A contractor employs 8 workers and has an annual payroll of $420,000. If the workers' compensation rate is 4.2% of payroll, what is the annual premium?
Correct Answer
D) $17,640
Annual premium = $420,000 × 0.042 = $17,640. California requires all contractors with employees to maintain workers' compensation insurance.
Why This Is the Correct Answer
$420,000 × 0.042 = $17,640. Workers' compensation premiums are calculated as a percentage of total payroll. The number of employees (8) is not used in the premium calculation itself — only the total payroll amount and the applicable rate matter. $420,000 × 4.2% = $17,640.
Why the Other Options Are Wrong
Option A: $18,480
$18,480 would result from multiplying $420,000 by 4.4% rather than 4.2%. This reflects a rate misread or arithmetic error and does not match the given 4.2% rate.
Option B: $19,320
$19,320 results from a higher incorrect rate (approximately 4.6%) or from incorrectly incorporating the number of employees into the calculation. Neither approach matches the straightforward payroll × rate formula.
Option C: $16,800
$16,800 results from applying a 4.0% rate to the $420,000 payroll. This is close but uses the wrong rate — it rounds down from 4.2%, producing an understated premium.
Memory Technique
Workers' comp premium formula: Payroll × Rate (as decimal). Ignore headcount for premium calculation. Convert percent to decimal by dividing by 100: 4.2% ÷ 100 = 0.042. Then multiply: $420,000 × 0.042 = $17,640.
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