Premium Audit FAQs
 Sept. 27, 2013

Thanks to CMTA's workers' compensation partner CompWest for providing sound guidance on the premium audit process.

Being ready for your final audit at the completion of the policy year requires a little preparation and a basic understanding of how your policy premium is determined and calculated. Being prepared makes for a smooth premium audit and brings the policy year to a problem free closure. If you still have questions after reviewing these Frequently Asked Questions, contact CMTA or CompWest to address your specific concerns.

Q: How is my premium determined?

A: There are two main components to determining premium:

1. The work an organization performs
2. The total compensation paid

There are more than 500 industry classifications that describe businesses and industries. Just as these industries are varied, so is the risk related to on-the-job injuries. Consequently, jobs that have a greater likelihood for injury, also have a higher cost associated with the payroll those employees earn. Insurance rating bureaus in every state develop rates for each classification by comparing statewide payroll earned to the losses experienced. The "pure premium" rates are developed by the bureau for your industry and used for further calculating the rate for your company, which are then multiplied by your total payroll.

Q: My employees perform different duties, does that change their classification?

A: Most employees are included under the "operating classification," which is the classification that describes your business as a whole. For example, a restaurant may have cooks, bakers, servers, greeters, cashiers, bartenders and general support staff. While the duties of each employee will vary, the enterprise is to operate as a restaurant and, therefore, all employees would fall under the restaurant operation and classification.

There are two standard exceptions: clerical and outside sales. These exceptions are allowed for individuals whose duties are exclusively clerical or sales. These individuals: 1) Work exclusively in areas that are separated from all other work places by buildings, floors, partitions, railings or counters; and 2) Perform work that is exclusively outside sales, clerical office or office drafting in nature.

Managers, supervisors and clerks, such as stock clerks, whose work is necessary, incidental or pertinent to any operations of the business other than clerical office, shall not be considered clerical office employees.

Q: What information will I need to prepare my payroll audit?

A: The following information is needed for an audit:

  • Payroll (journal/register) records for all employees that detail:
      1. Gross earnings
        Overtime pay
        Section 125 Cafeteria Plan deductions
        Auto, housing allowances
  • Quarterly employment reports such as Federal Form 941 or State DE6/DE9
  • General Ledger reports that show outside services, subcontractors and casual labor payments

  • Q: What payroll is excluded in calculating premium?

    A: Generally, all types of compensation are included in calculating premium. However, the primary items that can be deducted are:
  • Premium overtime
  • IRS Section 125 Cafeteria Plan deductions
  • Tips
  • Severance (earned vacation/holiday/sick portions are not excludable)

  • Q: How do I calculate premium overtime?

    A: Premium overtime is that portion of your employees' wages that you pay over their normal rate of pay. If an employee is paid $10 per hour for regular hours, and $15 per hour for overtime hours, you deduct the additional $5 from their total earnings (or total time and a half amount divided by three) to arrive at the subject workers' compensation wages. In the example above, if your employee is paid $20 per hour for double-time, we would deduct $10 from the total (or total double time amount divided by two) to arrive at the subject workers' compensation wages.

    Q: Do I need to provide workers' compensation for independent contractors?

    A: If you hire an independent contractor, you should:

    1. Obtain a certificate of insurance from the contractor. If the contractor provides you with a current certificate of insurance, you are not responsible for providing workers' compensation.

    2. If the contractor does not have a current certificate of insurance, refer to the following website and answer the questions to determine if the contractor should be treated as an employee:


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