Premium audits: how workers' comp and liability premiums are trued up

Why the first bill is only a deposit

An auditable policy is priced on something that changes during the year: payroll for workers’ comp, and payroll, sales, units sold or subcontract costs for general liability. The Texas Department of Insurance puts it plainly: “The premium that is paid at the inception of the policy is a deposit (estimated) premium.” The insurer may then examine your books, usually after the policy expires but sometimes during it. If actual exposure was higher than estimated, you may owe more premium. If it was lower, you may get money back⁠¹.

For workers’ comp the requirement sits in Part Five (Premium) of the standard Workers Compensation and Employers Liability Insurance Policy. That part requires you to keep the records needed to compute premium and to provide copies when asked. The final premium uses “the actual payroll and the proper classifications and rates that lawfully apply to the business,” according to Alaska’s insurance division⁠². Pennsylvania’s State Workers’ Insurance Fund tells applicants that under its policy contract the audit “must take place within three years of the policy period ending”⁠³. So a bill can arrive well after the policy has ended.

The audit does more than settle one year’s bill. California’s State Compensation Insurance Fund lists three purposes: charge the correct premium for the term, update details that affect coverage and rates, and “confirm actual payroll for calculating your experience modification”⁠⁶. Audited payroll and class assignments feed the experience mod, so an error can carry into later years.

What a gap costs, in our calculation: a business estimates $400,000 of payroll in one class and pays the deposit. Actual payroll is $460,000. At a rate of $1.00 per $100 of payroll, a round figure used only to show the arithmetic, the deposit was $4,000 and the audited premium is $4,600, so the audit bill is $600 before any experience mod or other adjustments. The bill always scales with the gap: 15% more payroll means 15% more manual premium, whatever your actual rate is. Your rates are on the policy’s rating page, and the premium calculation guide shows how the other factors stack on top.

What an auditor asks for

Alaska’s Bulletin B15-08 lists the records a workers’ comp insurer may request⁠²:

• IRS Form 941 quarterly payroll tax returns, Form 940, W-2s and W-3s, and Forms 1099 and 1096.
• State quarterly unemployment contribution reports.
• The payroll ledger and any certified payroll reports.
• The latest general liability audit report.
• A list of vendors and subcontractors used during the term, with the amounts paid, and their certificates of insurance.
• In unusual cases, bank statements or check registers, IRS Schedule C or Form 1120.

Penn National’s audit guide adds the general ledger, cash disbursements, job cost records, sales journals, state sales tax returns, hire and termination dates, and the cost of hired equipment. It also describes an operational review: tools and processes, employee duties, a tour of the premises, and the type of business entity⁠⁴. That review is how the auditor checks your class codes, not just your totals.

Class assignment is where audits most often change the bill. When an employee does work in more than one class, Penn National says some states allow the payroll to be split, but only if the employer keeps records “which reflect the actual time spent performing work in each classification (percentages are not accepted).” Several states allow no split outside construction. Without proper records, “the entire payroll is assigned to the highest rated classification”⁠⁴. California’s State Fund similarly requires daily time records with start and stop times for an employee whose pay is divided between classes⁠⁶.

Overtime: only the straight-time part is premium payroll

Workers’ comp payroll is broad. It includes wages, commissions, bonuses, holiday, vacation and sick pay, and other money substitutes⁠⁴⁠⁶. Overtime is the main exception. Beacon Mutual, an NCCI member insurer, summarizes NCCI’s definition: the straight-time portion of overtime is payroll; “the extra pay for overtime” is excluded, and “the extra pay is the difference between the regular pay rate and the overtime pay rate”⁠⁵. California applies the same rule. State Fund’s example: an employee earning $10 an hour paid $15 for overtime has $5 an hour of “overtime excess” excluded. Extra pay for swing or graveyard shifts is not overtime excess and stays in payroll⁠⁶.

Two conditions decide whether you get the exclusion:

1. Records must show it

   Penn National says the excess “can be deducted; if your records can verify this excess”⁠⁴. A payroll report that shows only total gross pay gives the auditor no basis to remove anything.

2. The state must allow it

   The same guide says the deduction “is not applicable in Pennsylvania and Delaware for workers compensation coverage”⁠⁴. Those states have their own rating bureaus, not NCCI.

What the exclusion is worth, in our calculation: a crew of 10 employees each paid $25 an hour works 400 overtime hours a year each at time and a half ($37.50). Total overtime pay is $150,000. Of that, $50,000 is the premium half ($12.50 × 400 hours × 10 employees). With the overtime premium shown separately, $50,000 comes out of payroll, worth $500 for every $1.00 of rate per $100. In a class rated at several dollars per $100, that is several thousand dollars.

Officer and owner payroll: floors and ceilings

Executive officers’ pay is not used as reported. Rating rules set a minimum and maximum payroll for officers whose coverage is included, so a founder on a $30,000 salary is audited at the floor and one on $400,000 at the ceiling. In NCCI’s manual this is Basic Manual Rule 2-E⁠⁹. The limits are set state by state and change from year to year; in Indiana they apply to the officer’s average weekly payroll⁠⁷.

