Workers' comp audit prep: a year-round playbook for small contractors

Every contractor dreads the workers' comp audit. If you keep good records year-round, the audit is a 30-minute review. If you don't, it's a 3-day reconstruction project.

Once a year, your workers' comp insurer audits you. They want to know who you employed, how much they were paid, and what classification each one falls into. Get it right, no problem. Get it wrong, and your premium adjusts upward — often by thousands.

Most small contractors treat the audit as a fire drill: 2–3 days of frantic reconstruction from paper timecards, QuickBooks reports, and memory. Here's how to turn it into a 30-minute review.

What auditors actually want

Three things, in order of importance:

1. Gross payroll by classification code. Your premium is computed as a rate × gross payroll per class. Get the classifications right.
2. Subcontractor payments + certificates of insurance. If a sub isn't insured, you're paying premium on their work as if they were your employee.
3. Overtime exclusion proof. In most states, the OT premium portion (the 0.5× on top of base) is excluded from the comp-premium calculation. You need clean records to claim it.

Year-round playbook

Every week

• Save the weekly payroll PDF + CSV from your time-tracking system. Keep them in a year-named folder.
• Note any new hires with their classification (e.g., 5183 - Plumbing, 5190 - Electrical Wiring).

Every month

• If you used 1099 subs this month, log the dollar amount paid AND confirm you have a current Certificate of Insurance on file.
• Review payroll for unusual entries — bonuses, vacation cash-out, sick pay — these are sometimes excluded from premium calc.

Every quarter

• Reconcile your time-tracking export against your QuickBooks payroll register. Mismatches now are easy to fix; year-end is brutal.
• Spot-check classifications — anyone whose duties changed mid-quarter?

Year-end (before the auditor's visit)

1. Pull total gross payroll for the year, broken down by employee.
2. Map each employee to one classification code (or split if their work mixed classifications).
3. Pull total 1099 sub payments + verify COI for each sub.
4. Compute the OT premium portion you want to exclude (the 0.5× on top of base) — your time-tracking system should show this.
5. Pull weekly PDFs into a single folder, easy to share.

Classification: the single biggest source of refunds (and penalties)

Workers' comp rates vary wildly by classification. Electrical wiring (NCCI 5190) is much cheaper than roofing (NCCI 5551). Misclassify a journeyman as the cheaper code and you save money — until the audit, when they assess back premium plus penalties.

Conversely: if you have employees doing low-risk inside work (estimators, office staff) being charged at the high field rate, you can request a reclassification and lower your premium. Most contractors never bother and overpay year after year.

The 1099 trap

If you pay a sub without a current Certificate of Insurance, the auditor treats their pay as YOUR payroll and charges you the premium. A $25,000 plumbing sub without a COI just cost you ~$1,500 in extra premium (at typical trade rates).

Mitigation: don't pay a sub their final invoice until you have their COI on file. If they let coverage lapse mid-job, you're exposed for the period they were uncovered.

Overtime premium exclusion

In most states (35+), the premium portion of overtime — the 0.5× added on top of the base rate — is excluded from the comp-premium calculation. So if Carlos earned $40/hr regular and $60/hr OT, only $40 of each OT hour goes into the comp-premium base. The $20 OT premium is excluded.

But the auditor only excludes this if YOU show them the math. Bring a report that breaks out OT premium by employee. Otherwise they default to including everything and you overpay.

How Clox helps

Clox's PDF + CSV exports break out:

• Total regular hours + gross
• Total OT hours + premium portion (the 0.5× excluded amount)
• Per-employee totals you can hand the auditor
• Per-project hours if you need to allocate to job classifications

Drop the year's worth of PDFs in a folder, share with the auditor, done.