The policy renewed months ago. Business was good. You hired two guys in the spring, paid a couple of subs in the summer, and ran a lot of overtime in the fall. Then a letter shows up from your workers' comp carrier asking for payroll records, 941s, 1099s and certificates of insurance. A few weeks later there is a bill you did not plan for.
That is the workers' comp audit. It is not a penalty. It is the carrier swapping the estimate on your policy for what actually happened. Here are the questions our clients call us with, answered in plain English.
When your policy starts, the carrier sets the premium from your estimated payroll for each class code. The standard workers' comp policy says that premium is an estimate, and that the final premium is figured after the policy ends using the actual payroll and the right classifications. If the final number is higher than what you paid, you pay the balance. If it is lower, they refund it.
The same policy lets the carrier examine your records during the policy and for up to three years after it ends. It happens whether you renewed, switched carriers or canceled.
Under the NCCI Basic Manual, payroll means money or substitutes for money. That includes wages and salaries, commissions, bonuses, holiday, vacation and sick pay, piecework, tool allowances, prevailing wage pay, and employee contributions to 401(k) or cafeteria plans that come out of gross pay. It generally leaves out tips, employer payments into group insurance or pension plans, severance, and properly documented business expense reimbursements.
If you work prevailing wage jobs, that pay counts at the full rate. We break down the math and the fringe benefit question in prevailing wage jobs and your workers comp audit.
The standard policy bases premium on pay to your officers and employees, and to "all other persons engaged in work that could make us liable." If you do not have payroll records for those people, the carrier can use the contract price for their services and materials. That part does not apply if you give the carrier proof that their employer carried workers' comp.
In plain terms: a sub with a current workers' comp certificate stays off your payroll. A sub or 1099 worker without one can be added to it, usually at the class code for the work they did. The tax form you sent them does not decide it. The certificate does.
One thing we will not do is tell you whether a specific worker is an employee or an independent contractor. That is a legal call, it changes by state and by agency, and it belongs with an employment attorney. What we can tell you is how your insurance responds either way. Our post on workers comp for 1099 workers walks through what happens when someone else makes that call for you.
NCCI's rule excludes the extra pay for overtime, the difference between the regular rate and the overtime rate, from the payroll used for premium. The straight-time part still counts. The catch is records: the exclusion applies only if your books show overtime pay separately by employee and in summary by class code. If your payroll report lumps it all together, you can lose the deduction. A few states handle overtime differently, so check with us before you count on it.
Owners, partners and officers may be included or excluded from coverage depending on the state and your entity type. When included, their payroll for premium is usually set between a state minimum and maximum, not their actual draw. Ask us for your state's limits.
Example of a state rule: Nevada caps workers comp payroll per employee
| Policy period | Cap |
|---|---|
| Policies effective before 10/1/2026 | $36,000 |
| Private employers, policies 10/1/2026 to 12/31/2026 | $98,433.60 |
| Policies on or after 1/1/2027 | $102,452.16 |
| Officers and LLC managers | $36,000 |
Sources: NCCI Nevada filings; NRS 616B.222 as amended. Other states set their own rules. Ask us about yours.
NCCI writes the rule book in most states. Some states run their own bureau, and some add exceptions. Five states where we write a lot of contractors:
| State | Rating rules | Worth knowing |
|---|---|---|
| Utah | NCCI | Standard NCCI payroll rules apply. |
| Colorado | NCCI | Standard NCCI payroll rules apply. |
| Arizona | NCCI | Standard NCCI payroll rules apply. |
| Texas | NCCI, with Texas exceptions | Most private employers can choose not to carry workers' comp, but must notify employees and the state if they don't. |
| Nevada | NCCI, with a state payroll cap | Payroll per employee is capped. For private employers, policies starting on or after October 1, 2026 use $98,433.60, up from $36,000. Officers and LLC managers stay at $36,000. |
Working elsewhere? Tell us where your crews work and we will tell you what applies. See our state pages for Utah, Texas and Nevada workers' comp.
Every dollar of payroll lands in a class code, and clerical work rates very differently from roofing or excavation. The policy says that if your actual work does not match the classifications on it, the carrier will assign the right ones. An auditor needs records to split one person's pay between codes. Without time records showing hours by type of work, expect more of that pay to land in the higher-rated code. Keep the records, and tell us when someone's duties change.
Every carrier's list looks a little different. Have these ready for the full policy period, not the calendar year:
More on getting organized: preparing for a contractor insurance audit.
The short answer: workers' comp follows the legal entity, not the payroll account. Each company whose employees are doing the work needs to be a named insured on a workers' comp policy, and its payroll gets reported for that entity and its class codes.
