A contractor employs 15 workers and reports quarterly payroll of $180,000. If exempt employees earn $45,000 of this total, what is the workers' compensation premium at a 2.8% rate?
Correct Answer
D) $3,780
Workers' comp premium applies only to non-exempt payroll: ($180,000 - $45,000) × 0.028 = $135,000 × 0.028 = $3,780.
Why This Is the Correct Answer
$3,780 is correct. Workers' compensation premiums are calculated only on non-exempt payroll. The taxable payroll is $180,000 minus $45,000 (exempt) = $135,000. Applying the 2.8% rate: $135,000 × 0.028 = $3,780. This tests the critical concept that exempt employees are excluded from the premium calculation base.
Why the Other Options Are Wrong
Option A: $5,040
$5,040 is incorrect. This figure results from applying 2.8% to the total payroll of $180,000 without subtracting the exempt portion ($180,000 × 0.028 = $5,040). Forgetting to exclude exempt employee wages is the most common calculation error.
Option B: $4,200
$4,200 is incorrect. This does not correspond to any correct calculation using the given figures. It may result from using an incorrect base or an incorrect rate.
Option C: $3,500
$3,500 is incorrect. This figure does not result from the correct application of 2.8% to any logical payroll base derived from the given information.
Memory Technique
Workers' comp premium formula: (Total Payroll minus Exempt Payroll) x Rate. Subtract first, then multiply. 'Exempt employees don't count toward the premium base.'
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