Many business owners get an unpleasant letter a few months after their workers’ compensation or general liability policy renews: an additional premium bill. The cause is the premium audit, the insurer’s review of your actual payroll, sales, or subcontractor costs after the policy period ends. A good year of growth often shows up here first. Here are the questions owners ask most, with plain answers.
What is a premium audit, and why does it happen?
Workers’ comp and many general liability policies are priced on estimates made at the start of the policy, usually payroll for comp and payroll or sales for liability. Once the policy ends, the insurer compares those estimates to your actual figures and adjusts the premium. If payroll grew 20% because you hired or gave raises, the premium generally grows with it. If business shrank, you may receive a refund. Audits may be done by mail, by phone, or in person, depending on the size of the policy.
What counts as payroll in a premium audit?
More than many owners expect. Under the payroll rules in the NCCI Basic Manual, used in many states, payroll includes wages and salaries, bonuses, commissions, holiday and vacation pay, and employee salary reductions for retirement or cafeteria plans. Excluded items include tips, severance pay, employer contributions to retirement or cafeteria plans, and expense reimbursements your records verify as valid business expenses.
Can overtime be excluded?
Often the extra portion can, if your records support it. Under the NCCI rules, only the amount above straight-time pay is excluded, and only when your records show overtime separately by employee and in summary by classification. If you record time-and-a-half as one combined figure, one-third of that total is excluded. Ask your payroll provider to break out the overtime premium now so it is ready at audit time. Some states use their own rating bureaus, so confirm the rules that apply to you.
Why do class codes matter so much?
NCCI, the rating organization used for workers’ comp in many states, maintains the classification system. Each employee’s payroll is assigned to a class code with its own rate, and clerical rates are far lower than field or warehouse rates. If records do not clearly separate an employee’s office work from higher-risk work, the auditor may assign all of it to the higher rate. Keep job descriptions current and track divided duties where the rules allow it.
Do owner and executive officer wages count?
Usually, within limits. Many states set minimum and maximum payroll amounts for executive officers, and some allow certain owners to exclude themselves from coverage. The rules vary by state and entity type, so confirm how your owners are treated before the auditor arrives.
What about subcontractors?
This is the most common source of surprise bills. If a subcontractor cannot show a valid certificate of insurance for the period they worked for you, the insurer may add what you paid them to your own payroll. Collect certificates before work begins, track expiration dates, and keep copies with your payment records.
How should we prepare for the auditor?
- Gather payroll reports, quarterly tax filings, and a general ledger for the full policy period.
- Separate overtime premium pay and verified expense reimbursements.
- Organize subcontractor payments with matching certificates of insurance.
- Prepare job descriptions for employees whose duties span classifications.
- Ask for the audit worksheet afterward and dispute errors in writing. Our commercial insurance team can review a worksheet with you.
What if our estimates are already out of date?
Call your broker mid-term. Many insurers will adjust the estimated exposure on the policy, which spreads the difference across remaining installments in place of one large bill later. Owners who grew quickly this year should make that call before year-end. Clear payroll categories also make related compliance work easier, which our HR compliance and legal team can support.
Looking Ahead to 2027
Set up next year’s records with the audit in mind from the first payroll in January: separate overtime premium pay, code divided duties, and track subcontractor certificates as you go. Revisit your estimates at midyear, especially if hiring or revenue plans change. Tooher-Ferraris will help you build a premium audit routine so your 2027 audit holds no surprises.
