Payroll Audit

Overview

A payroll audit is a specific type of premium audit focused on verifying the actual payroll figures that determine workers' compensation and general liability premiums. Since these policies are priced based on payroll (the primary exposure measure for workers' comp and a common one for GL), the accuracy of payroll data directly affects premium calculations. The payroll audit ensures that the insured paid the correct premium based on their real payroll during the policy period.

How It Works

At the beginning of a policy period, the insured provides estimated payroll figures broken down by classification code. The carrier calculates a deposit premium based on these estimates. After the policy period ends, the carrier conducts the payroll audit to compare estimated payroll against actual payroll.

The auditor examines several types of records:

• Payroll records: Gross payroll by employee, including wages, salaries, bonuses, and commissions
• Tax filings: Quarterly 941 forms, state unemployment tax reports, and W-2 summaries
• Overtime records: Only the straight-time portion of overtime pay is included in auditable payroll for workers' comp
• Officer payroll: Many states have minimum and maximum payroll amounts for corporate officers
• Subcontractor payments: Payments to subcontractors who lack their own workers' comp coverage may be included as the insured's payroll
• Classification breakdown: Payroll must be correctly allocated to the appropriate class code for each employee or job function

The audit result is one of three outcomes:

• Additional premium: Actual payroll exceeded estimates, and the insured owes more
• Return premium: Actual payroll was less than estimated, and the insured receives a refund
• No change: Estimates were accurate

Compliance Relevance

Payroll audits intersect with COI compliance in important ways:

• Subcontractor COIs as premium defense: The most direct connection is that uninsured subcontractors' payments are added to the insured's auditable payroll. Maintaining COIs from all subcontractors prevents this costly reclassification.
• Policy stability: Large audit adjustments can strain a vendor's finances, potentially leading to policy cancellation or non-renewal — both compliance risks.
• Classification accuracy: Payroll audits may reveal misclassified employees, triggering coverage questions about whether the policy adequately covers the work being performed.
• Vendor screening: A vendor with a history of significant audit adjustments may be underreporting exposures, raising reliability concerns.

Compliance platforms should track audit status as part of vendor risk monitoring, particularly for vendors with large on-site workforces.