A contractor completes a $150,000 residential addition. The project required 450 hours of labor at $85 per hour, plus $111,750 in materials. What is the workers' compensation premium using a rate of $3.20 per $100 of payroll?
Correct Answer
D) $1,224
Payroll = 450 hours × $85 = $38,250. Premium = ($38,250 ÷ $100) × $3.20 = 382.5 × $3.20 = $1,224.
Why This Is the Correct Answer
Step 1 — Calculate payroll (labor cost only): 450 hours × $85/hour = $38,250. Step 2 — Apply the premium formula: ($38,250 ÷ 100) × $3.20 = 382.5 × $3.20 = $1,224. Materials costs are never included in workers' compensation payroll calculations — only labor wages count.
Why the Other Options Are Wrong
Option A: $3,576
$3,576 results from incorrectly including materials in the payroll base: ($150,000 ÷ 100) × $3.20 = $4,800 — not even this figure, suggesting another calculation error. Some students use the total project value ($150,000) instead of payroll, leading to a wildly inflated premium.
Option B: $1,428
$1,428 may result from an arithmetic error in the multiplication step (e.g., 382.5 × $3.73 or a similar mistake) or from using an incorrect hourly rate. Double-checking the multiplication 382.5 × $3.20 = $1,224 confirms this is wrong.
Option C: $4,800
$4,800 results from applying the rate to the total project value: ($150,000 ÷ 100) × $3.20 = $4,800. This is the most tempting wrong answer because it uses the most prominent dollar figure in the problem. However, workers' comp premiums are based on payroll (labor wages), not total contract value.
Memory Technique
Remember: 'Workers' comp covers WORKERS, so use WORKER PAY.' Step 1: Hours × Wage Rate = Payroll. Step 2: (Payroll ÷ 100) × WC Rate = Premium. The $150,000 contract value and $111,750 in materials are decoys — cross them out on your scratch paper.
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