Short answer
A workers comp audit for 1099 contractors can raise your premium because your policy starts as an estimate. After the term ends, the carrier audits your actual payroll. Payments to 1099 contractors who have no workers’ comp of their own may be counted as your payroll. Collecting their certificates of insurance before they start is the main way to reduce that risk. Treatment depends on your policy, state rules and the carrier’s audit findings.
Why there is a workers comp audit at all
Workers’ comp, and some general liability policies, are priced on estimated payroll or revenue at the start of the term. Nobody knows the final numbers yet, so the carrier uses your best estimate.
After the term ends, the carrier audits what actually happened. It then charges you for the difference or credits you if the estimate was too high.
Your old carrier usually still requires the audit after you switch policies. Changing carriers does not make it go away.
What the auditor asks for in a workers comp audit
Most audits follow a similar document list:
- Payroll records
- Quarterly 941 tax filings
- Owners and officers
- Job duties of employees
- Payments to subcontractors
If you used no subcontractors, the auditor typically asks you to complete a “no subcontractor” verification form.
The workers comp audit 1099 contractors trap
Many design firms use freelancers and assume they sit outside the audit. A common question is whether a 1099 counts as subcontracting. In an audit, it often does.
If you pay a 1099 contractor who has no workers’ comp of their own, the carrier may treat what you paid them as your payroll. A firm that pays a freelancer with no comp policy of their own could see the full amount added to its audited payroll.
The fix is simple. Collect a certificate of insurance from every subcontractor before they start, and keep it on file for the audit.
That step helps, but it does not remove every risk. If a subcontractor’s coverage lapses, your firm can still be exposed.
A simple example
An architecture firm hires a freelance architect who works through his own company. The firm pays him fees over the year and never asks for a certificate. At audit, the auditor asks about payments to subcontractors and finds no proof of coverage. The carrier may add those fees to the firm’s payroll and bill additional premium..
Had the firm collected a certificate showing the freelancer’s company carried its own comp, the carrier might have treated the payments differently. The outcome depends on the carrier’s rules and the state.
Why the bill shows up a year later
Audit adjustments land after the term ends, often during the next policy year. That timing confuses bookkeeping, because a charge in the current year belongs to the previous one.
Some carriers raise the premium mid-term by endorsement when exposure grows. This helps avoid a large audit bill later. Carriers handle it differently, so check how yours works.
You can dispute a workers comp audit
If the auditor used wrong numbers or misclassified work, you can file an audit dispute. Your insurance agent can help prepare it.
Common fixes include:
- A wrong class code
- Owner payroll counted when the owner is excluded
- Subcontractors counted even though they had coverage
You may be wondering whether this is something you can fight. Sometimes it is, but only when the records support your position.
How to avoid surprises at your next audit
Start with realistic payroll estimates at renewal, and update your insurance agent when you hire. You do not have to call in and report each new employee. The carrier picks up new hires at audit, so the estimate is what you control.
Keep subcontractor certificates and payroll records organized through the year. A folder you update each quarter makes the audit much easier.
What we see at Hardcover
A firm paid an architect who freelanced for them through his own company. They asked whether those fees would count as payroll. The answer depended on whether his firm carried its own workers’ comp, so we told them to get his certificate.
One client’s audit bill arrived during the next policy year. Their bookkeeper could not tell which year the charge belonged to. We walked them through the timeline, and the confusion cleared up.
What to check
- Does every subcontractor and freelancer have a current certificate on file?
- Do your payroll estimates match what you expect to pay this year?
- Is each employee assigned the right class code?
- Is owner or officer payroll treated correctly for your state and policy?
- Is your audit bill from this policy year or the prior one?
Related questions
Why did I get a bill after my workers comp audit of 1099 contractors?
Your actual payroll may have been higher than the estimate your premium was based on. The carrier may also have counted payments to uninsured subcontractors.
Do 1099 contractors count as payroll in a workers comp audit?
They can, if they do not carry their own workers’ comp. Collect their certificates before they start.
Can I dispute a workers’ comp audit?
Yes. If the numbers or classifications are wrong, you can file a dispute with supporting records.
Why am I being charged for last year now?
Audits happen after the policy term ends. The adjustment often arrives during the next policy year.