If you have a traditional workers' comp policy — rather than a PEO pay-as-you-go arrangement — a premium audit is coming at the end of every policy year. The audit is mandatory, built into the policy structure, and often a source of financial surprise for businesses that weren't prepared. Understanding what the auditor is looking for and how to organize your records can make a significant difference in the final number.
Why Audits Happen
When you buy a traditional workers' comp policy, you pay premium based on estimated payroll. The carrier takes your best guess at what you'll pay in wages over the next 12 months and charges premium accordingly. At the end of the policy year, they send an auditor to verify what actually happened.
If actual payroll was higher than estimated, you owe additional premium. If it was lower, you receive a return premium. The problem is that most contractors underestimate payroll — not dishonestly, but because busy seasons, new hires, and overtime are hard to predict precisely a year in advance. The audit almost always produces a bill rather than a refund for growing businesses.
What Types of Audits Exist
| Audit Type | How It Works |
|---|---|
| Mail / self-audit | Carrier sends a form. You complete it and return payroll records by mail or online portal. Common for smaller policies. |
| Phone audit | Auditor calls to review records verbally and via email. Also common for smaller risks. |
| Field audit | Auditor comes to your place of business. Reviews physical records in person. Standard for larger policies, complex operations, or histories of discrepancies. |
What the Auditor Examines
Regardless of audit format, these are the core records reviewed:
- Payroll records: W-2s, quarterly 941s, payroll journals, or payroll processor reports. The auditor is verifying total wages paid to each employee by class code.
- 1099 subcontractors: Every 1099 you issued will be examined. If a subcontractor cannot provide a valid certificate of insurance, their payments will be reclassified as employee payroll and added to your premium basis. This is the most common audit surprise for contractors.
- Certificates of insurance: For each sub you used, you need an active COI on file for the work period. Expired or missing certs result in their wages becoming your exposure.
- Classification accuracy: The auditor may challenge whether some employees are correctly classified. An office manager doing field supervision half the time may be reclassified to a higher code for that portion of wages.
- Overtime premium: Under most workers' comp rules, overtime premium (the extra 0.5x paid above the regular rate) is excluded from the premium basis. Confirming this exclusion is applied correctly can reduce your audited payroll.
The 1099 Subcontractor Problem — Florida's Biggest Audit Trigger
This is worth emphasizing because it surprises so many Florida contractors. If you pay subcontractors on a 1099 basis and they don't have their own workers' comp policy — or can't prove it with a certificate — the carrier will treat their compensation as your employee payroll and charge premium on it.
The logic: if that worker were injured on your job, and they had no coverage of their own, your policy would be on the hook. The carrier collects premium to cover that risk.
Common Audit Surprises and How to Avoid Them
1. Payroll Was Higher Than Expected
The most straightforward scenario — you hired more people, paid overtime, or had a bigger year than anticipated. Prepare for it by running a payroll comparison mid-year. If actual wages are running 15%+ above your estimate, contact your carrier and request a mid-term payroll endorsement. It spreads the adjustment across the remaining installments rather than concentrating it in one audit bill.
2. Employee Tips, Overtime, and Bonuses
Most forms of compensation beyond base wages are includable in the premium basis — bonuses, commissions, holiday pay. Overtime premium (the "half" in time-and-a-half) is generally excludable, but only if your payroll records track it separately. Lump-sum overtime combined with regular pay is harder to strip out.
3. Officer Wages in Construction
Florida construction officers who have filed exemptions are excluded from the premium basis. But if your exemption lapsed, those wages come back into the calculation — potentially for the entire year.
The Alternative: Eliminating the Audit Entirely
Pay-as-you-go workers' comp through a PEO program doesn't have a year-end audit. Premium is calculated on actual payroll each cycle, collected in real time, and settled. When the year ends, there's nothing to reconcile.
For businesses that have been burned by audit bills — or that simply want the predictability of knowing their workers' comp cost is settled every payday — this structural difference is often the most compelling reason to make the switch.