09 Mar Insurance Talk — What is a Workers’ Comp Audit?
Rex and Cheri have the answers. Listen here.
Cheri Martinen – Welcome to Insurance Talk with Cheri Martinen and Rex Lesueur. We’re the father-daughter team from Bancorp Insurance. We are located in beautiful Central Oregon, and we’re a family-run insurance agency here to help you with all of your burning insurance questions.
Rex Lesueur – Yes, we are. And the burning insurance question today is what is a workers’ comp audit and why do I have to do one?
CM – Those dang audits. And why do they want one?
What is a Workers’ Comp Audit?
RL – If you’re an employer, you need to have workers’ comp. It’s mandatory, it is the law. We’ll do another podcast here in a little bit about what a subject employee is. We could probably do a whole 30-minute podcast on subject employees and what you have to do to make sure someone is an employee or isn’t an employee, or if they are an independent contractor. Or are they truly a volunteer if we were running a non-profit organization. All these things come into play with workers’ comp.
The topic we want to talk about the day is the workers’ compensation audit. And for people who don’t know what a workers’ compensation audit is, it works this way: when you buy workers’ comp, your workers’ comp is based on a rate per hundred of payroll. So if you have let’s say a restaurant and the rate is 2% of payroll, then if you have $1,000 worth of payroll, you’re going to have a $20 bill. That’s 2% of $1,000.
The insurance company, when they start at the beginning of the year, doesn’t know, and neither do you, what your exact payroll is going to be. So if you know that your payroll has been running at a certain level every year, you’re going to say, alright my payroll is $100,000 a year, so we’re going to start there. And the insurance company starts collecting a premium from you at that rate. If it was $100,000 a year and you had a 2% rate, they’d collect $2,000 from you. At the end of the year when the year is over, you know how much your payroll has been. The insurance company is going to send you a note and say exactly what your payroll was. Was it exactly $100,000? Not likely. Was it $98,000? Was it $105,000? They want to know. If it’s $105,000, you own them 2% of $5,000. If it’s $98,000, they owe you 2% of $2,000. And that’s what an audit is all about.
It’s one of those things, it’s kind of like a tax audit. You pay in and you wait to see what happens. Another analogy is you set the policy up based on an estimated bill, it’s kind of like your electric bill. I was talking to someone yesterday about electric meters. It makes the electric meter spin, but they don’t spin anymore. They’ve replaced all those spinny electric meters with digital ones. I guess I’m showing my age, sorry everybody.
The question is with workers’ comp. Workers’ comp is like an onion. You start at the top and it looks pretty simple. It’s pretty simple, why are we even talking about it?
CM – Because people don’t like doing their audits and I don’t blame them.
What is Payroll?
RL – They don’t like doing their audits, but then they start asking what if questions or why questions. And some of the questions are, what is payroll?
Verifiable Time Records
CM – And I know that some companies even have different types of workers. They might have an in-office worker, and then they might have an out-in-the-field worker. And those rates might be different for each one. But what if you have that guy that answers the phones half the day and then is out in the field half of the day?
RL – How do you do that? Well, there’s a very particular way to do that. That’s a conversation on what we call verifiable time records. If you have somebody who draws plans in the morning and in the afternoon is a plumber, you have to keep track of exactly what the person does in the morning because his rate is different in the morning than it is in the afternoon. And you have to be able to have him keep track of that so that when the audit comes in, you can tell the insurance company accurately what’s going on.
CM – And you want to because the desk person is less expensive than the person in the field.
RL – You have to be able to document that just in case the workers’ comp company sends an auditor over to see you. Most of the time they send you a form in the mail. You hand it to your bookkeeper and your bookkeeper takes care of it. Or even your payroll person, they can keep track of this for you as well if you’re using an outside payroll service. But you do need to keep track of it and you do need to be able to show that to the insurance company if they ever show up.
Payroll in Depth
Let’s talk about things that are payroll that you wouldn’t think. Salary bonuses, commissions, extra pay for overtime. Well, for overtime there’s an exception because you don’t pay workers’ comp on overtime. So if straight time is $10 an hour and overtime is $15, you’re going to pay workers’ comp on $10. You’re not going to pay the workers’ comp on the extra $5.
Getting more complicated here, if you pay someone for vacations and periods of sickness, that becomes payroll. Payments for allowances, for tools and other work items that you pay for your employees, those are considered payroll. Rental value of an apartment, let’s say that you have the kind of business where the employee works remotely, and you give them a cottage to live in while they’re living and working there.
CM – Like a resort or something like that. That’s really common, because if they’re going all the way out to the resort, they might have a place for the employee to live while they’re there. And then maybe for the week that they’re off, they’re obviously not living there.
RL – The rental value of that dwelling that you’re giving them as part of their pay is something you have to report to the workers’ comp company. There are all kinds of annuity plans that actually can be considered. Expense reimbursements, some of them are per diems. Those are reimbursable. Payment for filming commercials, excluding subsequent residuals. Anything that basically they’re doing, you have to report as income to the workers’ comp company. You don’t have to report them to the IRS, but you do have to report them to the workers’ comp company.
But there are some things that you don’t have to report like employee discounts. Say you give your employees 10% off on what they buy from the company. That’s not considered income. Dinner money for late work, uniform allowances, those are not considered income. There’s actually a whole list of them. Employer-provided perks, some of them are not included so you need to be aware that not everything is included and not everything is excluded.
Unless your payroll is really straightforward, you need to do some research to make sure that you’re reporting it accurately. Or hire someone to do it. And if you have any questions, you can always give us a call and we’ll be happy to help walk you through it.
Do You Have Questions About Workers Comp?
CM – If you do have questions on workers’ comp insurance, or if you are a new employer and just got your first employee, you can call Bancorp Insurance at 1-800-452-6826. You can ask for a Rex or Pam or Laurie or Jessica. All of those people would be so happy to help. Find us online as well at www.bancorpinsurance.com.