A contractor has 12 employees with a monthly payroll of $48,000. If workers' compensation insurance costs 2.5% of payroll, what is the monthly insurance cost?
Correct Answer
C) $1,200
Monthly insurance cost = $48,000 × 0.025 = $1,200. Workers' compensation is mandatory for contractors with employees.
Why This Is the Correct Answer
Workers' comp insurance cost = Payroll × Rate = $48,000 × 0.025 = $1,200. The number of employees (12) is extraneous information — workers' comp premiums are based on total payroll dollars, not headcount. This is a straightforward percentage calculation.
Why the Other Options Are Wrong
Option A: $1,500
$1,500 results from applying an incorrect rate. One common error: dividing $48,000 by 32 or multiplying by 3.125% instead of 2.5%. Another path: $1,500 ÷ $48,000 = 3.125%, not 2.5%. This does not match the given rate.
Option B: $2,000
$2,000 significantly overstates the cost. This may result from applying approximately 4.17% to the payroll, or from incorrectly using a per-employee calculation: 12 employees × ~$167 = ~$2,000. Workers' comp is calculated on payroll totals, not per employee.
Option D: $1,000
$1,000 results from applying approximately 2.08% to the payroll, or from miscalculating by dividing by 48 instead of multiplying by 0.025. This is lower than the correct answer and does not reflect the stated 2.5% rate.
Memory Technique
Workers' Comp = Payroll × Rate. Headcount is a red herring. Multiply $48,000 × 0.025 = move the decimal: $48,000 × 2.5% = $1,200.
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