Hi, this is Alyssa Burley with Ranchemace's Media Communications and Client Services Department. Thank you for listening to today's top Ranchemace news brought to you by our Safety and Risk Management Network, Studio One. Welcome back everyone. My guest today is Rory Anderson, Account Executive in the Tree Care Group with Ranchemace.
He specializes in commercial insurance for the tree trimming industry. Today we're going to talk about the workers' compensation, Annual Audit. Rory, thanks for joining us. Hey Alyssa, thanks for having me.
It's really good to be back here at Studio One. Now, business owners are probably familiar with Annual Audits that make sure their accounting books and tax returns are accurate, but they may not be familiar with a workers' compensation audit. Can you explain what a workers' compensation audit is for our audience? Yeah, that's a great question Alyssa.
And yeah, that's what we'll discuss today. Usually when we hear the word audit, you know, it's not really a warm word that kind of makes us feel fuzzy. It sounds pretty daunting. These audits are tough.
And if you don't know what's happening, you feel confused, you feel frustrated, and you don't understand why these insurance companies people are asking you so many questions. And I just want to simplify that. So today I'm going to explain a little bit about how the process works, so that you're prepared. And I'll tell you some tips and tricks to make sure that your audits go super well, and you understand exactly what's going on.
First, can you explain how workers' compensation premiums are calculated? Yeah, absolutely. So the premium is calculated using two basic factors. The first being the type of work that each employee does, and also the payroll that the employee receives.
So you sit down with your insurance agent at the beginning of each year, and you estimate what payroll you'll have, and how to classify each employee's job. And your final worker's comp premium is based on your actual payroll and actual jobs that the people did. So at the beginning of each year, you created an estimate and you said, I think they'll be making this much money, and I'm sure they'll be doing that type of work. You describe those two things at the beginning as an estimate, but at the end, there's going to be an audit where the carrier will say, okay, what was the actual payroll and the actual jobs that the people did?
So a worker's comp audit is simply when a representative of the insurance company contacts you and audits your financials with the goal of figuring out what actually you should have paid for insurance. So you have a person who you don't know calling you asking to take a look at your books and immediately it can kind of make you feel defensive and confused, and you know, understanding it is the most important part. And that's really important to understand. The worker's compensation insurance premium is based on payroll for specific jobs.
So the insurance carrier can determine the employee's risk of getting injured. And the audit sounds like it's just a way to adjust the numbers of the employer pays based on the actual amount of risk, not just what was estimated. At what point does the audit happen? Yeah, so it generally happens about a month or two after the annual policy term is up.
So whenever your policy term is about a month later, you may receive a call from the insurance company saying someone wants to come out and do a work comp audit for you. And that's going to happen after the policy period is complete. So that's generally when the audit happens and it can be frustrating sometimes because it feels like, especially if you underestimate payrolls and end up getting a bill by the time that you get that bill, it's like four months after the policy period is over, right? So you get this bill and it's like, wait a minute, this is for last year.
And yes, it is absolutely from last year and that's why it can be frustrating. But understanding that in the end is what this podcast is all about. So hopefully you'll understand that a little bit better. So Rory, what are some of the ways an employer can make the audit go smoothly?
We want smooth. That's what we're shooting for. So the first thing is monthly payroll reporting. So if you're still paying monthly stipulated payments, it's definitely time that you get switched over to monthly payroll reporting.
It's the best way to go. Instead of paying your monthly premium based on estimated payrolls, when you're on monthly payroll reporting, you're paying your monthly premium based on actual payrolls. So there really shouldn't be any big surprise at the end of the year during the audit. So the way that it works is once a month, you'll log on to the carrier's website and report how much payroll you actually did.
And that would then generate a bill. It's super easy and for sure the best way to be positive that you're staying up to date on payrolls. And really, it's just essentially a pay as you go method rather than having to deal with overpaying or underpaying. Another key to a smooth audit is to keep really good books.
So the better books that you have, the more organized it is, the easier that it's going to be for the auditor and ultimately the easier that it's going to be on you as well. And then the last thing to know and understand about the audit is you really should know and understand your employee class codes. So if you're splitting class codes, you absolutely must maintain proper records that show segregation between classes. You really want to do this accurately because if you're not, the auditor can change the class code and say, well, no, you said that they were only doing sales, but they were also on the job site supervising and they'll just adjust that class code, which then could increase your premium at the end of the year.
And that's when you actually see those bills at the end of the year during the audit. So you always want to make sure that you understand the parameters of each class code and just make sure that you're maintaining those records accurately. Because if you don't, then the auditor will assign the payroll to the highest rated class. So it's definitely in your best interest to keep those good records.
Rory, if a tree care professional has questions about their annual workers compensation audit, what's the best way to get in touch with you? Yeah, just give me a call on my cell phone. It's 310-753-6804. Or you can also send me an email.
My email address is randerson at ranchomaysa.com. Rory, thank you so much for explaining the workers compensation audit with us. Absolutely. Thanks, Lisa.
This is Alyssa Burley with Branchia Mesa. Thanks for tuning in to our latest episode produced by Studio One. For more information, visit us at ranchomaysa.com and subscribe to our weekly newsletter.