Workers' Comp Premium Audits and Subcontractors: What the Auditor Asks For

What a Workers' Comp Premium Audit Is

Workers' comp premium is charged per $100 of payroll, at a different rate for each class code: roofing costs more than clerical work. Your experience modification then adjusts the total up or down. When the policy starts, the premium is calculated on estimated payroll, so it is effectively a deposit.

After the policy year ends, the insurer checks the estimate against what you actually paid. That check is the premium audit. It may be a questionnaire, a phone or video call, or an auditor at your office going through payroll and the books. If the real payroll came in higher, or more of it falls in costlier class codes, you get a bill for additional premium; if lower, a refund. It covers the policy period, not the calendar year.

Why Your Subcontractors End Up on It

In many states the law makes the hiring contractor responsible for an uninsured subcontractor's injured workers. If your sub had no workers' comp and one of their crew is hurt on your job, the claim can come to your policy. Your insurer therefore counts uninsured subs as exposure it carries.

At audit, that usually means the auditor adds the sub's payroll to yours, under the class code for the work they did. When the sub's payroll isn't available, which is most of the time, the rating rules often use a share of what you paid them instead. A framing sub you paid $120,000 can become tens of thousands of dollars of payroll in one of the most expensive class codes on your policy.

The same applies to individuals you paid on a 1099. A 1099 says how you paid someone, not whether they were insured. A one-person sub with no certificate and no exemption on file is often treated as your own worker.

What the Auditor Asks For

For the subcontractor part of the audit, expect some version of this list:

• Every subcontractor and independent contractor you paid during the policy period, with the amount paid. Usually from your general ledger, check register or 1099 records.
• A certificate of insurance for each one showing a workers' comp policy in force for the dates they worked for you.
• Exemption paperwork for subs who legitimately carry no workers' comp, such as a business owner with no employees in a state that allows it.
• Your own payroll records: payroll reports, quarterly tax filings, and how hours split between class codes.

The payroll and payments come out of your accounting system. The certificates and exemptions have to come from wherever you keep them. If that's an inbox, this is the week you find out.

Subs with No Employees: Which Exemptions Count

Plenty of small subs legitimately have no workers' comp: one person, no employees. What the auditor needs is proof of that, and the proof differs by state:

• An exemption certificate issued by the state. Florida, for example, issues construction exemptions to corporate officers and LLC members, up to three per business, and they expire. See Florida subcontractor insurance requirements.
• A no-employees exemption on a licence record. California, for example, lets licensees with no employees file an exemption with the licensing board instead of carrying a policy. See California subcontractor insurance requirements.
• A signed statement, where the state issues nothing. Your agent can tell you what form your carrier accepts.

Two things to check on any exemption: it usually covers only the named person, so a sub who brings helpers is uninsured for them; and it has dates. An exemption that expired mid-job is no exemption for the months after.

Six Gaps That Cost Money

Most of these are paperwork, not missing insurance: a workers' comp line nobody asked for, a renewal nobody collected, an exemption nobody checked against the size of the crew. That's the part you control.

How to Prepare, Step by Step

1. 1

   List every subcontractor and 1099 payee for the policy period

   Use the policy's own dates, not the calendar year. Your general ledger, check register or 1099 records give you payee and amount. Include one-off jobs; they're the ones most often missing paperwork.

2. 2

   Match each one to workers' comp proof

   A certificate showing a workers' comp policy, or the state's exemption paperwork. Match by legal name; a W-9 on file is what connects the name on the check to the name on the certificate when they differ.

3. 3

   Check the dates against when they worked

   The workers' comp policy period, or the exemption's dates, has to cover the dates the sub worked for you. Workers' comp often renews on a different date from GL, so check that line on its own.

4. 4

   Check that an exemption fits the sub

   An exemption usually covers its named owner or officer only. If the sub brought a crew, the exemption doesn't cover them. Ask the sub for their workers' comp policy, or ask your agent how the auditor will treat it.

5. 5

   Chase the gaps before the auditor does

   A sub who was insured can usually get their agent to issue a certificate showing the policy period that covered your job. It is far easier now than after the sub has moved on.

6. 6

   Gather your own payroll records too

   The auditor also reviews your own payroll: payroll reports, quarterly tax filings and the split of hours between class codes. Ask your agent which records your carrier wants.

7. 7

   Read the result, and question what's wrong

   If the audit charges a sub you can show was insured or properly exempt, tell your agent. Carriers will often revise an audit when you produce the paperwork afterwards, but how long you have depends on the carrier.

For step 2, the COI audit checklist covers what to check on a single certificate, including the named insured and the policy dates.

State Differences Worth Knowing

Workers' comp is state law, and the audit follows your state's rating rules. A few differences change what you collect:

• Texas is the only state where workers' comp is optional for private employers. A sub can be a non-subscriber and hand you a valid certificate with no workers' comp line on it. See Texas subcontractor insurance requirements.
• Washington, like Ohio, North Dakota and Wyoming, sells workers' comp only through a state fund, so it won't appear on a certificate at all. In Washington you check the sub's account with Labor & Industries, and a contractor who doesn't can be billed for a sub's unpaid premiums. See Washington subcontractor insurance requirements.
• Everywhere else, the rules your carrier applies come from a rating bureau, which differs by state. How an uninsured sub is charged, and what share of a contract counts as payroll, varies with it. Your agent knows which applies to you.

Making Next Year's Audit Easy

Every gap above is cheaper to prevent than to fix at audit time. Five habits cover most of it:

• Ask for workers' comp, not just a certificate. A certificate with only a GL line answers half the question. Ask for the workers' comp line or the exemption every time.
• Collect before the first payment. Workers' comp proof and a W-9 before the sub's first invoice is paid, including for one-off jobs.
• Track the workers' comp expiry on its own. It often renews on a different date from GL, and exemptions expire too.
• Keep the old certificates and exemptions. The audit asks about last year. When the renewal arrives, the expired document is still the proof for the months it covered.
• Collect the renewal when it's due, not when you're audited. Ask the sub before the expiry date, and the "coverage for part of the period" gap never opens.

A spreadsheet can do all five at a small scale. Past a few dozen subs, the separate workers' comp dates and the history are where it slips.

This guide explains how workers' comp premium audits commonly treat subcontractors. It isn't insurance or legal advice: rating rules vary by state, carrier and class code, and your policy's wording and your state's law govern. Ask your agent how your policy handles subcontracted work.