To reduce hassle and stress, it’s good to organize your records well before an audit is required. It’s also important to keep in mind if there’s a change to your company’s ownership, corporate titles, or stock, it could affect your policy premium and should be reported immediately. You should also report large payroll changes to your broker or underwriter as they occur.

Estimated payroll can be changed during the policy period and any additional premium owed may be spread over several installments. Reporting these changes will keep the policy in line with the actual payroll figures and avoid large differences at time of audit, which can result in charges you don’t expect.

Also, identify the job duties of the employees. If you have clerical or outside sales employees, you’ll be asked to state at least three job duties that they perform (by employee).

At Audit Time

To make things go as smoothly as possible at the time of an audit, it’s good to have a person who is familiar with the business operations and familiar with the payroll records available during the process to provide records and answer the auditor's questions.

Paperwork You’ll Need

Here’s a checklist to help you gather the right resources to prepare for your audit:

  • Quarterly Tax Returns: CA State Quarterly Tax Filing (DE9/DE9C) or Quarterly Federal Tax Return (941)
  • Payroll records summarized by employee and classification codes showing gross wages, overtime wages, hours worked, and deductions

If you don’t have documented payroll, as noted above, the following records are required: 

  • Federal tax returns with all attachments (e.g., 1040 Schedule C, Corp 1120, etc.)
  • General ledger or bank statements with either the check register or all cancelled checks issued during the policy period
  • Records of cash payments

Additional Records That may be Required

  • Timecards:
    • If an employee's payroll is divided between two or more classifications, copies of their timecards and corresponding paystubs for any one (1) pay period during the policy period are required. Timecards must show hours worked in each separately classified operation and total wages earned for each operation.
    • Construction Dual Wage Payroll: You must provide copies of timecards and corresponding paystubs for any one (1) pay period during the policy period for all high-wage employees to qualify for any high-wage/low-rate classification(s), such as 5432 Carpentry and 5187 Plumbing. Timecards must show hours worked, daily start/stop times, hourly wages and description of work.
  • Records of Contract or Day Labor: Dates and amounts of payments, license numbers, and certificates of insurance
  • Forms 940 and 941
  • Forms W-2 and W-3
  • Forms 1096 and 1099
  • Federal Income Tax Return
  • List of Officers, Clerical Employees and Outside Salespersons
  • Certified Payrolls for Wrap-Up (OCIP/CCIP/SEWUP) jobs
  • General Ledger and Check Register
  • Bank Statements with Cancelled Checks
  • Profit & Loss Statement
  • Cash Disbursement Journals
  • Sales Journal/Cash Receipts
  • Job Cost Records, Contracts, & Invoices
  • Gross Receipts
  • Materials Costs