Scroll the table sideways to see every column.

Indiana’s bureau has already published its 2027 limits: $57,200 minimum and $265,200 maximum from January 1, 2027⁠⁷. New Hampshire uses a flat payroll charge of $40,000 for sole proprietors and partners in 2026⁠⁸. Missouri’s values page, which carries no effective date, lists a single amount, $43,800, for “premium determination” for executive officers, LLC members, partners and sole proprietors under Rule 2-E, not a minimum and maximum⁠⁹.

The same officer can produce very different premium bases. In our calculation, an officer paid $45,000 is audited at $66,300 in California, $54,600 in Indiana and $45,000 in New Hampshire. An officer paid $300,000 is audited at $171,600 in California, $254,800 in Indiana and $300,000 in New Hampshire. Whether an officer can be excluded at all is a state law question, covered on each state page and in the workers’ comp guide.

Subcontractors without proof of coverage

A contractor’s workers’ comp policy picks up the employees of an uninsured subcontractor, so the audit charges premium for them. NCCI’s Basic Manual Rule 2-H handles this. A 2022 decision by Alaska’s Division of Insurance describes it: to avoid paying premium for a subcontractor, the contractor must provide evidence of workers’ comp insurance or a certificate of exemption. Without it, Rule 2-H-2 “requires the insurance company to charge WC premium based on the degree of documentation provided by a contractor in accordance with the established tables”⁠¹⁰.

In that case the general contractor had a signed subcontract and a certificate of insurance, but the subcontractor carried no workers’ comp. The contractor supplied no payroll records for the sub, so “the full subcontract price was the basis for determining the premium due.” Alaska’s review committee and the hearing officer both upheld the audit. The decision notes that neither the Director of Insurance nor the committee had authority to decide whether the sub was really an independent contractor, and that the insurer had advised the contractor in writing when the policy was issued that premium would be added for subcontractors without workers’ comp⁠¹⁰.

What that means, in our calculation: you pay an uninsured framing sub $150,000 and have none of its payroll records. The auditor adds up to $150,000 to your payroll in the class that applies to the work. Rule 2-H-2 ties the charge to the documentation you can produce, so the sub’s payroll records can bring it below the contract price; evidence that the sub carried workers’ comp for the work avoids the charge under Rule 2-H⁠¹⁰.

Two rules make this worse in some states. California presumes a worker is an employee and puts “the burden … on the employer to prove that a worker is not an employee”; State Fund lists business licenses, contractor license numbers, written contracts and comp certificates as documents an auditor may ask for⁠⁶. And a certificate only helps if the sub actually carries workers’ comp: in the Alaska case the contractor had a certificate of insurance on file, but the sub had no comp policy, so the charge stood⁠¹⁰. The general contractors page covers how this plays out across trades.

General liability audits: sales, payroll and total cost

The CGL policy’s premium audit condition works like the comp policy’s: a deposit, then an audit against actual payroll, sales or units⁠¹. The difference is the exposure base, which depends on your GL class. Penn National lists the auditable bases as payroll, total cost, sales or receipts, and admissions⁠⁴:

• Gross sales is everything charged for goods and work during the term, including rentals and dues. Sales and excise taxes paid to a government, credits for returned or damaged goods, finance charges, freight charges and patent or copyright royalties can be deducted⁠⁴.
• Total cost is used “primarily for general liability when subcontractors are used.” It is the cost of all labor, materials and equipment used in the subcontracted work, plus fees, bonuses and commissions⁠⁴.

Certificates matter on the GL side too. Penn National says GL and workers’ comp certificates from each subcontractor, collected at hiring, “will lessen the chargeable premium at time of audit”⁠⁴. Wrap-ups are a separate trap: if you work on an owner-controlled (OCIP) project and your policy is not endorsed to exclude it before the job starts, the same exposure “may result in audit charges on both policies”⁠⁴. Penn National also lists garage liability and inland marine installation floaters as policies it audits⁠⁴. The general liability guide explains how each base is rated.

California’s extra audit rules

California sets audit rules in statute and in the WCIRB’s statistical plan. State Fund summarizes the WCIRB guidelines in its September 2026 employer seminar⁠⁶:

• A policy with an annual premium of $10,500 or more is physically audited every year. Smaller policies are audited “at sufficient interval.”
• Employers with exposure in high-wage construction classes are audited at least every three years.
• Roofing contractors holding a C-39 license get a site inspection.

The roofer rule comes from Insurance Code section 11665. An insurer that writes comp for a C-39 roofing contractor “shall perform an annual payroll audit,” including “an in-person visit to the place of business” to check whether the reported number of employees is accurate. The insurer may add a surcharge to cover the reasonable cost of those audits⁠¹¹. The roofers page covers how this affects their premiums.

