How to Prepare Payroll Data for a Workers' Comp Audit

Workers' comp auditors require your payroll data segmented by employee classification code, with detailed breakdowns of gross wages, overtime hours and pay, officer and owner compensation, and subcontractor payments. These records must span the entire audit period and reconcile cleanly with your quarterly Form 941 filings.

Most guides on how to prepare for a workers compensation audit stop at "gather your payroll records" and move on, as if locating and organizing that data were the easy part. In practice, it rarely is. This guide covers the specific data fields auditors request, which compensation types count toward your premium and which are excluded, how classification codes drive premium calculations, the data extraction challenge that nearly every audit preparation guide overlooks, common audit findings that trace back to poor payroll data quality, and a step-by-step preparation checklist you can work through before your auditor arrives.

Whether you are pulling workers comp audit payroll data from a modern HRIS or from a stack of quarterly tax filings and payroll summaries, the real work is not just knowing what auditors need. It is getting that data out of your source documents in a format that is accurate, complete, and organized by classification.

What Workers' Comp Auditors Need From Your Payroll Data

Workers' compensation premiums are calculated directly from employer payroll data. The quality and completeness of that data is the single largest factor in whether your audit produces an accurate premium or an inflated one. According to NCCI's annual State of the Line review, workers' compensation net written premium for private carriers totaled $41.6 billion in calendar year 2024, with premiums calculated directly from employer payroll data reported during premium audits. With that much money flowing through the system, auditors have no tolerance for incomplete or disorganized records.

Here is exactly what a premium auditor will request from your payroll data:

Employee name and job title for every individual on payroll during the audit period
Classification code assignment for each employee, matching their actual job duties
Gross wages per employee per classification code, not just a company-wide total
Overtime hours and overtime wages, separated from regular wages (overtime premium pay receives different treatment in the premium calculation)
Officer and owner compensation amounts, reported separately since most states cap or set minimum payroll amounts for officers
Subcontractor payments along with each subcontractor's certificate of insurance status (uninsured subcontractors get added to your payroll for premium purposes)
Employee headcounts by classification, typically shown as an average or period-end count

The critical detail most employers miss: auditors need this data broken down by employee classification code, not in aggregate. A flat total of company-wide wages tells the auditor nothing useful. Each classification code carries a different premium rate based on the risk profile of the work performed. A clerical employee and a warehouse worker fall under different codes with vastly different rates. The classification-level breakdown is what actually determines your premium, and presenting data without it guarantees follow-up requests and delays.

The Payroll Register as Primary Source Document

Your payroll register is the primary document auditors rely on. This is the detailed record from your payroll provider, whether that is ADP, Paychex, Paycom, Gusto, or another platform, showing every employee's compensation broken down by pay period. It contains the granular, per-employee wage data that auditors need to verify classification assignments and calculate premiums. If you are unfamiliar with the specific fields found in payroll documentation, understanding payslip fields and data points provides a useful reference for what each line item represents.

Cross-Referencing With Form 941

Auditors do not take your payroll register at face value. They cross-reference it against your quarterly Form 941 filings (Employer's Quarterly Federal Tax Return) to verify that reported wages are consistent. Form 941 shows total wages paid and taxes withheld each quarter, giving the auditor an independent check on your numbers. Any significant discrepancy between your payroll records and your Form 941 totals, even a few thousand dollars on a mid-size payroll, will trigger further scrutiny, additional document requests, and potential adjustments to your premium.

But not all of these compensation elements carry the same weight. Some are included in the premium base; others are excluded entirely.

Included and Excluded Compensation: What Counts Toward Your Premium

Not all compensation carries the same weight in a workers' comp premium calculation. The auditor's job is to determine your auditable payroll, which is the total compensation that falls within the premium base after applying NCCI rules and state-specific adjustments. Correctly categorizing each compensation type before the audit determines whether you pay the right premium or overpay.

Compensation Included in the Premium Base

The following compensation types count toward your auditable payroll and directly increase your premium:

Regular wages and salaries paid to employees
Commissions earned by sales staff or other commissioned roles
Bonuses, whether discretionary or performance-based
Vacation and holiday pay
Sick pay
Overtime pay at straight-time value only (see the overtime exclusion below)

Every dollar in these categories gets multiplied by the rate assigned to the employee's classification code. Misreporting any of them inflates or deflates your premium.

