Home›For employers›Premium audit

How your premium is calculated and audited

By Richard Vaughn CPCU, ARM, AIS. Reviewed November 8, 2026. Richard is an insurance professional, not an attorney. This page explains the law; it is not legal advice.

Estimated going in, actual coming out

A workers' compensation policy is written on an estimate: the payroll you expect to pay in each classification over the coming year, times the insurer's rate per $100, times your experience modification. Because nobody knows the year's payroll in advance, the Insurance Code and the policy give the insurer the right to audit your records after the fact and charge or refund the difference. The audit is not an investigation; it is the second half of the pricing. It becomes an investigation only when the records do not support the estimate.

What goes into the calculation

Remuneration. The base is remuneration, which is wider than wages. Under the uniform statistical reporting plan the WCIRB files and all insurers follow (Insurance Code §11734(b), (c)), it includes gross wages and salaries, commissions, bonuses, most profit-sharing, vacation, holiday and sick pay, the straight-time portion of overtime, the market value of gifts, automobile allowances, and the value of meals and lodging provided in lieu of wages. It excludes the premium portion of overtime, tips, severance pay (other than accrued vacation and similar items), employer contributions to benefit plans, stock options, the value of an employer-furnished automobile, and the value of meals and lodging that are not in lieu of wages. Keeping payroll records that break out overtime premium and tips is worth real money at audit.

Classification. Each employee's remuneration is assigned to a classification. Most employees take the governing classification of the business. Clerical office employees (8810) and outside salespersons (8742) are the standard exceptions that can be classified separately, and the clerical exception is strict: the employee's duties must be entirely clerical and performed in an office physically separated from the operations, and an employee's payroll may not be divided between clerical and any other classification. An employee who splits time between the shop and the office is charged entirely to the operations class.

Officers and owners. Included officers, partners and LLC members have their remuneration reported subject to an annual minimum and maximum set in the statistical reporting plan and adjusted each year; for policies beginning on or after September 1, 2026 the floor is $66,300 and the cap $171,600, so a high-earning officer is charged only up to the cap and a low-paid one at least the floor. Those who have signed and had accepted an exclusion waiver are left out entirely; the exemptions page covers who qualifies.

Subcontractors. The audit covers wages paid to employees of your uninsured subcontractors (Insurance Code §11760.1(a)). A payee who did labor and for whom you cannot produce a certificate of insurance or evidence of a genuine independent business is charged as your payroll, in the class of the work they did. The independent contractors page explains the test the auditor and the appeals board apply.

Your obligations and the consequence of refusing

You must give the insurer access to your records during regular business hours throughout the policy period and for three years after it ends (Insurance Code §11760.1(b)). The insurer must have reasonable procedures for notifying you and scheduling the audit (Insurance Code §11760.1(c)). If you do not provide access after the insurer's third request over a period of at least 90 days, and have no compelling business reason, you owe total premium equal to three times the insurer's then-current estimate of the annual premium, plus the costs of the attempted audits, collectible 30 days after the insurer sends notice by certified mail (Insurance Code §11760.1(a), (d)). If you then provide access and the audit is completed, the premium is revised to the audited amount (Insurance Code §11760.1(e)). Non-cooperation is the most expensive option available.

Knowingly false statements of material fact to reduce the premium, about payroll, classifications, operations or who is an employee, are premium fraud: up to a year in county jail or a state prison term, and a fine of up to $50,000 or double the value of the fraud, whichever is greater (Insurance Code §11760(a)).

The WCIRB's role

The WCIRB does more than publish rates. It inspects risks for classification purposes and furnishes rate information to employers on request (Insurance Code §11750.3(d)), and it may initiate test audits of insured employers' payrolls within one year after a policy expires to verify that insurers are reporting correctly (Insurance Code §11750.3(f)). A classification dispute that the insurer will not resolve can be taken to the WCIRB, and from there to the Insurance Commissioner. The WCIRB also computes the experience modification from the audited payroll and losses every insurer reports, which is why an audit error in one year echoes in the modification three years later.

Preparing for the audit

Three months before expiration, reconcile payroll to the tax filings and sort it by classification. Collect a current certificate of insurance for every subcontractor who worked during the term, dated to cover the work. Write a one-line duty description for any employee whose class is not obvious. Pull the officer exclusion waivers and the insurer's acceptance. Then schedule the audit for the first weeks after expiration rather than waiting to be chased, and have the person who knows the books attend. An audit that closes quickly with a small adjustment is the one that keeps the renewal on schedule; the lapsed coverage page covers what an unpaid audit balance does to it.

Questions people ask

Richard Vaughn CPCU, ARM, AIS

Richard Vaughn spent 35 years in commercial property and casualty insurance, most of it in workers' compensation: running a self-insured group, auditing premiums, and implementing claims systems for carriers and third-party administrators. He is not an attorney. dickvaughn.com