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Cash Disbursements, 1099s
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Quarterly State and Federal Tax Returns
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Certificates of Insurance for Subcontractors
Contact a Keller-Brown Insurance Services insurance agent today to answer any questions about the audit process or for a free review and insurance quote. As an independent insurance agency serving Pennsylvania and Maryland, we represent several top-rated insurance companies. We have the flexibility to find you the right coverage at competitive premiums for business, home, auto, and more.
