Audit Preparations

Audits are a part of a policy’s cycle, but they don’t have to be a negative experience.  An informed client is a prepared client; with a proper understanding of the policy review process, audits go smoothly with few surprises.

Here are some of the most commonly asked questions regarding audits.

Why am I being audited?

• State Fund routinely conducts audits to verify an employer’s operations, determine correct premium and confirm the accuracy of the information used for calculating experience modifications and classification rates.

What records will you ask me to provide for the audit?

• Generally, clients will be asked to provide their State Quarterly Wage and Withholding Reports (DE-6 forms), payroll journals, and State Fund payroll reports, as well as 1099s and certificates of insurance for independent contractors covering the audit period. The information required for each audit may differ, and we may ask your clients to provide other records that relate to their specific type of workers’ compensation policy.

What types of wages and benefits are subject to premium?

• Gross payroll serves as the basis of premium calculations, not net payroll. The date used for gross payroll consideration is the date the check was written, not the pay period. Retirement and pension plans, in which a reduced salary funds a pension or deferred compensation plan, are still subject to premium.

Are payments made to family members subject to premium?

• As employees, family members are entitled to workers’ compensation benefits, and as such, their payments are subject to premium. (Special rules may apply to family members living in the main household while working on a family-owned farm. See the California Labor Code for other exemptions.)

What if I pay employees in cash?

• If clients pay employees in cash instead of with payroll checks, they must keep a log of the cash payments, hours worked, dates paid, amounts paid, and the first and last name of each employee. Otherwise, all cash withdrawals on the check register will be included for computing workers’ compensation premium. 

Which employees qualify as clerical (8810) and outside sales (8742)?

• Class codes 8810 and 8742 are the most commonly misunderstood and misused when reporting payroll. The use of class code 8810 (clerical) is subject to specific restrictions. It requires physically separating clerical employees from all other working areas and confining their duties to general office work.
  
  Class code 8742 includes outside sales employees who may engage in solicitation, collection activities, or client meetings outside the office, with the balance of their time spent in the office performing clerical duties. If they have duties of any other nature, including product delivery, we will classify them accordingly.
  
  When in doubt about class codes, contact a State Fund representative for further assistance.

Are contractors subject to premium?

• Payments to valid independent contractors are not subject to premium. Independent contractor status is determined on a case-by-case basis. If your clients use contractors, they will be asked to supply some or all of the following information:
• Business name.
• Business license.
• Copy of contract.
• Certificate of workers’ compensation insurance.
• Contractor’s license number.

If a construction contractor has a valid California contractor’s license, a valid certificate of workers’ compensation insurance (if the contractor has employees), or an exemption from workers’ compensation issued by the Contractor’s State Licensing Board, he or she may be considered independent.

If your clients have additional questions regarding their audit or policy, please have them contact a State Fund representative.