Companies with common ownership can sometimes be on the same policy, and sometimes need separate ones. It depends on the ownership, the state and the carrier. Running everyone through one EIN does not settle it either way. Call us before the audit, not during it, and bring a list of which people worked for which company.
Slow season: cancel the policy or keep it in place?
Run both sides with the Grit team before you send a cancellation notice. (801) 505-5500.
"Do we cancel and start fresh when I bring the guys back, or is there a hold?" There is no pause button on a workers' comp policy. But because premium is driven by payroll, a policy with almost no payroll for a few months generally develops almost no premium for those months. Here is how the two paths compare:
That is the advantage of keeping it: often about the same cost, far less risk. But the math depends on your minimum premium and your carrier's rules. Call us and we will run both sides before you send a cancellation notice.
General liability, workers comp, commercial auto, equipment - we package the whole program for contractors. Apply in about 10 minutes and we will get to work.
Not difficult, but not free. The standard policy lets you cancel by sending the carrier advance written notice of the date you want it to end. What follows is the cancellation audit and, if you canceled, a final premium that may be figured on a short-rate basis.
If you are moving carriers, timing is everything. The new policy must start the same day the old one ends. We handle that handoff for our clients.
Ignoring the audit letter does not make it go away. NCCI adopted a national audit noncompliance rule in 2017. Where a state has adopted it, the carrier may add an audit noncompliance charge of up to two times your most recent estimated annual premium. The carrier may also bill you on an estimate, send the balance to collections, or decline to renew you.
That holds even if you already switched carriers. More in why you should complete your insurance audit.
Send the dispute to us first.
The payroll and classification points in this article are general information, not legal or tax advice. Talk to your CPA about payroll reporting, and send any employee vs. independent contractor question to an employment attorney.
Most audit surprises are predictable if someone looks before the policy ends. Before your workers' comp renews, we review your payroll by class code, your sub list and your certificates with you. When the audit comes, we go over the result and help push back when something is wrong.
We write workers' compensation and the full commercial program for contractors across the country, and we came from the trades we insure.
It is the carrier's check of your actual payroll after the policy period ends. Your premium at the start of the year was based on an estimate. The audit replaces the estimate with real numbers, by class code. If actual payroll came in higher, you owe the difference. If it came in lower, you get a refund. The standard policy lets the carrier audit during the policy and for up to three years after it ends.
It can be. The standard policy counts pay to anyone doing work that could make the carrier liable, not just W-2 employees. If you paid a subcontractor or 1099 worker and cannot show proof that they carried their own workers' comp, the auditor can add what you paid them to your payroll. A current certificate of insurance for the full time they worked for you is usually what keeps them off.
Straight-time pay for overtime hours counts. Under NCCI rules, the extra overtime portion (the half in time and a half) can be left out, but only if your payroll records show overtime pay separately by employee and by class code. A few states treat overtime differently, so ask us about yours.
The carrier will not just drop it. Under NCCI's audit noncompliance rule, where a state has adopted it, the carrier may add a charge of up to two times your estimated annual premium. The carrier may also bill you on an estimate, send the balance to collections or decline to renew. Completing the audit is almost always the cheaper path, even if you already switched carriers.
Yes. Ask the carrier for the audit worksheet, find the line that is wrong, and send your records showing why, in writing. Common fixes are subs with valid certificates, overtime that was not excluded and employees put in the wrong class code. If the carrier will not budge on how a manual rule was applied, NCCI runs a filed dispute resolution process in most NCCI states.
Usually not, but run the numbers with us first. Canceling may trigger a short-rate penalty and a cancellation audit, and you still pay at least the minimum premium. Restarting means a new application and a new minimum premium. Keeping the policy in place with payroll near zero often costs about the same and leaves no gap if someone comes back to work early.
Yes. A canceled policy still gets a final audit for the time it was in force. The final premium is figured on the actual payroll for that period, and if you canceled, it may be more than a straight pro rata share.
Maybe the last audit bill caught you off guard. Maybe you have a slow season coming and are not sure whether to cancel. Either way, a short conversation now is cheaper than a surprise later.
Start a commercial application or call the Grit team at (801) 505-5500. Tell us what is going on and we will give you a straight read on where you stand.
This article reflects the Grit team's best knowledge as of the date it was published. Laws, rules, carrier guidelines and dollar amounts change, so confirm the current requirements at the time you read this before relying on it. Call the Grit team at (801) 505-5500 to confirm what applies to you. This is general information, not legal advice or a guarantee of coverage.