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Workers' Compensation Payroll Audits

TDIC’s experts are here to help you decode workers’ compensation claims and the payroll audit process. Find answers to common payroll audit questions here. 

Understanding Your Payroll Audit

The word “audit” may sound intimidating, but TDIC will streamline and guide you through your annual payroll audit. 
 
The payroll audit process is an important step in making sure you and your employees have appropriate and adequate coverage. Check here for frequently asked questions about workers’ compensation payroll audits. 

General Information

All insurance companies that provide workers’ compensation policies require their policyholders to complete payroll audits.   
   
Workers’ compensation insurance is mandated by law to provide coverage to your employees if they are injured at work. The premium for this policy is based on the payroll of the business. At the beginning of the policy term, the insurance carrier uses your estimated payroll for the upcoming year to determine your premium. At the end of the policy term, the actual payroll for the policy term must be reported to determine the final premium for that policy year.  
 
The final premium is determined after your workers’ compensation policy expires. To calculate the final premium, actual payroll figures are needed to compare with the initial estimated payroll figures. Through an audit process a determination is then made if any premium adjustment is necessary.   

A completed audit form, together with two source payroll documents, such as those described below, are required to complete your audit. Please keep in mind that, if necessary, you may receive a follow-up request for additional information at the time of the audit: 

  • Completed, signed and dated Payroll Reporting form. A signature is required for processing. 
  • A primary source document showing transactions or payments during your policy period, which is either a report from a payroll software program, or if payroll is calculated manually, a copy of the payroll ledger, payroll journal or timecards.
  • The report should include: (1) subtotals for each employee, (2) total gross earnings, (3) total overtime paid (if applicable) and (4) any withholdings and deductions such as employee contributions to a Cafeteria Plan 125. Note that we will not allow deductions unless we can verify the amounts on your payroll source documents. 
  • Additionally, a secondary source, such as state payroll tax documents (DE 9C’s) are also required and are used to verify the primary source document. Provide copies of the DE 9C (Quarterly Contribution Return and Report of Wages) reports that most closely match the audited policy term. Often the DE 9C is confused with the DE 9 and 941; however, we require the employee earnings detail that the DE 9C provides. 

Yes. Payroll reporting is mandated for all insurance companies by the Workers’ Compensation Insurance Rating Bureau (WCIRB) and is also a condition of your policy.  Information that is needed as part of the payroll report includes a primary source document showing transactions or payments during your policy period, which is either a report from a payroll software program, or if payroll is calculated manually, a copy of the payroll ledger, payroll journal or timecards. Additionally, a secondary source, such as state payroll tax documents (DE 9C’s) are also required and are used to verify the primary source document. 

Yes. However, if you have independent contractors and we request the independent contractor questionnaire, the policyholder must complete a questionnaire for each independent contractor.   

Yes. You will receive a summary once we have completed your audit. If you have any questions about the calculation, please contact a TDIC Insurance Solutions agent at 800.766.0633. TDIC communicates with policyholders well before the due date of their payroll report and audit, information about the upcoming deadlines, information needed and how to submit it.  

Audit Payroll Details Example

Payroll information is a vital element used by all insurance companies to determine your workers’ compensation policy premium. Because of this, failure to provide requested audit information has consequences that can include increased premiums or policy cancellation.  
TDIC communicates with policyholders well before the due date of their payroll report and audit, information about the upcoming deadlines, information needed and how to submit it.  

Yes, you can send it to us. However, please remember that audits are completed in the order they are received. If you received notification that your audit was estimated and you’re uncertain of what is required, please contact your TDIC Insurance Solutions agent at 800.733.0633. To avoid cancellation of your policy, please pay any invoices you receive. We will send new documentation and adjust the premium once the audit is completed.  

What Can Be Excluded

In California, you may exclude excess overtime payments, severance pay and employee contributions to a Section 125 cafeteria plan set aside for such items as medical, dental and vision premiums and related out-of-pocket expenses under an IRS approved Section 125 (Cafeteria Plan). This includes money set aside for dependent care obligations under the plan. For a comprehensive list, you can visit the WCIRB webpage.  

When officers, partners or members are subject to workers’ compensation coverage, the annual payroll used for premium computation is subject to minimum and maximum limitations as mandated by the California Workers’ Compensation Insurance Rating Bureau.  
 
For more information, please see the WCIRB’s webpage regarding executive officers and partners.  

Depending on your business entity, there are different exclusions available.  
 
For corporations, partnerships or LLCs, a signed waiver must be on file with the insurance company to exclude eligible individuals from coverage. The waivers are specific to the business entity type and will detail the eligibility requirements. With your signature, you will be attesting that you meet the said requirements.  

TDIC includes coverage for any relatives who work in your office. However, as a sole proprietor/individual, you can exclude any of these relatives who reside with you from your Workers’ Compensation coverage.  
 
Residing relatives who may be excluded are: spouse, child by birth or adoption, stepchild, grandchild, son-in-law, daughter-in-law, parent, stepparent, parent-in-law, grandparent, brother, sister, stepbrother, stepsister, half-brother, half-sister, brother-in-law, sister-in-law, uncle, aunt, nephew or niece.  
 
Relatives who both work in your practice and reside with you may be eligible for  
exclusion from your current Workers’ Compensation coverage if you are a sole proprietor. Please note that this does not apply to any other business entity types. Contact an agent at TDIC Insurance Solutions for more information.  

No. Family members who work for your dental practice are not automatically excluded from coverage. You can speak to your agent to determine if your family member can be excluded.   