Compensation Excluded From the Premium Base

These compensation types do not count toward your auditable payroll:

The overtime premium portion (the additional amount above base pay for overtime hours)
Tips and gratuities
Severance pay
Employer contributions to group insurance plans and retirement plans

These are defined exclusions under NCCI rules. Failing to separate them from included compensation means you are overpaying.

The Overtime Exclusion: Where Most Overpayments Happen

The overtime exclusion is one of the most valuable adjustments available to employers, and one of the most frequently missed. Here is how it works.

When an employee earns $30/hour and works overtime at time-and-a-half ($45/hour), only the $30 base rate for those overtime hours counts toward the premium base. The $15 premium portion per overtime hour is excluded.

For a construction company with 20 field workers averaging 10 overtime hours per week, the excluded overtime premium adds up fast. If those workers earn $35/hour, the excluded amount is $17.50 per overtime hour, per worker, per week. Over a full policy year, that exclusion can reduce auditable payroll by tens of thousands of dollars.

The catch: your payroll records must separate overtime hours and overtime premium pay from regular hours and regular pay. If your payroll reports lump all compensation into a single line per employee, the auditor has no basis to apply the exclusion, and you pay the full amount. This is why auditors specifically request payroll registers broken out by pay type, not just total compensation summaries.

Officer and Owner Compensation Caps

Most states cap the amount of officer and owner compensation that can be included in the premium base. These caps vary by state and are updated annually by the state's rating bureau or NCCI.

As a practical example: if a corporate officer earns $500,000 annually but the state cap is $250,000, only $250,000 is included in the premium calculation. The remaining $250,000 is excluded. Some states also set minimum includable amounts for officers, preventing owners from reporting artificially low compensation to reduce premiums.

You need to know your state's current officer minimum and maximum payroll limits before the audit. Reporting the full officer salary without applying the cap results in overpayment. Reporting below the minimum triggers an auditor adjustment that you will not control.

Subcontractor Payments

Payments to subcontractors who do not carry their own workers' comp insurance are included in your premium calculation as if those subcontractors were your employees. The logic is straightforward: if a subcontractor is injured on your job and has no coverage, your policy bears the risk.

Subcontractors who provide a valid certificate of insurance showing active workers' comp coverage can be excluded from your auditable payroll. This is exactly why auditors request subcontractor certificates of insurance alongside payroll records. Without the certificate on file, the auditor adds the full subcontractor payment to your premium base, regardless of whether the subcontractor actually has coverage elsewhere.

Before the audit, collect current certificates of insurance from every subcontractor you paid during the policy period. Expired certificates do not count. A certificate that lapsed mid-year means the payments made during the lapsed period get included in your premium.

These rules give you the framework for categorizing your payroll data. The next variable is which classification code each dollar falls under, because that determines the rate it is multiplied by.

How Classification Codes Drive Premium Calculations

Every employee on your payroll is assigned a classification code based on the work they actually perform. The National Council on Compensation Insurance (NCCI) maintains the standard classification system used in most states, and each code carries a distinct premium rate per $100 of payroll. That rate reflects the injury risk associated with the job type. A desk-based role and a construction role carry vastly different rates because they carry vastly different risk profiles.

The calculation itself is straightforward once you have accurate, classification-level payroll figures. Here is how it works for a small contracting firm with both office and field staff:

Step 1: Calculate manual premium by classification

Classification Code	Description	Annual Payroll	Rate per $100	Manual Premium
8810	Clerical Office Employees	$200,000	$0.25	$500
5403	Carpentry	$350,000	$8.50	$29,750
	Manual Premium Subtotal			$30,250

Step 2: Apply the experience modification rate (EMR)

The EMR adjusts the manual premium based on the employer's actual claims history compared to the expected losses for businesses of similar size and industry. It is calculated using three years of historical claims data.

An EMR below 1.0 means your claims experience is better than the industry average. You receive a discount.
An EMR above 1.0 means your claims experience is worse than expected. You pay a surcharge.

