Workers’ Comp and General Liability Audits: What Small Business Owners Need to Know
Running a small business means you’re wearing a lot of hats. One day you’re managing employees, the next you’re handling invoices, payroll, or taxes. Then, out of nowhere, you get a notice from your insurance company about a workers’ compensation audit or general liability audit. For anyone who has ever gone through this before, it can be confusing and overwhelming.
Audits are a normal part of business, especially if you carry workers’ compensation or general liability insurance. Understanding why they happen and how to prepare can make the process much smoother.
Why Insurance Audits Happen
Insurance companies use audits to make sure your policy accurately reflects your business operations. When your policy started, your premium was likely estimated based on projected payroll, sales, subcontractor costs, or business activities.
It’s not common for business needs to change throughout the year. The insurance company performs an audit at the end of the policy period to compare the estimate with what actually happened.
For example:
- Your payroll may have increased because you hired more employees.
- You may have used subcontractors during busy seasons.
- Your revenue may have grown.
- Your business operations may have changed.
Audits help the insurance company determine whether your premium was accurate. The results determine whether you owe additional premium or get a refund.
What Is a Workers’ Compensation Audit?
Workers’ compensation audits will review employee classifications and payroll records. The purpose is to confirm that employees were classified correctly and that the payroll estimate on your policy matched your actual payroll.
Workers’ comp premiums are largely based on:
- Employee payroll
- Job duties
- Risk level of the work being performed
Here’s an example to consider. Office administrators will have a lower workers’ comp rate than a construction worker because the risk of injury is lower. Insurance companies can request payroll reports, quarterly payroll tax filings, employee job descriptions, certificates of insurance for subcontractors, general ledger reports, cash disbursement records, and much more. If your records show higher payroll than originally estimated, your premium could increase. If payroll was lower, you may receive money back.
What Is a General Liability Audit?
General liability audits focus more on business operations than on employee injuries. General liability insurance protects your business from claims involving bodily injury, property damage, or accidents involving customers or third parties. Some of the aspects that affect premium prices include the following:
- Gross sales
- Annual revenue
- Subcontractor costs
- Business operations
- Number of employees
During a general liability audit, the insurance company may request:
- Profit and loss statements
- Tax returns
- Sales records
- General ledger reports
- Subcontractor documentation
The goal is to verify the information used to calculate your insurance premium.
Why Small Business Owners Should Take Audits Seriously
Small business owners are busy, but that’s not a reason to ignore audit notices. If you fail to respond, the insurance company can issue an estimated audit. Estimated audits are usually much higher than your actual premium because the insurance company assumes a worst-case scenario. Ignoring audits can lead to cancellations of your policy or difficulty obtaining future coverage. One of the best things you can do is stay proactive when audits are issued, not to panic, and stay organized throughout the year.
Poor recordkeeping is one of the biggest mistakes business owners can make. Missing or incomplete financial records can make the process difficult and may result in higher premiums. Another common mistake is misclassifying workers, especially if you have freelance workers, subcontractors, full-time, or part-time W-2 employees. A good rule of thumb is to expect things to change as your business does. As you expand or hire more employees, your insurance policy may need to be adjusted before audit time.
Prepare Effectively For An Insurance Audit
Staying organized throughout the year can make all the difference. If you do, an audit won’t be stressful. Below are some great tips to follow:
Keep Accurate Payroll Records
Make sure payroll reports are current and organized. Separate overtime pay if applicable because some overtime premiums may be excluded from workers’ comp calculations.
Maintain Clear Financial Statements
Up-to-date bookkeeping helps audits go much more smoothly. Profit and loss statements, general ledger reports, and tax records should all be accurate and easy to access.
Track Subcontractors Carefully
Always collect certificates of insurance from subcontractors and their W9 before work begins. Store those documents in a safe place so they are easy to provide during an audit.
Review Employee Classifications
Employees should be classified correctly based on their actual job duties. Incorrect classifications can lead to costly adjustments.
Work With Your Bookkeeper or Accountant
Having professional bookkeeping and accounting support can make audits much easier. A bookkeeper can help gather documents, organize reports, understand potential liabilities, and ensure your records are accurate before the auditor reviews them.
Flexkeeper Helps Keep The Stress Off Your Small Business
When insurance audits and bookkeeping questions start piling up, it’s easy for small business owners to feel overwhelmed. Flexkeeper makes things easier than ever with our services. We help take the guesswork out of your finances. Contact us to learn more about what we have to offer.