The price you pay for workers' comp during the year is a guess. After the policy year ends, the insurer checks your real payroll records and settles up, and that check is the audit. Three things make the bill: more payroll than estimated, a change in your job class, and subcontractors who had no workers' comp of their own. A PEO, an outside company that runs your payroll, HR and often workers' comp, can take the first one off your plate. It doesn't make the other two go away, and it doesn't make the audit disappear.

The short version

  • What it is: your workers' comp price is set on an estimate of your payroll. After the year, the insurer checks the real figures. You pay the difference, or get a refund.
  • What makes the bill: more payroll than estimated, the auditor moving some of your workers into a costlier job category, and money you paid to subcontractors who had no workers' comp of their own.
  • What a PEO changes: a PEO, an outside company that runs your payroll, HR and benefits, typically charges workers' comp with each payroll on the wages you actually paid. So the "more payroll" part has little left to settle.
  • What's the catch: the audit still happens, on the PEO's policy. A wrong job category or uninsured subcontractors can still cost you money. And the PEO charges its own fee.
  • What to do: keep your payroll estimate up to date, collect proof of insurance from every subcontractor before they start, and if you get a bill you think is wrong, dispute it in writing.

What a workers' comp audit is

Workers' comp is the insurance that pays medical bills and lost wages when an employee is hurt on the job. Its price, the premium, is a rate for every $100 of payroll. The rate depends on the kind of work your people do. Insurers call each kind a "classification," or job class: roofing costs more than office work.

At the start of the year, the insurer multiplies your estimated payroll by the rate. The standard policy used in most states says plainly that this price "is an estimate". The final price is worked out after the policy ends, using your actual payroll and the right job classes. "If the final premium is more than the premium you paid to us, you must pay us the balance. If it is less, we will refund the balance to you."

In California, for example, the insurer may audit during the year and for up to three years after the policy ends. An audit can be a phone call, a form to fill in, or a visit to look at your payroll records, tax filings and invoices.

The bill can be large. "I've personally been hit with a $20k and you have like a month to pay it," one contractor wrote in October 2026. How long you get to pay depends on your insurer; no rule sets one deadline.

The three things that make an audit bill

1. More payroll than the estimate. If you hired, gave raises or ran more overtime than you expected, you owe premium on the extra wages. Payroll here means almost all pay: wages, bonuses, commissions, overtime, holiday and sick pay. A few things are left out. In many states, including California and New York, the extra half of time-and-a-half is free of premium, but only if your payroll records show it separately.

2. A change in your job class. The auditor checks that each worker is in the right class for the work they actually did. If some of your payroll belongs in a costlier class, the standard policy lets the insurer change it. Without records of who did what, the auditor may put everyone in the costliest class. New York's state fund says that without that split, "all your payrolls may be assigned to the highest rated classification." A remodeler in a California thread described the fight: "They wanted to stick everyone in carpentry to charge high rates all the time." His fix was to track, by the hour, what task each worker was doing.

Whether a class change reaches back to the start of the year depends on your state and on the kind of change. It is set out in the detail section at the end.

3. Subcontractors with no workers' comp. If you pay a subcontractor who has no workers' comp policy, an injured worker of theirs can end up claiming on yours. So the insurer counts what you paid them as your payroll. California law has the audit include pay earned by "any of its uninsured subcontractors." If you have no payroll records for them, the standard policy lets the insurer use the contract price. The fix is simple: before a sub starts, get a certificate of insurance, a one-page proof of their policy, and keep it on file. New York's state fund says that if you can't produce it at audit, "your policy premium will be recalculated to include them in your payroll."

Example with made‑up numbers

To show how the three add up, here is a made-up 10-person remodeling company. The rates are invented and kept round; real rates depend on your state, insurer and type of work.

The owner estimated $500,000 of payroll for the year, at a made-up rate of $4 for every $100, and paid $20,000 over the year.

Where a made-up $11,000 audit bill comes from
What the auditor foundThe made-up mathAdded to the bill
Payroll was higher than the estimate$600,000 actual vs $500,000 estimated: $100,000 more × $4 per $100$4,000
Some work belongs in a costlier job class$100,000 of payroll moved from a $4 class to an $8 class: $100,000 × $4 per $100 extra$4,000
Two subcontractors had no workers' comp$75,000 paid to them, counted as your payroll: $75,000 × $4 per $100$3,000
Total after the auditFinal price $31,000, minus the $20,000 already paid$11,000

Illustration only. Made-up company, payroll and rates, kept round; not typical or average. Real rates depend on your state, insurer and type of work. Not a quote.

Only the first line came from growth. The other two came from records: who did which work, and which subcontractors had insurance.

What a PEO changes, and what it doesn't

A PEO (professional employer organization) co-employs your staff: it puts them on its payroll for taxes, benefits and, often, workers' comp, while you still run the work. When the PEO carries your workers' comp, it typically charges it with each payroll, on the wages you actually paid. If your payroll grows, the charge grows with it, so there is little left for the year-end check to correct. That part is real.