For this employer, assume an EMR of 0.85:

$30,250 x 0.85 = $25,712.50 adjusted premium

Why classification accuracy matters this much: Look at what happens if $50,000 of carpentry payroll is incorrectly allocated to the clerical classification. At the carpentry rate of $8.50 per $100, that $50,000 generates $4,250 in premium. At the clerical rate of $0.25 per $100, the same $50,000 generates only $125. The misallocation would understate the premium by over $4,000 on that single reclassification. This is precisely the type of discrepancy auditors are trained to find, and it triggers additional premium charges plus potential penalties.

The EMR itself is also affected by payroll accuracy. Because expected loss calculations are derived from reported payroll by classification, misreported payroll distorts the baseline the EMR is measured against. Inaccurate data feeds inaccurate modification factors, compounding the error across policy periods.

The critical point is that none of these calculations work with aggregate payroll totals. The premium is built classification by classification. Each code must have its own verified payroll figure for the math to hold up under audit scrutiny.

This creates a practical problem during audit preparation. Your payroll system produces registers organized by employee, pay period, and earnings type. The audit demands that same data reorganized by classification code, with included and excluded compensation already separated within each classification. The gap between how payroll data is stored and how auditors need it presented is where most employers get stuck.

The Data Extraction Step Every Audit Guide Skips

Every workers' comp audit preparation guide starts with the same advice: gather your payroll records. Most treat this as a checkbox item, something you do in five minutes before moving on to the real work. For many employers, this step is actually the hardest part of the entire audit process. The payroll register your provider generates is not organized the way auditors need it, and getting from one format to the other is where preparation stalls.

The root of the problem is the PDF. Payroll providers like ADP, Paychex, and Paycom generate payroll registers as multi-page PDF files. These reports typically list employees in alphabetical or department order with per-pay-period detail, showing gross wages, deductions, and net pay for each check date. They are built for payroll verification and recordkeeping, not for workers' comp audits. To satisfy an auditor, you need to reorganize that same data by classification code, separate overtime wages from regular wages, isolate officer compensation, and produce classification-level totals that tie to your policy. None of that is possible directly from a PDF.

Consider what a typical payroll register looks like. Your PDF lists employees alphabetically: "Adams, Sarah" with her biweekly gross pay, deductions, and net pay for the January 15 pay period, followed by "Baker, Tom" with the same layout. The report is organized for payroll verification. But the auditor needs to know: how much total payroll fell under classification 8810 (Clerical), how much under 5403 (Carpentry), how much overtime was worked in each classification, and what the officer compensation totals are per code. That reorganization requires extracting every row of data from the PDF, tagging each employee by classification, separating overtime from regular pay, and subtotaling by code. The PDF gives you none of that structure.

The scale compounds the difficulty. A standard audit covers 12 months of payroll data, but audits triggered by policy changes or disputes can span 24 to 36 months. For a company with 100 employees paid biweekly, a single year represents roughly 2,400 individual pay records spread across potentially hundreds of PDF pages. For larger employers or multi-year audits, payroll registers can run into thousands of pages. Construction companies with 10 to 20 active classification codes across multiple trades and jobsites face an even more complex reorganization task.

The workaround most employers default to is manual re-keying: opening the PDF on one screen and typing figures into a spreadsheet on the other, then sorting and subtotaling by classification code. A transposed digit in a wage amount, an employee assigned to the wrong code, overtime dollars counted as regular pay: these manual transcription errors are the leading source of premium adjustments that employers dispute after the fact.

The extraction challenge has a direct solution, and it belongs before any sorting or organizing. Converting PDF payroll data into a structured, sortable format is the prerequisite step that most audit guides skip entirely. For a detailed walkthrough of this process, see our guide to extracting payroll data from PDFs into Excel. Once your payroll records exist as usable spreadsheet data rather than static PDF pages, every downstream preparation task becomes manageable: grouping by class code, splitting overtime, verifying officer caps, and producing the summary totals your auditor expects.

From PDF to Audit-Ready Data: Manual vs Automated Extraction

There are two approaches to the extraction step, and the difference in effort is significant.

Manual Extraction

The traditional method looks like this: download or print your PDF payroll register, read each employee's record line by line, and type the relevant fields into a spreadsheet. For each entry you need to capture employee name, classification code, gross wages, overtime wages, and total compensation. Then you separate overtime from regular pay, assign or verify classification codes, and subtotal each code grouping.

