Short answer: the premium on a workers’ comp policy is an estimate. After the policy year ends, the insurance company audits the payroll you paid in each class code and bills or refunds the difference. Surprise audit bills almost always come from one of three things: payroll grew and nobody updated the policy, an employee’s work belongs in a higher-rated class, or subcontractors could not show their own certificates of insurance.
All three are fixable before the audit, and most of them are fixable during the policy year. This guide covers how the audit works, what counts as payroll under the rules Illinois policies follow, and what to do if you think the result is wrong. If you want to see what an audit could look like for your own numbers, the calculator below runs it.
Estimate Your Audit
How a Workers’ Comp Audit Works
Your policy’s declarations page lists an estimated payroll for each class code and a rate per $100 of payroll for each class. The premium you pay during the year is built from those estimates, adjusted by your experience mod if you have one. When the policy expires, the insurer asks for your actual payroll records for the same period and recalculates the premium on what you paid.
Smaller accounts are usually audited by mail, phone or a virtual meeting; larger ones may get an auditor on site. Either way, expect to be asked for:
- Payroll registers or a payroll service report covering the exact policy dates, by employee
- Federal Form 941 and your Illinois unemployment wage reports, which the auditor uses to check totals
- Job descriptions or duties for each employee, so each person lands in the right class
- Overtime records, if you want the overtime premium excluded
- Payments to subcontractors, 1099s, and a certificate of insurance for each sub
- Owner and officer names, titles, pay and whether each is included or excluded
Answer the audit request. A business that does not cooperate can be billed on an estimate that is rarely in its favor, and for policies in the Illinois assigned risk plan, the final premium is based on actual payroll under the plan’s rules (50 Ill. Adm. Code 2904.120), so the audit is how that premium gets settled.
What Counts as Payroll
Illinois is an NCCI state, and most Illinois workers’ comp policies are rated under NCCI’s Basic Manual. Its payroll rules are more specific than “gross wages,” and a few of them work in your favor if your records are set up for them.
| Item | How it is usually treated |
|---|---|
| Wages, salaries, commissions and bonuses | Included |
| Straight-time pay for overtime hours | Included |
| The extra “premium” part of overtime pay | Excluded, if your records show it by employee and by class |
| Shift differentials | Included (they are not overtime) |
| Corporate officers | Actual pay, held between a yearly minimum and maximum; an officer with no salary is charged the minimum |
| Sole proprietors and partners who elect coverage | A flat payroll amount set each year, not their actual draw |
| Uninsured subcontractors | Added to your payroll, based on the sub’s payroll records or what you paid them |
| Insured subcontractors with a valid certificate | Not charged to you |
Overtime: an example
An employee who earns $10 an hour works 4 overtime hours at $15 an hour. The overtime pay is $60. The straight-time part, 4 hours at $10, is $40 and stays in payroll. The extra $5 an hour, $20 in total, is the overtime premium and can be excluded. Multiply that by a crew working steady overtime all year in a high-rated class and the exclusion is worth real money, but only if your payroll system separates the premium portion by employee and by class code. A single “overtime” total does not qualify.
Class Codes Decide the Rate
Every dollar of payroll is assigned to a class code, and the rate per $100 for roofing can be many times the rate for clerical work. Three rules cause most of the class-code surprises at audit.
- Clerical and outside sales are only for people who do nothing else. The low-rated clerical office (8810) and outside sales (8742) classes cover employees whose only duties are clerical or outside sales. An office manager who also runs to job sites or works in the shop goes into the business’s main class.
- Splitting one person’s payroll takes time records. An employee who does two kinds of work can have their payroll divided between two classes only if both classes apply to your business and your records show the actual hours and pay in each. A percentage estimate is not enough; without the records, all of that employee’s payroll goes to the higher-rated class.
- The business is classified by what it does. If your operations changed during the year (you added installation work to a retail store, for example), the auditor will classify the payroll for the new work under the class that fits it, even if that class is not on your policy.
The reverse happens too. Employees coded into a higher-rated class than their duties warrant cost you money every year, and Illinois law requires insurers to apply correct classifications and refund the excess premium when they did not (215 ILCS 5/462b).