If your spouse works for you, they are not excluded from Workers’ Compensation coverage. However, your spouse may be eligible for exclusion depending on the practice ownership structure and the legal entity formed. Speak to a TDIC Insurance Solutions agent to find out if your spouse qualifies for exclusion. 

Due to legislation that became effective Jan. 1, 2017, every eligible corporate officer, partner or member who meets the eligibility requirements and does not want to be covered by workers’ compensation must complete a waiver to be excluded. If TDIC does not receive a completed waiver, the individual’s earnings (subject to a minimum and a maximum) will be included in the Workers’ Compensation policy. Each corporate officer, partner or member who wishes to be excluded from coverage must complete and return a signed waiver to TDIC. Please note the law prohibits the insurance company from backdating the exclusion more than 15 days (about 2 weeks) from the date received, so it is important that you send the signed waiver to the insurance company as soon as possible if you do not want to be included in the coverage.  
To return completed waivers, contact your TDIC Insurance Solutions agent at 800.733.0633.

Learn more: AUDIT LEGISLATION FAQs

The waiver is effective as of the date received by the insurance carrier; however, when necessary, the law allows TDIC to backdate the waiver up to 15 days prior to the date received.   

Independent Contractors

Independent contractors are a classification of individuals whose services were used by your practice and who are not on your employee payroll and therefore not issued a W-2. They are often issued IRS Form 1099s and could include associate doctors, specialists, relatives, working interviewees, janitorial and temporary workers.  

It depends. State labor laws generally require employers to prove that workers are true independent contractors. For workers’ compensation insurance purposes, you may be held responsible when an uninsured subcontractor’s employee is injured. To protect your business, be sure to secure a Certificate of Insurance showing workers’ compensation coverage from each subcontractor/independent contractor you use. Otherwise, TDIC is obligated to provide coverage and thus charge premium for any individual who is not lawfully excludable as an independent contractor.  
 

You are required to provide a disbursement report of all payments made to all contracted workers paid during the audited period.     
 
To exclude a contracted worker from your coverage, you can provide their Certificate of  
Workers’ Compensation Insurance that was in force during the entire audited policy period.    
 
If the individual does not carry their own workers’ compensation policy for a separately established business, you may complete the Independent Contractor Questionnaire to determine if they are excludable by law.  

Incorporation in and of itself does not exclude the worker from Workers’ Compensation coverage. Individuals can become incorporated as sole owners, and the sole owner is performing the services at your practice. Labor Code, § 18 defines a person as “any person, association, organization, partnership, business trust, limited liability company, or corporation.” The individual working relationships must be reviewed for each person providing services within your practice to determine if a worker is a true independent contractor under California law.   

Receiving a 1099 tax form is simply the result of how an employer classified the worker for federal tax purposes, but the form itself does not mean they were correctly classified as an independent contractor under California employment law.  

Not necessarily. This situation could simply reflect that they work part time for several dental practices. An independent contractor would typically run their own business and have several clients. Determination of an employee’s status is based on several factors. If they own a distinct separately established business and carry their own workers’ compensation coverage, they will likely be considered an independent contractor.

Please contact an agent at TDIC Insurance Solutions to discuss your audit results. Some of the information that may be required to address an independent contractor dispute is:  

  • Certificate of Workers’ Compensation Insurance, effective during the audited term for the worker. Please note that other coverages, i.e., Professional Liability or General Liability, are not interchangeable with Workers’ Compensation coverage. 
  • Completed and signed independent contractor questionnaire (a questionnaire is only required if proof of workers’ compensation coverage was not provided for the entire audited policy period). 
  •  A report of all payments made to any workers who were not issued a W-2 as an employee, including associate doctors, specialists, relatives, temporary workers and 1099 Misc. workers paid from the period in question. 

If the individual is operating their own practice out of your practice location, you may need changes to your policy to adequately protect your combined exposure. Please contact an agent at TDIC Insurance Solutions immediately to ensure your policy coverages are adequate.  

California legislation dictates how employees are classified for the purpose of workers’ compensation payroll audits. Learn more about employment laws and regulations for determining employee status.

Disputes

You can discuss your audit with an agent by contacting your TDIC Insurance Solutions agent at 800.733.0633.  

After discussing your audit with an agent, if you choose to dispute the audit results, a TDIC Insurance Solutions agent will advise you of the dispute process and provide you with an Audit Dispute Form.   
 
The Audit Dispute Form will walk you through the documentation needed depending on the item you are disputing. If your dispute does not fall under any of the categories provided, just select the box marked as Other and provide a description of what you are questioning or disputing.   
 
Be prepared to provide supporting facts and/or documents that support your calculations, which will help us to resolve the dispute as quickly as possible.   

Yes. Please pay all amounts currently due to avoid disruption or potential cancellation of your coverage. If the dispute warrants an adjustment to your audit, upon completion of the dispute, your audit will be revised and your premium will be adjusted accordingly.   

Policy Renewal

If you have experienced changes in your business operations, such as change of mailing address, new location, changes in legal entity or changes in ownership, it is important to make sure those changes don’t impact your coverage needs. Take time with a TDIC Insurance Solutions agent to review your coverage if you have made changes to your business operations to ensure that you have adequate coverage.  

TDIC records show that one or more of your prior audits was estimated because we were unable to obtain all the requested documents needed to complete your audit(s). Since reporting payroll is a requirement to continue coverage, we are unable to offer renewal while the audits remain estimated.

If you received a notice of non-renewal (due to failure to report payroll), it is important that you pay close attention to the non-renewal effective date because all the documents requested in the letter must be submitted prior to that date to prevent the expiration of your policy. It is also important that you include a letter requesting TDIC to renew your policy. You can contact your TDIC Insurance Solutions agent at 800.733.0633 for additional information or assistance.

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