State Fund also lists what California does not count as payroll: tips, meals, overtime excess, severance pay, auto and travel reimbursement, employer matching contributions to retirement or cafeteria plans, IRC section 125 amounts, and some lodging and prevailing-wage fringe payments⁠⁶.

When you disagree with the audit

Start with the audit worksheet: check payroll by class, the deductions taken and any subcontractor charges. Then use the insurer’s own process. State Fund’s is to contact the auditor and then send “your written statement along with copies of supporting documentation” to its audit dispute address⁠⁶. Records that were missing at the audit, such as an overtime breakdown, time records by class or a subcontractor’s certificate, are what can change the result.

If the insurer will not change the result, each state has an appeal route:

1. California

   Insurance Code section 11737(f) requires every insurer to give anyone “aggrieved by the application of its filings” a hearing on written request. If the insurer neither grants nor rejects the request within 30 days, you can treat it as rejected. You then have 30 days after written notice of the insurer’s action to appeal to the Insurance Commissioner, who holds a hearing within 60 days of the appeal (or later by agreement) and may affirm, modify or reverse the insurer’s action; an appeal the commissioner finds has no reasonable basis can be denied in writing without a hearing⁠¹².

2. NCCI states

   The NCCI Basic Manual sets out dispute rules in its Appendix G⁠¹⁰. In Alaska, a dispute over an audit goes first to NCCI and a grievance committee, then to the Director of Insurance, whose final order can be appealed to the superior court within 30 days⁠¹⁰.

Know what a review panel will decide. In the Alaska case the committee limited its review to whether the insurer applied the manual rule, and the decision says neither the committee nor the Director of Insurance had authority to decide whether the worker was an employee or an independent contractor⁠¹⁰. So an appeal works best when it shows a rule was misapplied, or brings records the auditor did not have.

Getting ready before the auditor calls

1. Split payroll by class during the year

   Keep payroll records by class code and time records for anyone who works in more than one class. Percentages agreed at audit time are not accepted⁠⁴⁠⁶.

2. Show overtime premium separately

   Set up payroll so the extra half or full time appears on its own line, by employee and class. Otherwise it stays in payroll⁠⁴⁠⁵.

3. Collect certificates when you hire, not at audit

   Get workers’ comp and GL certificates from every subcontractor, check that they cover the dates worked, and keep payroll records for any sub that cannot provide one⁠²⁠⁴⁠¹⁰.

4. Reconcile the totals

   Your audited payroll should tie to your 941s, W-2s and state unemployment reports, and sales to your sales tax returns⁠²⁠⁴. Explain any difference before the auditor finds it.

5. List officers and owners with their elections

   Note who is included or excluded and their pay, so the state minimum and maximum are applied correctly⁠⁶⁠⁷.

6. Report wrap-up projects before work starts

   Ask for the OCIP endorsement so the same payroll is not charged twice⁠⁴.

7. Budget for the result

   Texas’s insurance department advises allowing for “additional premium charges resulting from an audit”⁠¹. If your payroll or sales are running well above the estimate, the gap will appear on the audit bill.

Sources

1. 1
   Texas Department of Insurance, Commercial general liability insurance Checked 13 Oct 2026 · Back to text ↑
2. 2
   Alaska Division of Insurance, Bulletin B 15-08: Audit of workers' compensation insurance policies Checked 13 Oct 2026 · Back to text ↑
3. 3
   Pennsylvania Department of Labor & Industry, State Workers' Insurance Fund, SWIF: how to obtain a policy (right to audit up to three years after the policy period ends) Checked 13 Oct 2026 · Back to text ↑
4. 4
   Penn National Insurance, Preparing for your premium audit (Q&A) Checked 13 Oct 2026 · Back to text ↑
5. 5
   Beacon Mutual Insurance Company, Premium audit preparation: payroll inclusions and exclusions Checked 13 Oct 2026 · Back to text ↑
6. 6
   State Compensation Insurance Fund of California, Advanced premium audit topics (employer seminar, September 2026) Checked 13 Oct 2026 · Back to text ↑
7. 7
   Indiana Compensation Rating Bureau, Payroll limitations for owners and executive officers Checked 13 Oct 2026 · Back to text ↑
8. 8
   New Hampshire Insurance Department, Maximum/minimum payroll Checked 13 Oct 2026 · Back to text ↑
9. 9
   Missouri Department of Commerce and Insurance, Workers' compensation miscellaneous values Checked 13 Oct 2026 · Back to text ↑
10. 10
    Alaska Division of Insurance, In the matter of Rickman Building Company, Inc., Case No. H 22-01 (proposed decision, July 1, 2022) Checked 13 Oct 2026 · Back to text ↑
11. 11
    California Legislature, California Insurance Code section 11665 Checked 13 Oct 2026 · Back to text ↑
12. 12
    California Legislature, California Insurance Code section 11737 Checked 13 Oct 2026 · Back to text ↑

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