A contractor employs 8 workers and pays $125,000 in annual wages. If the workers' compensation rate is $3.50 per $100 of wages, what is the annual premium?
Correct Answer
B) $4,375
Workers' compensation premium calculation: ($125,000 ÷ $100) × $3.50 = 1,250 × $3.50 = $4,375 annual premium.
Why This Is the Correct Answer
Option B is correct because workers' compensation premiums are calculated by dividing the total annual wages by $100, then multiplying by the rate per $100. The calculation is ($125,000 ÷ $100) × $3.50 = 1,250 × $3.50 = $4,375. This is the standard method used by insurance companies to determine workers' compensation premiums based on payroll exposure.
Why the Other Options Are Wrong
Option A: $4,500
Option D ($5,250) is incorrect because it significantly overestimates the premium, possibly from using a rate of $4.20 per $100 instead of the correct $3.50 rate.
Option C: $3,500
Option C ($4,500) is incorrect because it overestimates the premium by approximately $125, possibly from rounding errors or using an incorrect rate calculation.
Option D: $5,250
Option A ($3,500) is incorrect because it appears to be calculated using a rate of $2.80 per $100 instead of the given $3.50 rate, resulting in an undercalculated premium.
Memory Technique
Remember 'Divide by 100, then Multiply' - think 'D100M' to recall the two-step process for workers' compensation premium calculations.
Reference Hint
Florida Building Contractor's Reference Manual - Chapter on Insurance Requirements and Workers' Compensation calculations
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