Yes, you still get audited. A sole proprietor with no employees and a minimum premium policy will get an audit request just like a company with 200 people. The insurance company wants proof that the business is as small as you said it was.
Most of these audits are done by mail or phone. They are simple if your records are in order. They get expensive if they are not.
Why the insurance company audits a business with no employees
The policy was priced on the assumption that there is no payroll. The audit tests that assumption. The auditor is looking for two things: people you paid who look like employees, and subcontractors who had no coverage of their own.
Either one gets added to your policy as payroll, and you pay premium on it.
What the auditor asks for
- Your tax return for the policy period, usually the Schedule C
- 1099s you issued
- Bank statements or a check register
- Certificates of insurance for every subcontractor you paid
- A description of the work you do
Is the owner’s pay included?
That depends on the state and on whether you chose to be covered. In most states a sole proprietor is not automatically covered and can elect coverage. If you elect in, the state sets a fixed payroll amount for you, no matter what you actually earned. If you are excluded, your own pay is not counted.
Check the policy. The endorsement that includes or excludes you should be attached.
The uninsured subcontractor trap
This is where sole proprietors get hurt. You hire a helper for a few jobs and pay by check. At audit, you have no certificate of insurance for that helper. The auditor treats the payments as payroll.
Suppose you paid a helper $30,000 during the year and your rate is $12 per $100 of payroll. That is $3,600 in added premium on a policy you thought cost a few hundred dollars.
Get the certificate before the work starts. Read more about subcontractors, 1099s and the audit.
Do not ignore the request
If you do not respond, the insurance company can estimate the audit, add a noncompliance charge and cancel the policy. See what happens when you skip a workers’ comp audit.
For the full picture, read how a workers’ comp audit works.