A contractor has 10 employees with an average annual salary of $45,000. The workers' compensation rate is $12.50 per $100 of payroll. What is the annual workers' compensation premium?
Correct Answer
D) $56,250
Total payroll = 10 employees × $45,000 = $450,000. Premium = ($450,000 ÷ $100) × $12.50 = 4,500 × $12.50 = $56,250. Workers' comp rates are expressed per $100 of payroll.
Why This Is the Correct Answer
Option D is correct because the calculation follows the standard workers' compensation premium formula. First, calculate total annual payroll: 10 employees × $45,000 = $450,000. Then apply the rate of $12.50 per $100 of payroll: ($450,000 ÷ $100) × $12.50 = 4,500 × $12.50 = $56,250. This represents the proper method for calculating workers' compensation premiums based on payroll exposure.
Why the Other Options Are Wrong
Option A: $12,500
Option B ($12,500) results from incorrectly applying the $12.50 rate directly to the number of employees (10 × $12.50 × 100) or misunderstanding the rate structure. This ignores the actual payroll amount and doesn't follow the per-$100-of-payroll calculation method required for workers' compensation premiums.
Option C: $5,625
Option A ($5,625) represents only one-tenth of the correct premium. This error occurs when someone miscalculates the total payroll as $45,000 (single employee salary) instead of $450,000 (total for all 10 employees), then applies the workers' compensation rate to this incorrect base amount.
Memory Technique
Remember 'PPR': Payroll × People, then Rate per $100. First get total Payroll (salary × People), then divide by 100 and multiply by the Rate.
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