Most business owners treat the workers’ compensation audit as a bill that shows up. It is not. It is a document request, and the number at the end is decided by paperwork you either have or do not have when the auditor asks.

Audit season runs from December through early spring for anyone on a January policy. If your renewal is January 1, your auditor is being scheduled right now. That makes this the last useful month to fix anything.

What an audit actually is

Your premium at the start of the year was an estimate, based on payroll you projected. The audit reconciles that estimate against what you actually paid people, and against which classifications that payroll belongs in.

Two things get decided:

• How much payroll there was. Mostly arithmetic, and mostly not where the money is.
• Which classification each dollar belongs in. This is where audits go wrong, and where the number can move by tens of thousands.

An auditor who cannot tell from your records which class a worker belongs in will assign the higher-rated one. That is not malice, it is the default. The burden of proof sits with you.

What counts as payroll, and what does not

This catches people every year, because payroll for workers’ compensation is not the same as payroll for the IRS. The WCIRB publishes the list. Here it is.

Included when determining premium:

• Gross wages
• Salaries
• Commissions
• All bonuses
• Most profit sharing
• Vacation, holiday and sick pay
• Overtime, the straight time portion only
• The market value of gifts
• Automobile allowances, less reimbursement for documented expenses

Excluded:

• Meals or lodging, unless the classification phraseology specifically includes them or they are provided in lieu of wages
• Tips
• The premium portion of overtime pay, meaning the increase above the regular rate
• Severance pay, except for accrued vacation, sick pay, commissions and bonuses
• Employer contributions to qualified insurance, stock or retirement plans
• Stock options
• The value of an automobile furnished to an employee
• Employee discounts, residual payments for commercials, and uniform allowances

Read the overtime line twice, because it is the most common overpayment in California.

If you pay someone $30 an hour and they work ten hours of overtime at $45, only the $30 portion counts. The extra $15 an hour is excluded. On a crew working real overtime across a year, that difference is thousands of dollars of premium you do not owe.

But it only comes off if your payroll records break overtime out separately. If your reports show one lump figure, the auditor has nothing to subtract and you pay on the whole thing. Nobody will tell you this after the fact.

The dual wage trap

Several California construction classifications are split in two by an hourly wage threshold. Same work, same crew, two different rates depending on what the employee earns.

Two examples, using the approved advisory rates effective September 1, 2026, which are benchmarks rather than what any carrier charges:

• Sewer construction splits at $45.00 an hour. Below it, class 6307 at $7.451. At or above, class 6308 at $4.117.
• Plumbing splits at $35.00 an hour. Below it, class 5183(1) at $5.716. At or above, class 5187(1) at $2.732, less than half.

Roofing and carpentry work the same way. We have written separately on roofing classes 5552 and 5553 and carpentry classes 5403 and 5432.

Here is the part that matters at audit. The WCIRB rule is explicit: assignment of the high wage classification is subject to verification at the time of final audit. If you cannot show that an employee’s regular hourly wage equaled or exceeded the threshold, that payroll goes into the low wage class and you are billed the difference.

So the cheaper classification is not something you elect. It is something you prove, with records, after the fact. Payroll detail showing the regular hourly rate per employee per period is not administrative tidiness in this situation. It is the coverage.

Subcontractors and 1099s

The other reliable source of a surprise bill.

Auditors ask for certificates of insurance for every subcontractor you paid during the policy period. Where you cannot produce one, expect that spend to be treated as payroll on your policy, in whatever classification fits the work.

This is not an edge case. It is routine, and the fix is boring: collect the certificate before the sub starts, not at audit, and keep it where you can find it twelve months later. A sub whose policy lapsed mid-job is the version of this that hurts, because the certificate you have on file was valid when you got it.

The 1099 question is getting sharper for a separate reason. SB 1444 takes effect January 1, 2027. California already made willful misclassification of an employee as an independent contractor unlawful, with civil penalties from $5,000 to $15,000 per violation and $10,000 to $25,000 for a pattern or practice. Until now those penalties could be recovered as damages payable to the worker only by the Labor Commissioner or a public prosecutor. SB 1444 changes it so each employee can recover them directly.

Which means an audit that reclassifies your 1099s as employees is no longer only a premium problem. It is a written finding, in a file, that a worker now has an easier path to act on.

What to have ready before the auditor calls

None of this is hard. All of it is easier now than during the appointment.

• Payroll reports by employee, by period, showing regular hours, the regular hourly rate and overtime broken out separately
• Quarterly DE 9 and DE 9C filings for the policy period, which the auditor will reconcile against your payroll
• Job descriptions, in plain words, for anyone whose classification is not obvious. What the person physically does, not their job title
• Certificates of insurance for every subcontractor, covering the dates they actually worked
• Your general ledger or cash disbursements, which is where the auditor finds payments you forgot about
• Officer and owner details, including who is included and who is excluded, and whether any election changed mid-term
• A record of anyone who changed roles during the year, since split payroll is allowed in some situations but only with records to support it

One more that costs nothing: decide in advance who handles the audit. One person, who has the documents and knows the operation. An auditor who gets a vague answer from whoever happened to be in the office writes down the conservative assumption.

If the bill is wrong, it is not final

Most owners pay a bad audit because they do not know it can be challenged. It can, and there is a defined process.

The WCIRB sets it out in three steps.

Disputes with your insurer go to the insurer in writing, to its designated office. Contact details are in a policyholder notice attached to your policy, titled “Your Right to Rating and Dividend Information,” under “Our Dispute Resolution Process.” This is the route for classification assignments, application of your experience modification, employment status and premium disputes.

Disputes with the WCIRB, such as a classification assigned on a WCIRB inspection report or how your experience modification was calculated, follow the process in the Uniform Statistical Reporting Plan or the Experience Rating Plan, under the section on inquiries, complaints and requests for action, reconsideration and appeals.

If you have exhausted either and still disagree, you can appeal to the Administrative Hearing Bureau at the California Department of Insurance. The appeals process is in Title 10 of the California Code of Regulations, Chapter 5, Subchapter 3, Article 9.7.

Be specific about the issue, attach the documents, and explain why you think the decision was made in error. Vague disagreement goes nowhere. A payroll register showing that six employees were above a wage threshold goes somewhere.

Where we come in

Reviewing audits is a service we provide, and it is the one we think is most undersold in this business. Brokers market renewals because renewals pay. The audit is where a meaningful number of accounts quietly overpay for years without anyone looking.

What we do on an audit review:

• Check your classifications against what your people actually do, role by role
• Check whether overtime was correctly split, and whether excluded items were wrongly included
• Check dual wage assignments against your payroll records and tell you which ones you can defend
• Identify subcontractor spend that got picked up and whether a certificate exists for it
• Tell you whether a dispute is worth filing, and help assemble it if it is

If your audit came back higher than you expected, send us the audit worksheet and your payroll summary and we will tell you whether it is right. If it is, we will say so.

Our audit and payroll review page covers how that works. For how classification and rating fit together, start with workers’ compensation.

Call us at (888) 590-2667.

This article is general information about California workers’ compensation premium audits. It is not legal advice and it is not a description of any specific policy. Payroll inclusions and exclusions, classification rules, advisory pure premium rates effective September 1, 2026, and the dispute process described are published by the Workers’ Compensation Insurance Rating Bureau of California. SB 1444 (Chapter 162, 2026) is cited from its chaptered text. Coverage and premium are determined solely by the terms of the policy you hold and the rules filed by your insurer.