For a mid-size company covering a 12-month audit period, expect 8 to 20+ hours of data entry work depending on headcount and payroll complexity. Accuracy depends entirely on the person doing the transcription. A single transposed digit or misassigned classification code can ripple through every subtotal the auditor checks. Multi-year audits double or triple the workload.

Automated Extraction

The alternative is to upload your PDF payroll register to an extraction platform that converts the unstructured PDF into a structured spreadsheet. The output preserves employee names, compensation amounts, pay periods, and other fields as typed data in columns, ready for sorting, filtering, and analysis. Classification-code assignment and subtotaling then happen inside the spreadsheet itself rather than during manual transcription, where errors are hardest to catch.

The quality of the output depends on the platform. General-purpose PDF converters often garble multi-column payroll layouts. AI-powered payroll data extraction tools purpose-built for financial documents preserve the tabular structure and handle the scale these audits require. You can specify what to extract in plain language, for example: "Extract employee name, job classification code, gross wages, overtime wages, and total compensation. Group by classification code." The platform processes PDFs up to 5,000 pages per file and handles batches of up to 6,000 files, covering even the largest multi-year audit periods. The output is a structured Excel file with natively typed values, meaning numbers arrive as numbers and dates as dates, ready for pivot tables and subtotaling without reformatting.

For premium auditors who receive payroll documentation from dozens of policyholders, the extraction challenge is multiplied. Each employer's payroll register comes in a different format from a different provider. Batch processing capabilities become essential, allowing an auditor to upload an entire audit portfolio of PDFs and extract classification-level payroll data across all of them in a single workflow.

How the Two Approaches Compare

Factor	Manual Extraction	Automated Extraction
Time required	8-20+ hours per audit year	Minutes to upload and process
Accuracy	Depends on transcriber; error-prone at scale	Consistent extraction; errors caught in review
Multi-year audits	Workload multiplies linearly	Same process regardless of volume
Classification-code handling	Codes assigned during manual entry (high error risk)	Codes preserved from source or assigned in spreadsheet (auditable)
Output format	Manually built spreadsheet	Natively typed Excel with structured columns

Where This Matters Most

For construction companies and other high-risk industries facing the most involved audits, the extraction step becomes critical. These employers often carry dozens of classification codes spanning multiple projects, trades, and jobsites. Reorganizing payroll data manually across that many codes is not just slow but practically unworkable at scale. Firms in these industries benefit most from document data extraction for construction companies that can handle the volume and complexity their audits demand.

Whether you extract data manually or with automation, the objective is the same: audit-ready payroll figures organized by classification code with overtime separated, exclusions removed, and subtotals verified. The next section covers the most common audit findings that surface when that data is not prepared accurately.

Five Common Audit Findings Caused by Poor Payroll Data

Most additional premium charges after a workers' comp audit are not the result of fraud or deliberate misreporting. They stem from payroll data that was inaccurate, outdated, or poorly organized before it reached the auditor. Knowing the most frequent findings gives you the chance to catch and correct them first.

1. Employee misclassification

This is the single most common and most costly audit finding. It occurs when employees are assigned to the wrong classification code, either because their job duties changed and the code was never updated, or because the original assignment was incorrect. A clerical worker coded as a field installer carries a drastically higher rate, overstating your premium. The reverse is worse for you: a field worker coded as clerical understates the premium base, and the auditor will charge the difference plus any applicable penalties. Misclassification directly affects your experience modification rate over time, compounding the cost across future policy periods.

2. Overtime wages not properly separated

Workers' comp premiums should be calculated on the base-rate portion of overtime pay only, not the full time-and-a-half amount. The premium portion (the extra half) is excludable. Yet many employers report gross overtime pay without separating it, inflating the auditable payroll. Some organizations have been overpaying for years without realizing the overtime exclusion exists. The fix requires isolating the premium portion of overtime in your payroll exports before the auditor arrives.

3. Officer compensation not capped

Most states impose minimum and maximum payroll amounts for included officers and business owners. When officer compensation is reported at its full value and the state enforces a cap, the excess should be excluded from the premium base. Failing to apply the cap means you are paying premium on compensation that should never have been counted. The specific cap amounts vary by state and are updated annually, so last year's figures may no longer apply.