But the policy that covers your workers is still audited. How it is set up depends on your state's rules:

  • One big policy in the PEO's name. Many states allow a master policy that covers the workers of all the PEO's clients, with payroll and claims reported together. The insurer audits that policy.
  • A separate policy for your company. California requires a separate policy for each client's workers, even when the PEO buys it. That policy is audited like any other.
  • Your own policy. In Texas, the contract can leave workers' comp with you. Then you are audited exactly as before.

Either way, your workers keep the job class for your kind of work: California classes them "as though the workers are employees of the client." Whether the PEO bills you for a difference the insurer finds is up to your contract. Ask to see that clause before you sign.

The three causes of an audit bill when a PEO carries your workers' comp
What makes the billWhose policy is auditedDoes a PEO change it?
More payroll than estimatedThe policy that covers your workers: the PEO's one big policy, or a separate policy for your company (required in California)Mostly yes. The PEO typically charges workers' comp with each payroll on actual wages, so growth is paid along the way. The audit still checks the figures
A costlier job classThe same policy. Your workers keep the job class for your kind of workNo. A wrong class can still be corrected at audit. Your contract decides whether and how the difference is billed to you
Subcontractors with no workers' compThe same policyNo. The PEO's coverage is for the workers it co-employs, not 1099 subcontractors. Ask in writing how uninsured subs are handled

Rules differ by state, and your PEO contract says which setup you have. Sources: NCCI PEO models; California Experience Rating Plan and reporting rules; Texas Labor Code chapter 91. Checked October 2026.

"No annual audits? What's the catch?"

A roofing company owner with four or five employees asked exactly this: "What's the catch? No annual audits for payroll which seems amazing but almost too good to be true."

It is partly true. When the PEO carries the coverage, you typically stop getting a year-end payroll bill from your own insurer, because you paid on actual wages all year. The catches:

  • The audit moves; it doesn't vanish. The PEO's policy is audited, and your contract decides whether a difference comes back to you.
  • Job class and subcontractors still count. Roofing is priced as roofing inside a PEO too, and a 1099 subcontractor is not one of the workers its policy covers.
  • The fee. PEOs typically charge $40 to $160 per employee per month, or 2% to 12% of payroll, for the whole package. If the audit is your only problem, pay-as-you-go billing from an insurer may fix the payroll part for less.
  • Size. Many PEOs won't take a company below a minimum number of employees.

If you have no employees

Workers' comp is for employees, and a PEO's workers' comp covers the people on its payroll for you. An owner with no employees usually has little for a PEO to do here. Some states let owners and officers be covered under a PEO arrangement, so ask.

California contractors have a firm date to plan around. Today, most licensed contractors with no employees can file an exemption. Five trades must carry workers' comp anyway: roofing, concrete, heating and air-conditioning, asbestos removal and tree service. From January 1, 2028, every active license holder must have workers' comp on file, employees or not. The only exceptions are an inactive license and a joint venture with no employees. The date was first set for 2026 and was pushed to 2028 in 2024.

If you will need your own policy, the audit applies to you too. Keep the subcontractor certificates.

How to dispute an audit bill

  1. Ask for the auditor's worksheet. It shows the payroll, the job classes and any subcontractor payments the bill is based on.
  2. Send what was missing. Certificates of insurance for subs, overtime split out, and hours by type of work often change the result.
  3. Dispute in writing, with your insurer first. In most states, job-class rules come from one national rating organization, the NCCI. Its dispute process asks you to pay the part you don't dispute and explain the rest in writing. If you and your insurer still disagree about a rating rule, such as a job class, you can ask the NCCI to review it.
  4. In California, watch the 30 days. Send the dispute in writing to your insurer's designated office. If it turns you down, you have 30 days from its written decision to appeal to the Insurance Commissioner.

Don't ignore the audit itself. In California, an employer that won't allow one can owe three times the estimated premium. Most states that use the NCCI's rules allow a charge of up to two times.

Questions to ask

Ask your insurer or agent:

  • What payroll are you estimating for this year, and can I update it if we grow?
  • Which job class is each kind of work in, and what records do you want to see at audit?

Ask a PEO:

  • Whose name is on the policy that covers my workers, and in which state?
  • If the insurer's audit finds a difference for my company, do you bill me for it? Show me where the contract says how and when.
  • Which job class will you use for my workers?
  • How do you handle subcontractors I hire who have no insurance?

The bottom line

The audit settles a price that was always an estimate. A PEO that carries your coverage typically takes care of the growth part; job classes and subcontractors are still yours to get right. For more on how PEO coverage works, see our PEO workers' compensation guide. This is general information, not insurance advice.

If you are weighing a PEO for more than workers' comp, we can connect you with our independent broker. Request a Consultation through our PEO quotes page. It takes several business days, because the broker gathers quotes on your actual employee list. The consultation is free to you. If you sign through the broker, he shares part of his fee with us.

The detail, for your accountant or broker

When a class change takes effect in California. Under the state's reporting rules (Part 3, Section VI, Rule 3), moving payroll between classes already on the policy applies from the start of the policy. A move into a more expensive class that was not on the policy usually applies only from the date the rating bureau makes it official. The exception: if the wrong class is caught within three months of when it started, the higher rate can go back to that date. A move into a lower-rated class goes back to the start of the current policy, and to a policy that expired up to 12 months earlier. A change in what the business does applies from the date it changed. The insurer must tell you in writing within 30 days.

Sources