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California Workers’ Compensation Audit Guide

By June 10, 2026Insurance

What You Need to Know About Your Final Audit

At the end of every Workers’ Compensation policy period, your insurance company will perform a final premium audit. This audit is a normal part of the Workers’ Compensation insurance process and helps determine whether your final premium should be adjusted based on your actual payroll and operations during the policy year.

Many business owners are surprised when they receive an audit request. The good news is that preparation is simple if you keep good records throughout the year.

Why Does the Insurance Company Conduct an Audit?

When your Workers’ Compensation policy begins, your premium is based on estimated payroll figures.

After the policy expires, the insurance company reviews your actual payroll and business operations to determine:

  • Actual payroll paid during the policy period

  • Employee job duties and classifications

  • Use of subcontractors or independent contractors

  • Changes in operations during the year

  • Eligibility for payroll exclusions or credits

The audit ensures that you pay only for the exposure your business actually had during the policy term.

Depending on the results, you may receive:

  • An additional premium invoice if payroll was higher than estimated

  • A premium refund if payroll was lower than estimated

Records You Should Keep Throughout the Year

Maintaining organized records will make your audit faster and easier.

Payroll Records

Keep:

  • Payroll journals

  • Payroll summaries

  • Employee earnings reports

  • Timecards

  • Check registers

  • Quarterly payroll reports

Tax Documents

Keep copies of:

  • IRS Form 941

  • IRS Form 940

  • W-2s

  • W-3s

  • 1099s

  • California DE-9 and DE-9C reports

Employee Information

Maintain records showing:

  • Employee names

  • Job titles

  • Job descriptions

  • Hire and termination dates

  • Department assignments

Subcontractor Records

If you use subcontractors, retain:

  • Collect Certificates of Workers’ Compensation Insurance from all Subs

  • Contracts

  • Invoices

  • Contractor license information

Important: If you cannot provide proof that a subcontractor carried Workers’ Compensation coverage, the auditor may include those labor costs in your payroll calculation.

Financial Records

Keep:

  • Profit and Loss Statements

  • General Ledger

  • Cash Disbursement Journal

  • Income Tax Returns (if requested)

Construction Businesses

Construction employers should also maintain:

  • Detailed timecards

  • Certified payroll records

  • Project cost records

  • OCIP/CCIP documentation when applicable

How to Prepare for the Audit

Before the auditor contacts you:

Organize Records

Gather all payroll and tax records for the policy period.

Review Employee Classifications

Make sure employee duties are accurately described. Make sure you have employees classified properly by code

Verify Subcontractor Certificates

Confirm that certificates cover the entire period when work was performed.

Separate Payroll by Job Classification

Employees performing different types of work may need payroll allocated between classifications.

Respond Promptly

Delays can lead to estimated audits and potential additional premium charges.

What Happens During the Audit?

The auditor may perform:

Telephone Audit

A brief review conducted over the phone.

Virtual Audit

Records are uploaded electronically for review.

Physical Audit

An auditor visits your business to review records and operations.

The auditor may ask questions about:

  • Business operations

  • Number of employees

  • Payroll records

  • Use of subcontractors

  • Changes in business activities

What Happens If You Do Not Cooperate?

Failure to complete a Workers’ Compensation audit can have serious consequences.

Your insurance carrier may:

  • Estimate your payroll at a higher amount

  • Issue a large additional premium bill

  • Send the account to collections

  • Report the balance as delinquent

  • Refuse to renew coverage

  • Make it difficult to obtain coverage from another carrier

An estimated audit is almost always more expensive than providing the requested records.

California Laws Regarding Workers’ Compensation Audits

California law and Workers’ Compensation regulations require insurers to conduct audits to ensure accurate premium calculations and reporting. The Workers’ Compensation Insurance Rating Bureau (WCIRB) also establishes auditing standards that insurers must follow.

The California Division of Workers’ Compensation oversees audit and enforcement activities to ensure compliance with Workers’ Compensation laws. California Labor Code Sections 129 and 129.5 authorize audit and enforcement programs within the state’s Workers’ Compensation system.

Can the Insurance Company Change My Premium After the Policy Ends?

Yes.

The final audit determines the actual premium owed for the expired policy period.

Common reasons for additional premium include:

  • Payroll higher than estimated

  • Misclassified employees

  • Uninsured subcontractors

  • New operations not disclosed during the policy period

Common reasons for refunds include:

  • Payroll lower than estimated

  • Reduced workforce

  • Proper documentation of excluded payroll

Tips to Avoid Audit Problems

✓ Maintain accurate payroll records.

✓ Keep certificates of insurance for all subcontractors.

✓ Track employee job duties throughout the year.

✓ Notify your agent when operations change.

✓ Respond quickly to audit requests.

✓ Ask questions if you do not understand what records are being requested.

Need Help?

Insurance Incorporated is available to help you prepare for your Workers’ Compensation audit before the auditor arrives. Proper preparation can reduce delays, avoid estimated audits, and help ensure that your final premium is calculated accurately.

Contact our office if you have questions workers compensation insurnace or would like a competing quote at 877-898-9333

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