Subcontractors: The Biggest Audit Surprise
When you pay a subcontractor, the auditor asks for that sub’s certificate of insurance. If the sub had its own workers’ comp policy in force for the whole time it worked for you, its payroll stays off your policy. If it did not, the insurer treats those payments as your payroll, charges your rate on them, and bills you for the difference. In a busy year that one adjustment can be larger than the original premium.
In construction it goes further than premium: under Section 1(a)(3) of the Workers’ Compensation Act, a contractor can owe comp benefits to an uninsured subcontractor’s injured employees. Our posts on how subcontractors affect your coverage and on owner-operators and ghost policies cover the certificate side in more detail.
- Collect the certificate before the sub starts, not when the audit letter arrives.
- Check that the policy dates cover every day the sub worked for you, and get a new certificate when their policy renews.
- Keep certificates with the payment records for each sub, by policy year.
- Write the insurance requirement into your subcontract, along with a chargeback for any premium you are billed because the sub was uninsured.
How to Avoid a Surprise Bill
- Update the estimate when payroll moves. If you add a crew or a location mid-year, ask for an endorsement to raise the estimated payroll. You pay more now instead of all at once later, and the policy reflects what you do.
- Set aside the difference. If you know payroll is running ahead of the estimate and you do not want to change the policy, set aside your rate times the extra payroll each month.
- Track overtime premium separately. Ask your payroll provider to report it by employee and class.
- Keep time records for anyone who does two kinds of work. Without them, their pay goes to the higher-rated class.
- Collect certificates continuously. One missing certificate can outweigh every other audit adjustment.
- Review the audit worksheet before you pay. Check the policy dates, the class for each employee, officer treatment and every sub the auditor added.
If You Disagree With the Audit
Start by asking the insurer for the auditor’s worksheet and the reason for each change. Many disputes end there: a certificate the auditor did not have, an employee placed in the wrong class, or payroll from outside the policy dates. Send the missing documents and ask for a revised audit.
If that does not resolve it, Illinois gives you a formal path. Under 215 ILCS 5/462, anyone aggrieved by how a rating system was applied can ask the insurer or the rating organization for a review in writing; if there is no action within 30 days, you can treat the request as rejected and appeal to the Director of Insurance within 30 days after that. NCCI also runs a dispute resolution process for classification and rating questions. While a dispute is open, pay the part of the bill you do not dispute so the policy is not cancelled for nonpayment.
Frequently Asked Questions
Why did my workers’ comp audit say I owe money?
Usually because the payroll you paid was higher than the estimate on the policy, some payroll was placed in a higher-rated class than you expected, or subcontractors you paid could not show their own workers’ comp certificates and were added to your payroll.
What records do I need for a workers’ comp audit?
Payroll reports for the exact policy period by employee, your federal 941s and Illinois unemployment wage reports, job duties for each employee, overtime records, payments to subcontractors with their certificates of insurance, and the names, titles and pay of owners and officers.
Is overtime included in workers’ comp payroll?
The straight-time part is. The extra premium part of overtime pay can be excluded if your records show it separately by employee and by class code. Shift differentials are not overtime and stay in payroll.
Do I pay workers’ comp on 1099 subcontractors?
Not if they carried their own workers’ comp for the whole time they worked for you and you have the certificate. If they did not, the insurer generally adds what you paid them to your payroll at audit and charges your rate on it.
Can I get money back from a workers’ comp audit?
Yes. If your actual payroll came in below the estimate, or employees were in a higher-rated class than their work called for, the audit produces a return premium. Illinois law requires insurers to refund premium charged because of an incorrect classification or payroll.
Can I split one employee’s payroll between two class codes?
Only if both classes apply to your business and your records show the actual hours and pay for each kind of work. An estimated percentage is not accepted; without the records, the whole payroll goes to the higher-rated class.
How do I dispute a workers’ comp audit in Illinois?
Ask the insurer for the audit worksheet and send any missing records. If that fails, request a written review under 215 ILCS 5/462; if the insurer or rating organization does not act within 30 days, you can appeal to the Director of Insurance. Pay the undisputed part of the bill in the meantime.
This article provides general educational information, not legal or accounting advice. Payroll and classification rules are summarized from NCCI’s Basic Manual rules as commonly applied in Illinois, and individual policies and insurers can differ. Your policy, the applicable manual rules and your insurer’s audit decide the result.
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