A California contractor's monthly payroll is $85,000. Using an Unemployment Insurance (UI) rate of 3.4%, what is the monthly UI tax owed if the wage base limit is $7,000 per employee annually and there are 10 employees earning equally?
Correct Answer
A) $198.33
Each employee earns $8,500/month ($85,000/10). UI only applies to first $7,000 annually per employee. Monthly UI wage base per employee = $7,000/12 = $583.33. Total UI wages = $583.33 × 10 = $5,833.30. UI tax = $5,833.30 × 0.034 = $198.33.
Why This Is the Correct Answer
Each employee earns $85,000 ÷ 10 = $8,500 per month. The annual UI wage base is $7,000 per employee, so the monthly taxable wage per employee is $7,000 ÷ 12 = $583.33. Total monthly taxable payroll = $583.33 × 10 = $5,833.30. Monthly UI tax = $5,833.30 × 0.034 = $198.33.
Why the Other Options Are Wrong
Option B: $238.00
$238.00 does not correspond to any standard calculation using the given inputs. It may result from using an incorrect wage base or rounding error.
Option C: $595.00
$595.00 results from applying the 3.4% rate to $7,000 × 10 = $70,000 annual wage base and then dividing by 12 incorrectly, or from applying the rate to the full monthly wage base without proper proration. The error is applying the annual cap directly rather than prorating it monthly.
Option D: $2,890.00
$2,890.00 results from incorrectly applying the 3.4% UI rate to the full monthly payroll of $85,000 ($85,000 × 0.034 = $2,890), ignoring the $7,000 annual wage base cap entirely.
Memory Technique
UI tax is a 'capped' tax: only the first $7,000 per employee per year is taxable. Always prorate annually to monthly (÷12) before calculating. The cap is the key — remember 'Cap Before You Calculate.'
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