Workers’ Comp Audit Subcontractors: What Business Owners Must Know Before Filing

Workers’ comp audits are stressful enough. Add subcontractors, and it can feel impossible to know what counts, what does not, and why your carrier is asking for so much paperwork.

Carriers often include subcontractor or contract labor in a premium audit unless you can prove the subcontractor had their own workers’ comp coverage during the time they worked for you. If you cannot, the auditor may treat those payments as payroll exposure and charge an additional premium.

This step-by-step guide explains what workers’ comp is, what “1099” really means, how subcontractors impact audits, and the exact documentation you should collect to reduce surprises.

1) What is workers’ compensation, and who does it apply to?

Workers’ compensation (workers’ comp) is insurance that helps cover medical care and wage replacement for employees who get hurt or sick because of their job. It’s generally required by state law for most employers (with some exceptions that vary by state and business size). 

Does workers’ comp apply to employees only or subcontractors as well?

• Employees: Yes, they’re typically covered under your policy.
• Subcontractors / independent contractors: Often not covered under your policy if they truly operate as independent businesses and carry their own workers’ comp coverage.
• But here’s the audit catch: if a subcontractor does not have their own workers’ comp coverage (or you can’t document it), auditors may include what you paid them as premium-bearing labor. 

How do you know the difference between an employee and a contractor?

There isn’t one universal test because workers’ comp is state-based, but two practical lenses help:

1. Tax lens (IRS): The IRS says worker status depends on the degree of control and independence in the relationship, not the label you use.
2. Workers’ comp lens (carrier/state): Even if someone is paid as a contractor, the carrier may treat them as premium-bearing unless you can show they’re a separate business with proper coverage (most commonly, valid COIs).

Bottom line: “They’re a subcontractor” is not enough. Your documentation is what protects you in a workers’ comp audit subcontractors scenario. RPM emphasizes audit readiness for reviews as part of our Pay As You Go service.

2) What is the “1099 law” and who falls under it?

Business owners often say “1099 law,” but what they usually mean is IRS reporting rules for paying nonemployees.

If you pay someone who is not your employee for services, you may need to report it on Form 1099-NEC.

The IRS instructions state you generally file Form 1099-NEC when, in the course of your business, you pay at least $600 for services performed by someone who is not your employee (and certain other payments). 

Who can be a “1099 contractor”?

Common examples include:

• independent tradespeople
• subcontractor companies
• freelancers/consultants
• owner-operators providing services

Critical clarification

A 1099 does not automatically exempt subcontractor labor from a workers’ comp audit. It’s a tax reporting method. Your carrier’s audit rules focus on exposure and coverage documentation. That’s why carriers commonly ask for subcontractor COIs and payment records during a workers’ comp audit subcontractors review.

3) Why subcontractors can raise your audit premium (the “why” business owners need)

Carriers generally include 1099/contract labor in the audit unless the policyholder can show the contractor carried their own workers’ comp coverage during the policy period. This approach exists so:

• people doing work are protected if injured, and
• coverage responsibility is assigned to the correct party.
• If you cannot show coverage, the audit may include all or part of the subcontract cost and apply premium accordingly.

RPM’s Audit Reviews service is designed to help policyholders identify why an audit changed (including 1099/subcontractor inclusion), review class codes and payroll data, and understand what documentation may be needed to correct errors or support a dispute.

4) Pros and cons (audit-wise) of hiring subcontractors

Hiring subcontractors can be a great business decision, but it changes your audit risk profile.

Pros

• Flexible staffing for seasonal or project-based work
• Specialized skills without long-term payroll commitments
• Less internal admin compared to hiring and onboarding employees.

Cons (specifically for workers’ comp audits)

• Documentation burden: you must collect and track COIs and work details
• Premium surprises: missing COIs can cause major audit increases 
• Classification complexity: if the auditor can’t tell what work was performed, it may be assigned to a higher-rated class code
• Dispute effort: once an audit is finalized, correcting missing documentation can take time

Inclusion of 1099 wages at audit can result in a remarkable amount of additional premium, and policyholders are often confused because they believe Pay As You Go prevents this. (This is exactly why education and documentation matter.) Even with Pay As You Go, audits still happen, and missing subcontractor documentation is one of the fastest ways to trigger an unexpected audit bill.

5) Checklist: what a subcontractor should provide to prove they are properly “1099 covered”

If you want to reduce workers’ comp audit subcontractors surprises, collect these before the subcontractor starts work:

Subcontractor document checklist

1. Workers’ Compensation Certificate of Insurance (COI)
   • Must be valid during all days worked through your policy term
   • Must specifically show Workers’ Comp coverage
   • Keep it on file and track expiration dates
2. General Liability COI (often requested alongside WC COIs)
   • Many businesses request GL to reduce broader risk and meet contract requirements 
   • W-9 (so your bookkeeping and 1099 reporting is clean)
3. Written subcontractor agreement
   • Clarifies they are a separate entity providing services (not functioning as part of your business)
4. Invoices that clearly separate labor vs materials
   • If materials are not clearly separated, an auditor may include too much of the invoice as labor exposure
5. Proof they’re a separate entity
   • Business name, EIN, business license if applicable, and where/when/how the work was done (helps support independent status)

RPM tip you can implement immediately: Create a simple “Subcontractor Packet” requirement (COI + W-9 + contract + invoice format rules) and do not allow work to begin until the packet is complete.

 

6) Documents the business owner must keep (and what you’ll likely submit during the audit)

Auditors typically ask for records that prove:

• who you paid,
• what the payments were for,
• what work was performed,
• and whether subcontractors had valid coverage.

