A contractor employs 8 workers and pays total wages of $480,000 annually. If the Unemployment Insurance (UI) tax rate is 3.4% on the first $7,000 of each employee's wages, what is the total annual UI tax owed?
Correct Answer
C) $1,904
UI tax is calculated on the first $7,000 per employee: 8 employees × $7,000 = $56,000 taxable wages. $56,000 × 3.4% = $1,904 total UI tax owed.
Why This Is the Correct Answer
Unemployment Insurance tax is calculated on the first $7,000 of each employee's wages, regardless of their actual earnings. With 8 employees, the taxable wage base is 8 × $7,000 = $56,000. Applying the 3.4% UI tax rate: $56,000 × 0.034 = $1,904. The total annual wages of $480,000 is irrelevant since UI tax only applies to the first $7,000 per employee.
Why the Other Options Are Wrong
Option A: $3,400
This answer incorrectly calculates the tax as if there were only 1 employee earning $7,000 ($7,000 × 3.4% = $238), or uses an incorrect calculation method. It fails to account for all 8 employees in the taxable wage base calculation.
Option B: $23,800
This answer appears to incorrectly apply the 3.4% rate to a much larger wage base, possibly using the total annual wages or miscalculating the per-employee limit. It significantly overestimates the UI tax liability by not properly applying the $7,000 per-employee cap.
Option D: $16,320
This answer suggests applying the tax rate to approximately $480,000 worth of wages, which ignores the fundamental principle that UI tax only applies to the first $7,000 per employee. It incorrectly uses the total payroll instead of the capped taxable wage base.
Memory Technique
Remember 'UI 7K Cap': Unemployment Insurance tax applies only to the first $7,000 per employee, like a cap on a bottle - nothing above $7,000 per worker gets taxed.
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