Tips for a smooth premium audit

A workers’ compensation premium audit is a routine and regular process for every policy. In fact, SFM premium auditors complete more than 20,000 of them each year.

Here’s why premium audits are so important, and how to ensure yours goes smoothly, year after year.

Premium audit basics

The annual premium audit helps ensure you end up paying the right amount for your workers’ compensation coverage — not too little, or too much.

The premium you pay for your workers’ compensation coverage is initially an estimate, based on your expected payroll and job classifications. Once the policy period has ended, we audit your actual payroll and classifications to determine your final premium. As a result, you might receive a bill or reimbursement to make up the difference between the estimate and the final audited premium amount.

Depending on your organization's characteristics, an auditor might visit to complete the premium audit, or you may be able to complete the premium audit online.

The records you’ll want to have on hand for your premium audit include:

  • Your payroll register or journal for the dates your policy is in effect
  • Your quarterly tax reports, including Form 941 and state unemployment forms
  • Departmental labor distribution report for larger employers (this is the money paid to laborers not included in your payroll records)

Certain types of companies may have additional record requirements.

We’ve worked to make the premium audit process as simple as possible. In fact, in recent surveys, 92% of policyholders who had an onsite premium audit rated the experience a 4 out of 5 or higher. Sixty-six percent rated the premium audit experience a 5 out of 5.

Hear more premium audit basics in this short video featuring our Premium Audit Team Leader Ken Johnson: 


Subcontractors and your premium

Classifying subcontractors when it comes to workers’ compensation can be confusing.

Workers’ compensation regulations set by your state may define employees and independent contractors differently than the IRS or your state unemployment insurance department. Don’t assume that someone considered an independent contractor for tax purposes is automatically considered one for workers’ compensation purposes.

That’s why our premium auditors examine payments made to people performing labor outside of your payroll. Whenever you’re paying people for labor but they are not included in your workers’ compensation premium, our auditors need to verify that they meet the criteria as independent contractors as defined by your state’s laws.

If you need help determining whether a subcontractor is an independent contractor or employee, don’t hesitate to ask your agent for help. See our post "Are your workers independent contractors or employees?" for more details.

Tips to avoid premium audit surprises

Because your workers’ compensation premium is initially an estimate, based on your expected payroll and job classifications, your audit results may surprise you if your actual payroll and classifications change significantly over the year.

Here are some tips to avoid unwanted surprises in your premium audit:

  • Update your agent if your operations change significantly. For example, your payroll may increase or decrease. Informing your agent of changes can help reduce the chances of large premium differences when the audit is completed.
  • When you hire subcontractors in specific states, you may be liable for their coverage, resulting in additional premium being due.
  • Get a certificate of workers’ compensation insurance from each subcontractor you use. In addition, each state has guidelines or laws in place to determine who qualifies as an employee versus an independent contractor, and it helps to be aware of the rules in your state.

Complete audits on time to avoid an extra charge

When you receive the auditor’s request to schedule your premium audit, don’t delay in starting the process.

Premium audit noncompliance could result in policy cancellation or a hefty charge of up to 200 percent of your estimated annual premium.

The premium audit noncompliance charge is a National Council on Compensation Insurance rule that has been in place on every policy since January 1, 2017. The Minnesota Workers’ Compensation Insurers Association and the Wisconsin Compensation Rating Bureau also adopted the rule.

Please respond to our attempts to complete the premium audit as soon as you can. If you have questions about the premium audit process, we’re here to help! Call your assigned premium auditor or our Premium Audit team at (800) 937-1181. 

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