A construction company hires 6 independent contractors for a project, paying each $2,800 monthly. If the IRS reclassifies them as employees, what additional monthly cost would the company face in employer FICA taxes (Social Security and Medicare)?
Correct Answer
C) $1,285.20
Total monthly wages: 6 × $2,800 = $16,800. Employer FICA rate is 7.65% (6.2% Social Security + 1.45% Medicare). Additional cost: $16,800 × 0.0765 = $1,285.20 monthly.
Why This Is the Correct Answer
When independent contractors are reclassified as employees, the company becomes responsible for paying employer FICA taxes at 7.65% of wages. This rate consists of 6.2% for Social Security and 1.45% for Medicare taxes. The calculation is straightforward: total monthly wages ($16,800) multiplied by the employer FICA rate (7.65%) equals $1,285.20 in additional monthly costs.
Why the Other Options Are Wrong
Option A: $1,542.60
This amount suggests a calculation error, possibly using only the Social Security portion (6.2%) without including the Medicare portion (1.45%), or applying an incorrect rate to the total wages.
Option B: $2,570.40
This amount appears to be calculated using an incorrect FICA rate, possibly mixing up different tax percentages or applying an outdated rate structure.
Option D: $1,927.80
This amount ($2,570.40) represents the combined employer AND employee FICA taxes (15.3% total), not just the employer's portion. The question specifically asks for the additional cost to the company, which is only the employer's 7.65% share.
Memory Technique
Remember 'FICA 765' - the employer FICA rate is 7.65%, which sounds like '765' when you say it quickly. Also remember '62 + 145 = 765' for the Social Security (6.2%) plus Medicare (1.45%) breakdown.
Reference Hint
Florida Construction Industry Licensing Board Study Guide - Chapter on Employment Law and Tax Responsibilities, or IRS Publication 15 (Circular E) for current FICA rates
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?