Workers' comp audits for plumbers, without the surprise bill

Why a workers' comp audit ends in a surprise bill

Your premium at the start of the year is a deposit on a guess. The standard workers' comp policy says the premium on your information page is an estimate. The final premium is set after the policy ends, using your actual payroll and the class codes that really apply. If it's more than you paid, you owe the balance. If it's less, you get a refund.

That check is the premium audit. The math runs per $100 of payroll. Each class code has its own rate, and the carrier multiplies your payroll in each code by that rate before applying your experience mod and any credits.

So the bill grows when payroll grows. That's the most common surprise, and it isn't an error. It's how the policy is built.

Example (made-up numbers): You estimate $250,000 in payroll for the year. In March you add a fourth tech and a helper, and actual payroll lands at $340,000. At a sample rate of $5 per $100 of payroll, that's $4,500 more premium due at audit, before your mod.

The fix is to keep the estimate honest. Call your agent when you hire, add a service van, or sign a big commercial job. A mid-year update moves the deposit closer to reality, so the audit has less to catch. Our page on workers' comp insurance for plumbers covers how the premium is built, and what plumber insurance costs puts it next to your other policies.

The other surprises are harder to see coming. They come from class codes, overtime, owner pay and subs.

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Class codes: plumbing work vs. sewer and digging work

Your class code should match what each worker does, not their job title. In states that use NCCI codes, a typical plumbing shop sits in code 5183, Plumbing NOC and Drivers. NOC means "not otherwise classified."

Office staff can go the other way. Code 8810 is for clerical office employees who do office work only. A dispatcher who never leaves the office may fit. A service manager who rides along on estimates usually won't.

Splitting one tech's pay across codes takes proof

Rating rules let one worker's payroll split across codes only when your records show the actual payroll in each code for that employee. A guess at "about 30% sewer work" doesn't count.

A few states run their own code systems, including California, New York and Pennsylvania. The numbers differ there, but the same idea applies: code by the work, and keep records that prove it.

How overtime shows up on a workers' comp audit

In most states that use NCCI rules, the extra pay for overtime comes off your audited payroll. That's the "half" in time-and-a-half. The catch is that your books must show overtime pay separately by employee and in summary by class code.

If your records show overtime hours at one combined amount (straight time plus the extra), the auditor backs out one-third of that amount when you pay time-and-a-half. Records that list the extra pay on its own line are cleaner and easier to defend.

Example (made-up numbers): A tech earns $30 an hour and works 200 overtime hours at $45. The extra $15 an hour adds up to $3,000. In a state that allows the exclusion, that $3,000 can come off your auditable payroll.

Not every state works this way. Pennsylvania's manual counts extra pay for overtime as payroll, so there's no break there. See Pennsylvania plumber insurance for the state's other rules.

Ask your agent how your state handles it before you count on the credit. Most payroll services can print an overtime report by employee, so pull it before the audit, not after.

Owner and officer payroll

Whether your own pay shows up on the audit depends on how your business is set up, your state, and the forms on file.

Under NCCI-style rules, sole owners and partners can choose to cover themselves by endorsement. If they opt in, the carrier uses a set payroll amount from the state's tables, not their actual draw.

Corporate officers are usually counted, with a state-set minimum and maximum payroll for each one. Many states let officers file to exclude themselves, but who qualifies varies a lot by state. LLC members follow their own state rules too.

The surprise comes when the paperwork doesn't match the plan. You thought you opted out, but the form never got filed, so the auditor adds your pay back in. Confirm in writing whether each owner is in or out, and keep a copy of any exclusion. For the legal side of opting out, check with your state's workers' comp agency or your CPA. If you're just setting up the business, our guide to starting a plumbing business covers this step.

Uninsured subs: the biggest workers' comp audit shock

If you pay a sub or 1099 helper who has no workers' comp of their own, the auditor may count what you paid them as your payroll. The standard policy says the premium basis can include people whose injuries could make your carrier liable. It drops them only if you prove their employer had its own comp in place.

When the sub's payroll records aren't available, NCCI-style manuals count a minimum share of the contract price. In the North Carolina manual, that's at least 90% for labor only and at least 50% for labor and materials. Our page on North Carolina plumber insurance covers that state's other rules.

Example (made-up numbers): You pay a 1099 drain cleaner $40,000 for labor only over the year. He has no comp policy and never gave you a certificate. Under that rule, the auditor can add at least $36,000 to your payroll, rated for the work he did.

This charge can dwarf everything else on the audit. It's also the easiest one to prevent:

• Get a certificate of insurance (COI) that lists workers' comp, not just general liability
• Check that the policy dates cover every day the sub works for you
• Get a fresh COI when their policy renews mid-job
• File each COI with that sub's 1099 and invoices

Our guide to 1099 subcontractors and workers' comp walks through the full share table, state employee tests, and what to do when a sub has no policy. For reading the certificate itself, see certificates of insurance for plumbers.

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Ohio plumbers: the state fund and the true-up

Ohio is a monopolistic state. Unless they qualify to self-insure, Ohio employers pay premium into the state insurance fund run by the Ohio Bureau of Workers' Compensation (BWC), not to a private carrier.

Instead of a carrier audit after each policy year, private employers file a payroll true-up with the BWC. For policy years starting July 1, 2024 and later, it's due Aug. 31, with no grace period.

The BWC can also audit your books at any time. Ohio employers must keep payroll records for at least five years, split by class code if they have more than one. See Ohio plumber insurance for how the state fund fits with the rest of your coverage.

Records that keep a premium audit clean

Most audit trouble comes from missing paper, not wrong numbers. When the auditor can't verify something, the gap usually gets filled against you.

Keep these in one folder all year:

• Payroll register or summary for the full policy period
• Quarterly Form 941 returns and state unemployment reports
• W-2 and W-3 totals
• Overtime pay listed separately by employee
• A one-line job description for each worker
• Hours by type of work for anyone who splits plumbing with sewer or digging jobs
• A list of every sub and 1099 payee, with amounts paid
• A COI for each sub, covering the dates they worked
• Your general ledger or check register for labor payments
• Owner and officer election or exclusion forms

The standard policy lets the carrier audit your records during the policy period and up to three years after it ends. Keep these files at least that long. Ohio's rule is five years.

The audit itself may come by mail, online, by phone or in person, depending on the carrier and the size of your payroll. Answer what's asked, send copies rather than originals, and keep a record of what you sent.

The verdict on keeping your workers' comp audit clean

A workers' comp audit only feels like an ambush when the paperwork falls behind the business. For a plumbing shop, the big swings come from growth, sewer or digging work coded as plumbing, overtime that isn't split out, owner forms that never got filed, and subs without comp.

Handle those during the year and the audit becomes a check-in. Update your agent when you hire, collect a COI before any sub starts, and keep one folder of payroll records ready. As you add your second truck or your first commercial contract, have your class codes and estimate reviewed at renewal. As an independent agency, we can shop your comp across the carriers we work with and review last year's audit at the same time. Start with a free, no-obligation quote.

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