Business owner audit file checklist

• Subcontractor master list (name, trade, dates worked, job sites, total paid)
• All subcontractor COIs (workers’ comp, plus GL if applicable) 
• Contracts / agreements
• Invoices with labor vs materials clearly shown
• Proof of payment (checks/ACH records)
• General ledger / cash disbursement journal / check register
  (Frequently requested for subcontractor payment verification.
• Payroll reports + tax forms for employee payroll confirmation
• 1099 records (to support tax reporting consistency)

Keep 1099/contract labor recorded separately from employee payroll reports. It reduces confusion and makes audits easier.

Where RPM helps: If you are an RPM client, Pay As You Go reporting and RPM’s audit support are built to make it easier to gather clean payroll data and respond to carrier requests with less back-and-forth.

7) Workers’ Comp Audit Terms, Explained

This is the section that prevents “I didn’t know that could change” audit stress.

Officer minimums (and maximums)

Many states apply minimum and maximum payroll limits for executive officers, partners, or owners when they are subject to workers’ comp coverage. That means the payroll used for premium calculations may be set to a minimum or capped at a maximum, depending on the rules. 

Class code allocations

Workers’ comp pricing depends heavily on class codes, which group job duties by risk. Some states generally assign one governing class code, while allowing additional class codes when rules are met and records support the split. 

Why this matters at audit: If your payroll or subcontractor duties are not clearly documented, payroll can be pushed into a higher-risk (higher-cost) classification.

Experience mod (modification factor)

Your experience modification factor (mod) adjusts your premium based on your loss experience compared to similar businesses. NCCI’s “ABCs of Experience Rating” explains experience rating as a method to tailor costs to an employer’s characteristics and loss experience. 

Net rate (why Pay As You Go can still end with an audit bill)

Think of your final premium as a stack of variables, not just payroll:

• base rates + class codes
• audited payroll and allocations
• experience mod
• fees/assessments, and sometimes credits/debits

Some net-rate adjustments (fees, discounts, factors) may not be disputable, yet still impact the audited premium. That’s why an audit bill can happen even when payroll has been handled consistently.

8) Step-by-step: how to prepare for a workers’ comp audit with subcontractors

Step 1: Build your subcontractor intake process (before work begins)

• Collect COIs (WC, and GL if required)
• Get a W-9
• Sign a contract
• Require invoices with labor/materials separated

Step 2: Track subcontractor work like you would track payroll

• Maintain a subcontractor log (dates, job sites, scope of work)
• Save every invoice and tie it to a payment
• Update COIs before they expire

Step 3: Pre-audit cleanup (monthly or quarterly)

• Reconcile your subcontractor list to your ledger
• Flag missing COIs early (this is where most premium surprises begin)

Step 4: When the audit notice arrives, submit clean documentation

Audit prep guidance commonly calls for subcontractor COIs and accounting records (ledger/check register), so having these organized speeds everything up. 

Step 5: If you receive a large audit bill, check for 1099/subcontractor inclusion first

Ask for:

• the auditor’s worksheets
• the subcontractor labor list they included
• what documentation they say is missing

Then compile COIs, invoices, contracts, and proof of payment to support a dispute if appropriate.

If you want a simpler, faster audit process, contact RPM to get support from dedicated audit specialists who can help you get organized, reduce back-and-forth with your carrier, and spot common 1099/subcontractor issues early. And if you’re also looking to make workers’ comp payments easier year-round, RPM’s Pay As You Go service helps align premiums with actual payroll while keeping you audit-ready.

9) FAQs: Workers’ Comp Audit Subcontractors

Are subcontractors always included in a workers’ comp audit?

Not always. If you can provide valid workers’ comp COIs covering the days worked, subcontractor payments are often excluded. If you cannot, payments may be included as premium-bearing exposure. 

Does paying someone as a 1099 automatically protect me at audit?

No. A 1099 is a tax form. Audit treatment depends on coverage and documentation, not the label.

What documents matter most to keep subcontractors from affecting the audited premiums?

The single biggest item is a valid workers’ comp COI covering the policy period, backed up by contracts, invoices, proof of payment, and clear work descriptions. 

Why did the auditor include the full subcontractor invoice amount?

If invoices don’t separate labor vs materials, auditors may treat more of the amount as labor exposure.

What are officer minimums?

Many states apply minimum (and maximum) payroll limits for certain owners/officers when calculating workers’ comp premiums. 

What’s a “class code allocation”?

It’s how payroll is assigned to job classifications. Without proper records, payroll can be assigned to more expensive classifications. 

What is an experience mod and why does it matter at audit?

It’s a rating factor tied to loss experience that can raise or lower your premium compared to similar businesses. 

How can RPM help with workers’ comp audit subcontractors issues?

RPM can help you prepare and organize the documentation your carrier expects and review audit results to identify 1099/subcontractor inclusion issues, class code problems, or payroll reporting gaps before they turn into costly surprises. Contact us to know more!

10) How to avoid the most common subcontractor audit mistake

Most workers’ comp audit subcontractors problems come down to one thing: missing or incomplete documentation.

If you want fewer surprises:

• collect COIs before work begins
• track dates and scope of work
• keep invoices and proof of payment clean
• separate labor vs materials
• keep contract labor records separate from employee payroll reporting

And if you want expert backup, Reliable Premium Management can help policyholders understand what carriers look for, identify likely drivers of audit changes (like 1099 inclusion), and support a cleaner, less stressful audit process. Contact our team to get started today!