Your workers’ compensation premium starts as an estimate. When the policy year ends, the insurance company audits your actual payroll and sends either a refund or a bill. For many New Jersey business owners, that bill comes as a surprise, and it usually traces back to a few avoidable mistakes. A little preparation before the auditor calls can save real money.
How the Audit Works
At the start of your policy, your premium is based on estimated payroll for each job classification. After the policy expires, the carrier’s auditor reviews your actual payroll records by phone, by mail, or in person. If payroll came in higher than estimated, or employees land in more expensive classifications, you owe additional premium. If it came in lower, you get money back.
Where Surprise Bills Come From
Misclassified employees. Every employee is assigned a classification code, and rates vary widely between them. An office manager who never visits a job site shouldn’t be rated the same as a field crew. When job duties aren’t clearly documented, an auditor may place employees in the higher-rated classification.
Uninsured subcontractors. If you pay a subcontractor who doesn’t carry their own workers’ comp coverage, the auditor can add what you paid them to your payroll and charge you premium on it. A current certificate of insurance for every subcontractor, covering the dates they worked for you, is your best protection.
Consider a landscaping contractor with $600,000 in estimated payroll. During the season, they paid three subcontractors a combined $90,000, but one sub’s coverage had lapsed, and the others never sent certificates. At audit, all $90,000 was added to payroll at the landscaping rate. At a rate of, say, $8 per $100 of payroll, that’s an extra $7,200 in premium, a bill that a few current certificates would have prevented.
Overtime records. In New Jersey, the overtime premium, the extra “half” of time-and-a-half, is excluded from workers’ comp payroll, but only when your records show it separately by employee and by classification. For example, if an employee earns $30 an hour and $45 for overtime, $15 of every overtime hour is excluded. If your payroll reports lump overtime into one number, you pay premium on money that should have been excluded.
How to Prepare
Before the auditor contacts you, gather:
- Quarterly payroll tax reports. Auditors commonly ask for federal Form 941 and New Jersey’s NJ-927 or WR-30.
- Payroll records broken out by employee, with overtime shown separately
- A short description of what each employee actually does
- Certificates of insurance for every subcontractor you paid
- Your 1099s and general ledger entries for outside labor
Review the Results Before You Pay
Audit results aren’t always right. Classification errors, double-counted payroll, and subcontractors counted as uninsured when a certificate was on file all happen. You have the right to question the findings before you pay the bill.
We Can Help
Workers’ compensation is our specialty. We’ll help you prepare before the auditor calls, and we’ll check the final results line by line. If something looks wrong, we work with the carrier to get it corrected. Learn more about our workers’ compensation services, or book a 15-minute call and we’ll walk through your next audit together.