A contractor employs 8 workers and has an annual payroll of $450,000. The workers' compensation insurance premium rate is 3.2% of payroll. What is the annual premium cost?
Correct Answer
A) $14,400
Annual premium = $450,000 × 0.032 = $14,400. All California contractors with employees must carry workers' compensation insurance.
Why This Is the Correct Answer
$450,000 × 0.032 = $14,400. The premium is calculated as a percentage of total payroll. The number of workers is irrelevant to this calculation — only the total payroll and the rate matter.
Why the Other Options Are Wrong
Option B: $12,600
$12,600 results from applying approximately 2.8% to $450,000, or possibly using a rounded-down rate. It does not match the 3.2% stated in the problem.
Option C: $16,200
$16,200 results from applying approximately 3.6% to $450,000, or possibly erroneously including additional costs beyond the base premium rate.
Option D: $18,000
$18,000 results from applying 4.0% to $450,000, which is higher than the stated rate. This is a common error from rounding up or misreading the percentage.
Memory Technique
Premium = Payroll × Rate. Convert percentage to decimal first: 3.2% → 0.032. Then: $450,000 × 0.032 = $14,400. Ignore the number of employees — it's a distractor.
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