A contractor has 8 employees earning $320,000 annually. Workers compensation insurance costs $12.75 per $100 of payroll. The contractor also pays $4,800 annually for general liability insurance. What is the total annual insurance cost?
Correct Answer
A) $45,600
Workers comp: ($320,000 ÷ $100) × $12.75 = 3,200 × $12.75 = $40,800. Total: $40,800 + $4,800 = $45,600
Why This Is the Correct Answer
The calculation has two steps. First, compute workers' compensation: divide total payroll by 100, then multiply by the rate. $320,000 ÷ 100 = 3,200 units × $12.75 = $40,800 workers' comp premium. Second, add the general liability premium: $40,800 + $4,800 = $45,600 total annual insurance cost. This two-step approach — rate per $100 of payroll plus fixed annual premiums — is the standard method for calculating contractor insurance costs on licensing exams.
Why the Other Options Are Wrong
Option B: $35,600
$35,600 results from an arithmetic error, likely miscalculating the workers' comp base or omitting part of the payroll. For example, calculating on a fraction of the payroll or using an incorrect rate would produce this lower figure. Double-checking the division ($320,000 ÷ 100 = 3,200) and multiplication (3,200 × $12.75 = $40,800) rules out this answer.
Option C: $48,800
$48,800 likely results from adding the general liability premium incorrectly or double-counting some portion of payroll. If someone calculated workers' comp at $44,000 (using a rounded or wrong rate) and added $4,800, they might arrive near this figure. Careful step-by-step calculation confirms the correct total is $45,600.
Option D: $40,800
$40,800 represents only the workers' compensation premium and omits the $4,800 general liability insurance premium entirely. This is a partial answer — a trap for test-takers who stop after the first calculation step without adding the second insurance component.
Memory Technique
Use the two-step formula: Step 1 = (Payroll ÷ 100) × Rate = Workers' Comp. Step 2 = Workers' Comp + Other Premiums = Total. Never stop at Step 1.
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A contractor has 8 employees with a total weekly payroll of $12,000. Using South Carolina's workers compensation rate of $3.50 per $100 of payroll for construction, what is the weekly premium?
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