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PREPARING FOR A PAYROLL AUDIT

A Guide to Compiling Essential Information
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Provided by: GDI Insurance Agency, Inc. 801 Geer Road Turlock, CA 95380 Tel: 888-991-2929
This document is meant to be neither a substitute for, nor a legal interpretation of, federal regulations. Companies should not use this document in lieu of legal advice. 2011 GDI insurance agency, Inc. All rights reserved.

This guide will help you collect the necessary documentation and statistics required during a payroll audit. Because of the nature of the required information, it is recommended that this guide be completed by the accounting department, unless your organization has someone specifically responsible for these documents and the workers compensation policy. STEP 1: Collect Necessary Materials Payroll records (employee specific) Unemployment tax returns Form 1040 Schedule C (if sole proprietor) Tax reports (Federal Payroll 940s or 941s) General ledger, subcontractor ledgers and journal (or 1099s) Certificates of insurance for subcontractors Workers compensation (WC) insurance policy Employee information (compiled here) Corporate officer information (compiled here) Audit package totals (compiled here) Subcontractor information (compiled here) Certificates of insurance for each subcontractor Additional materials upon auditor request

STEP 2: Employee Information Record the payroll information and classification of all employees except corporate officers. Class codes generally define the business and not the employees, with the exception of standard class exceptions (clerical, outside sales, other certain sales, etc). This is a large potential problem area - if your business has a large WC rate, but you can put some of your employees in a standard class exception (like clerical), you can drastically lower premium to pay. In bold or italics, make sure to note that these standard class exceptions vary from state to state. Manual rate can be found on your WC policy. Note: A portion of overtime can be subtracted from the total gross payroll (i.e. if your firm pays time-and-a-half, you can take the total gross overtime $ paid and subtract .33 percent of that number from the total $ paid over a given year). This number counts as an excluded remunerations (further instructions in Step 4). STEP 3: Corporate Officer Information In many states, officers have the option to remove themselves from coverage. States also have a maximum coverage, which needs to be located. Certain states,

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rather than a max, represent corporate officers as all earning the same (i.e. for workers compensation purposes they are all compensated $50,000) STEP 4: Excluded Remunerations Excluded remunerations vary from state to state so the list below may not be accurate for your location. Determine a complete list for your state by asking your agent, ratings bureau or insurance provider. Tips and other gratuities received by employees Payments by employer to group insurance plans The value of special rewards for individual invention or discovery Severance payments, except for time worked or accrued vacation Payment for active military duty for reservists called to active duty Employee discounts on goods, property, or services purchased from the employer Expense reimbursements to employees for legitimate business expenses (requires some record or receipt) The value of an employer-provided vehicle (car or airplane) The value of an incentive vacation (for example, a sales leader might win a vacation) The value of a ticket to an entertainment event that is provided by the employer Supper money for late work Work uniform allowances "Time-and-a-half" overtime is included as one of the columns under Employee Information. Overtime is therefore not listed above, but you will need to add it if your company determines overtime pay using a different (or multiple) calculation. If the payroll amounts you entered under Employee Information or Corporate Officer Information include any of the following types of payments, then total such payments by employee and enter these values in the Excluded Remunerations column under Employee Information or Corporate Officer Information, as appropriate. STEP 5: Audit Package Totals Review the information you compiled in Steps 2 4, checking to make sure all areas have been addressed and all figures are correct. Organize the information in a list arranged by class code. Include payroll information along with any excluded remunerations that apply.

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STEP 6: Subcontractor This is only for subcontractors that do not have workers compensation of their own. Be sure to capture only the cost of payroll for the contract (as opposed to total quarterly cost of the contract) in order to prevent overpayment. STEP 7: Source Materials Checklist Use this sheet to ensure that you have completed and compiled all necessary materials. Clip or bind together and have it on hand to provide to your auditor upon arrival. ADDITIONAL NOTES

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GDI Insurance Agency, Inc. Your Workers Compensation Partner 888-991-2929 www.gdiinsurance.com

Controlling Premium Audits to Eliminate Overcharges

Due to the volume of requests they receive, insurance companies have developed a very efficient premium audit process. While they strive to be as accurate as possible, they dont have the time or resources to investigate and resolve every possible error or ambiguity that presents itself. As a result your company may experiences multiple, unintentional overcharges. If you know the rules, you can take control of the process by anticipating and preparing the exact information your insurance company needs to prevent inadvertent overcharges, saving By controlling your company money in the process. Creating an Accurate Premium Audit Package To prevent overcharges, you need to take control of the process and create an overcharge-proof premium audit package that will give the auditor complete and accurate information to work with. items the auditor cannot classify quickly with a lower-rated code remain in the governing code. This may result in charges due to the improper classification of employees who should be in standard class exemption groups (clerical, outside sales) common to all industries. This may also affect employees who could be considered for a lower industry code (manufacturing, retail and wholesale are examples of industries with multiple class codes). Auditors may also accidentally include corporate officers, who should be excluded, or may not remove the information excluded remunerations that should be deducted from payroll in the audit process, you before calculating your premium liability. eliminate the possibility If you have questions, consult the NCCI Scopes Manual; it has detailed job descriptions for most states.

used can that overcharges will lead to higher premium rates.

To begin, you will need to collect the following source material: Payroll records (employee specific) Unemployment tax return 1040 Schedule C (if you are a sole proprietor) Federal and state payroll tax reports (940s and 941s) General ledger, subcontractor ledgers and journals (or 1099s) Certificates of insurance from subcontractors Your workers compensation insurance package

Excluded Remunerations Certain forms of compensation are not used to determine workers compensation premium. Tips are an example of this. Allowable exclusions differ from state to state, but typically fall within 18-20 categories. Once youve added up all the excluded remunerations (by employee code), make sure to deduct them from your reported payroll. Subcontractors It is recommended that you only use employee-insured subcontractors, requiring them to present relevant certificates of insurance before commencing work. Provide these certificates to the auditor in order to save on premium. If you do utilize uninsured subcontractors, they must be treated like employees for workers compensation purposes. In these cases be sure you report only their payroll to the auditor (excluding the cost of materials or other supplies that a contractor may be charging to you).

Properly Classify Employees Your business should have one primary classification. Outside sales, clerical employees and, in some states, drivers need to be classified with a separate code. Any

This Work Comp Insights is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice. 2011 GDI Insurance Agency, Inc. All rights reserved.