What are Premium Audits?: What to Know for your Workers Compensation and General Liability Policies.

For most business owners, the insurance audit process can feel confusing — or even intimidating. You buy a policy, you make payments all year, and then suddenly, you get a letter saying your policy is being audited. But what exactly does that mean?

If you have workers’ compensation or general liability insurance, your premium is based on estimated exposure — often payroll or gross receipts — that’s later adjusted through a premium audit. Understanding how estimated, audit, and cancellation premiums work can save you stress, surprises, and sometimes a lot of money.

Why Do Insurance Companies Audit?

Insurance is all about measuring risk, and that risk is directly tied to your company’s exposure — things like payroll, gross sales, or subcontractor costs. The challenge is that those numbers are rarely known with precision when a policy is first written.

When your agent sets up your policy, they have to estimate your annual exposure. Maybe you expect to have five employees and $250,000 in payroll — but over the course of the year, you add two more workers and your payroll grows to $325,000. That’s a big difference in risk for the insurer, and the premium you paid no longer reflects your true exposure.

That’s where the audit comes in. The audit is the insurance company’s way of reconciling your estimated exposure with your actual figures. It ensures the policy was priced fairly — not too high and not too low — based on what really happened during the policy term.

In short, premium audits exist to keep your insurance accurate. They protect both the insured and the insurer by making sure the premium paid matches the real-world level of risk.

Estimated vs. Audit vs. Cancellation Premium

1. Estimated Premium

When your policy is first written, your agent or carrier uses projected numbers — like expected payroll, number of employees, or total sales — to calculate your premium.

That’s your estimated premium, and it’s what you pay during the policy term (either in full or in installments).

For example:

If you estimate $250,000 in payroll for the year, your workers’ comp premium is based on that number. But if you actually end up paying $325,000, you’ve underpaid premiums throughout the year — and the audit will bill you for the difference.

2. Audit Premium

After your policy expires (or cancels mid-term), the carrier performs a premium audit.

They’ll verify your actual numbers — payroll, subcontractor costs, gross receipts, etc. — to determine the true exposure.

The difference between the estimated and actual exposure creates an audit premium adjustment:

If your actual exposure was higher than estimated → you’ll owe additional premium.

If it was lower → you may get a refund.

3. Cancellation Premium

If your policy cancels early (say, after six months), your earned premium isn’t just a straight 50% of the annual premium. Many policies apply a short-rate cancellation table — meaning the insurer keeps a bit more than the pro-rated amount to cover administrative costs and early termination.

So, if you cancel mid-term, expect a small penalty unless the carrier initiated the cancellation themselves.

Payroll Billing Options: Pay-As-You-Go Work Comp

Many modern carriers now offer payroll billing, often called “Pay-As-You-Go” or real-time premium reporting.

Instead of estimating your payroll upfront, your premium is calculated each pay period using actual payroll data — either entered manually or integrated with your payroll company (like QuickBooks, ADP, or Gusto).

Benefits include:

-        More accurate premiums with smaller audit adjustments

-        Improved cash flow (you pay as you go, not big chunks upfront)

-        Easier compliance if you add or remove employees mid-term

This is a great option for seasonal businesses or companies with fluctuating staff levels.

Recordkeeping Tips (Especially with 1099 Contractors)

Your audit results are only as accurate as your documentation. Keeping detailed and organized records is essential — especially if you use independent contractors (1099 workers).

If you pay contractors and they don’t have their own workers’ comp coverage, the auditor may treat those payments as payroll — and charge you premium for them.

Three ways to keep independent contractor payroll off your audit:

1)    Get a Certificate of Insurance

Obtain a current certificate of insurance from each contractor showing they carry their own workers’ compensation coverage. Make sure the policy is active during the time they performed work. Keep these certificates on file — auditors will ask for them.

2)    Pay for Their Workers’ Comp (and Withhold the Cost)

If your contractor doesn’t have coverage, you can cover them under your policy — but you should withhold the cost of that coverage from their pay and document it in a written agreement or subcontractor contract.

This shows intent that they’re independent but temporarily insured under your policy for that project.

3)    Have a Signed Work Comp Waiver

Some states allow independent contractors to opt out of workers’ compensation coverage by signing a waiver acknowledging they understand their rights but are choosing not to be covered. Keep a copy of that waiver — it’s one of the few ways to prove to the auditor that the worker truly declined coverage.

Without one of these three items, most carriers will include those contractor payments in your audited payroll — even if they’re true 1099s.

How Owners and Members Are Treated in Payroll Calculations

If you’re an owner, partner, or LLC member, your inclusion in payroll for audit purposes depends on your entity type and state rules:

Corporations: Corporate officers are typically included by default, with a minimum and maximum payroll used for premium calculations (often something like $50,000 minimum and $150,000 maximum, depending on your state).

LLCs / Partnerships: Members or partners are often excluded unless they elect to be covered, but the same min/max payroll caps apply if included.

Sole Proprietors: Generally excluded by default, but they can opt in for coverage by endorsement.

At audit, even if you didn’t take a formal salary, the insurer may still apply the state-mandated minimum payroll for any included owners. That means if you’re listed as included on your policy, you’ll be charged at least that minimum — whether or not you actually drew wages.

General Liability Premium Audits: How They Differ

Everything discussed above about how audits work applies similarly to general liability insurance — but the basis for premium and the types of policies differ slightly.

Auditable vs. Non-Auditable GL Policies

Some general liability policies are auditable, while others are not.

Auditable policies are based on variable exposures such as gross sales, payroll, or subcontractor costs. These apply to most contracting and service-based businesses — painters, landscapers, remodelers, HVAC, etc.

Non-auditable policies (sometimes called “flat-rated” policies) are based on a fixed premium that doesn’t change at the end of the term. These are common for low-exposure businesses like consultants, small offices, or retail stores written on BOPs (Businessowners Policies).

Audit Basis: Sales or Payroll

Each GL class code has a specific rating basis defined by ISO or the carrier. Common ones include:

-        Sales-based classes: restaurants, retailers, manufacturers, and wholesalers. The auditor verifies actual gross sales for the policy term.

-        Payroll-based classes: contractors, janitorial services, moving companies, and other labor-intensive trades. The auditor verifies actual payroll, similar to workers’ comp.

If subcontractors are used, and they don’t carry their own GL coverage, their cost is often included in your auditable exposure — just like uninsured subs on a work comp audit. Keeping certificates of insurance for subcontractors protects you from having their costs added to your audit.

Why It Matters

An accurate general liability audit ensures your coverage and premium truly reflect your risk. If your business grew, added staff, or expanded into new operations during the year, your exposure (and therefore premium) will change.

Understanding your audit basis — whether sales or payroll — helps you plan ahead and avoid large adjustments later.

Final Tips for a Smooth Audit

-        Keep organized records: payroll journals, 941s, W-2s, 1099s, certificates of insurance, and copies of signed contracts or waivers.

-        Don’t ignore audit requests: Failure to complete an audit can lead to premium estimates — often inflated — or even policy cancellation.

-        Communicate with your agent: If your business grows or changes mid-term, update your payroll or sales estimate so you’re not hit with a big surprise later.

In Summary

Premium audits aren’t meant to be punitive — they’re designed to ensure your insurance premium accurately reflects your actual exposure. By maintaining good records, understanding how contractors and owner payroll affect your policy, and considering pay-as-you-go billing options, you can keep your premiums fair and your coverage accurate — without surprises when audit season rolls around.

If you need professional help with your business’ insurance in the states of KS, MO, CO or AR, contact one of our licensed independent insurance agents at

Aspire Insurance Agency today!

(913) 904-1020

info@aspireins.com