For many Colorado business owners, few things cause more stress than a workers’ compensation insurance audit. Each year, insurers require companies to verify their payroll and employee classifications to ensure premiums accurately reflect their operations. While this process is standard, it often catches employers off guard—especially those unprepared for documentation requests or classification errors.
At Rocky Mountain Insurance Advisors (RMIA), we work closely with businesses across Castle Rock and the Front Range to simplify the audit process and prevent costly surprises. Whether you run a construction company, retail shop, or tech startup, understanding how to prepare for your annual workers’ comp audit can save you time, money, and compliance headaches.
This guide explains what the audit involves, common pitfalls, and practical steps to make the process smooth and transparent.
Understanding the Workers’ Comp Audit
A workers’ compensation audit is an annual review conducted by your insurance carrier (or their representative) after your policy term ends. Its purpose is to confirm that the payroll, job classifications, and business activities used to calculate your initial premium were accurate.
Because premiums are based on estimated payroll and risk classifications at the beginning of the policy period, insurers perform audits to reconcile estimates with actual figures. If your payroll increased or your staff’s job duties changed, your premium may be adjusted up or down accordingly.
Why the Audit Matters
- Ensures Fair Premiums: If you overpaid based on inaccurate estimates, you’ll receive a refund or credit. Conversely, if your payroll was higher than projected, you may owe an additional premium.
- Maintains Compliance: The Colorado Division of Workers’ Compensation (DWC) requires all employers with one or more employees to carry active coverage and cooperate with audits.
- Avoids Penalties: Failing to complete or accurately report an audit can result in fines or non-renewal of your policy.
According to the National Council on Compensation Insurance (NCCI), audit discrepancies occur in nearly 30% of small business policies, often due to misclassification or poor recordkeeping. Understanding what auditors look for helps you stay prepared.
Types of Workers’ Comp Audits in Colorado
Insurers use several audit methods depending on your company’s size and complexity:
Mail (Voluntary) Audit
Small businesses with predictable payrolls often receive a mail or self-audit form to complete. You’ll be asked to submit payroll records, employee classifications, and subcontractor details within a specified timeframe.
Phone or Virtual Audit
Mid-sized businesses may undergo a virtual or phone-based audit, where the auditor reviews your documents remotely. This method has become increasingly common since 2020.
Onsite (Physical) Audit
For larger or higher-risk industries such as construction or manufacturing, insurers typically conduct an in-person audit at your business location. The auditor may interview staff, tour the facility, and review financial records.
Understanding which type of audit applies to you allows you to prepare accordingly.
Documents You’ll Need for the Audit
Preparation is key to a stress-free audit. RMIA advises gathering all relevant documentation before the auditor contacts you. Typical items requested include:
- Payroll records for the policy term (by employee and department)
- Quarterly IRS Form 941s and annual Form 940
- State unemployment tax reports
- General ledger and profit/loss statement
- Certificates of insurance for subcontractors or independent contractors
- Timecards or job descriptions verifying employee duties
- Overtime details and bonus breakdowns
It’s also smart to review your original policy declarations to ensure you understand which job classifications (NCCI codes) apply. For instance, clerical workers (Code 8810) carry significantly lower risk than roofing laborers (Code 5551).
Common Audit Mistakes and How to Avoid Them
Even well-managed businesses can make unintentional errors that trigger penalties or premium adjustments. Here are the most common mistakes Colorado employers face—and how to prevent them.
1. Misclassifying Employees
Misclassification occurs when an employee’s job duties are incorrectly coded under the wrong NCCI classification. This often happens when workers perform multiple roles, such as a field technician who also handles office tasks.
Tip: Maintain accurate job descriptions and separate payroll by classification to avoid overcharges.
2. Failing to Track Overtime Correctly
Overtime pay should be reduced to the standard hourly rate before calculating premiums. If you fail to track overtime accurately, you could be overpaying.
Tip: Keep detailed time records and confirm that your payroll software distinguishes between regular and overtime wages.
3. Not Verifying Subcontractor Coverage
In Colorado, if a subcontractor doesn’t carry valid workers’ comp insurance, your business can be held liable for their coverage.
Tip: Always collect and file Certificates of Insurance (COIs) from every subcontractor. Verify that their policies remain active throughout the job duration.
4. Ignoring Classification Changes
As your business evolves, so do employee roles. For example, an office assistant who transitions into field sales may require a higher-risk classification.
Tip: Notify your insurance agent immediately of any job duty changes or business expansions. RMIA helps clients update classifications mid-term to avoid end-of-year surprises.
5. Missing Deadlines
Audits typically must be completed within 30 to 60 days. Failure to comply can result in estimated (often inflated) premium assessments.
Tip: Respond promptly to all audit requests and communicate with your agent if you need an extension.
According to the Colorado Division of Workers’ Compensation, incomplete or late audits are one of the top reasons policies are non-renewed or carriers require costly deposits for reinstatement.
How Rocky Mountain Insurance Advisors Helps Businesses Prepare
At Rocky Mountain Insurance Advisors, we help Colorado business owners approach workers’ comp audits with confidence and clarity. Our proactive approach reduces stress, minimizes discrepancies, and ensures your company remains compliant with state regulations.
Here’s how we support our clients:
- Pre-Audit Review: We review your payroll and classifications in advance to identify potential red flags before submission.
- Documentation Guidance: RMIA provides a checklist of records your insurer will likely request, helping you stay organized.
- Classification Verification: We confirm that all employees are correctly categorized under NCCI codes to ensure fair premiums.
- Subcontractor Compliance: Our team verifies COIs for all 1099 contractors to prevent surprise charges.
- Advocacy During Disputes: If your carrier’s findings don’t match your records, we help file an appeal or request a re-audit.
Our clients in Castle Rock and across Colorado often find that a brief consultation before their audit can prevent unnecessary premium adjustments and ensure compliance peace of mind.
Best Practices for a Smooth Workers’ Comp Audit
To keep your next audit straightforward and stress-free, follow these practical steps:
- Maintain year-round records. Don’t wait until audit season—track payroll, classifications, and COIs continuously.
- Review classifications quarterly. If job duties change, adjust codes promptly.
- Separate payroll by job type. This makes it easier to justify correct rates to the auditor.
- Consult your agent before the audit. A 15-minute review with RMIA can catch errors early.
- Store digital copies of all payroll and tax filings for quick reference.
Staying proactive throughout the year turns what many view as a stressful audit into a routine, manageable process.
Workers’ compensation audits don’t have to be stressful or unpredictable. With the right preparation, documentation, and expert support, you can turn them into a valuable opportunity to confirm fair premiums and maintain compliance. At Rocky Mountain Insurance Advisors, we help Colorado business owners across Castle Rock, Denver, and the Front Range simplify every stage of the audit process—from pre-audit reviews to classification verification and post-audit advocacy. Call 303-663-9457 today to schedule your workers’ comp audit consultation and ensure your business is protected, compliant, and financially prepared for the year ahead.
Prepare for your workers’ comp audit with confidence. Call Rocky Mountain Insurance Advisors at 303-663-9457 for expert pre-audit guidance and stress-free compliance support.