4. Uninsured subcontractor payments included (or insured subcontractors excluded)

If a subcontractor does not carry their own workers' comp coverage, your insurer treats their payments as part of your payroll for premium calculation. Conversely, subcontractors who do have coverage should be excluded. The problem is that certificate of insurance tracking is often incomplete. Expired certificates, missing certificates, and certificates that were never requested all create discrepancies. Auditors will add uninsured subcontractor costs to your premium base and may remove insured ones you were already paying on, but only if you can produce the documentation.

5. Payroll data does not reconcile with Form 941

Auditors routinely compare your reported payroll totals against the wages shown on your quarterly Form 941 filings. When the numbers do not match, it signals that employees or compensation types may be missing from the data you submitted. The mismatch could stem from unreported bonuses, excluded temporary workers, or timing differences between pay periods and reporting quarters. Regardless of the cause, any gap between your payroll submission and your 941s will trigger additional scrutiny and potential adjustments.

All five findings trace back to the same root cause: payroll data that was not accurate, complete, or properly organized before the audit began. Establishing data validation workflows for financial compliance as a standard part of your audit preparation catches these errors at the source. When classification codes, overtime splits, officer caps, subcontractor certificates, and 941 reconciliations are verified before the auditor requests them, the audit becomes a confirmation rather than a correction.

Your Workers' Comp Audit Preparation Checklist

Use this timeline to organize your preparation from the moment you receive your audit notification through audit day. Each phase builds on the previous one, so starting early gives you room to resolve discrepancies before the auditor arrives.

4 to 6 weeks before the audit:

Collect all payroll registers from your payroll provider covering the full audit period
Gather quarterly Form 941 filings for every quarter in the audit period
Collect subcontractor payment records, including 1099s and invoices
Request certificates of insurance from every subcontractor used during the period
Confirm the audit date, format (in-person, phone, or voluntary), and which records the auditor has requested

3 to 4 weeks before the audit:

Extract structured data from PDF payroll registers into spreadsheet format (this is the step most preparation guides skip entirely)
Ensure extracted data includes columns for employee name, classification code, gross wages, overtime wages, and total compensation
Verify the extracted data is sortable and typed correctly (numbers as numbers, not text strings)
Spot-check extracted figures against the original PDFs to confirm accuracy

2 to 3 weeks before the audit:

Organize extracted payroll data by NCCI or state classification code
Separate overtime wages into base-rate portions (included in premium calculations) and premium portions (excluded)
Apply officer and executive compensation caps according to your state's rules
Verify subcontractor insurance status and categorize uninsured subcontractor payments as payroll under the appropriate class code
Flag any employees whose job duties may have changed during the audit period and confirm their classification code assignments

1 to 2 weeks before the audit:

Reconcile classification-level payroll totals against Form 941 quarterly totals (the numbers should align within a reasonable margin)
Verify employee headcounts by classification code match your records
Review your data for the five most common audit findings: misclassification of employees, overtime calculation errors, officer compensation cap omissions, subcontractor coverage gaps, and Form 941 discrepancies
Resolve any discrepancies found during reconciliation before the auditor identifies them

Audit day:

Have your classification-level summary totals printed or readily accessible alongside the detailed spreadsheet data
Prepare a reconciliation worksheet showing how your payroll register totals tie to Form 941 quarterly totals
Keep original PDF payroll registers accessible for auditor reference and verification
Have subcontractor certificates of insurance organized and available
Have a brief explanation ready for any known discrepancies (mid-year reclassifications, retroactive pay adjustments, timing differences)
Designate one person (controller, HR manager, or CPA) as the primary point of contact for auditor questions

Accurate, well-organized payroll data is the foundation of a clean workers' comp audit. The preparation work described throughout this article, particularly the data extraction and classification steps, is what separates employers who pass audits without surprises from those who face additional premium charges. When your payroll figures are extracted into structured format, organized by class code, and reconciled against tax filings before the auditor arrives, you have already done the hardest part. The audit itself becomes a verification of work you have already completed rather than a discovery process that uncovers problems you did not know existed.