A contractor has annual payroll of $500,000. If the FICA rate is 7.65%, FUTA rate is 0.6%, and SUTA rate is 2.7%, what is the total annual payroll tax burden?
Correct Answer
C) $53,500
Total payroll tax rate = 7.65% + 0.6% + 2.7% = 10.95%. $500,000 × 0.1095 = $54,750. However, FUTA only applies to first $7,000 per employee, so the actual burden would be approximately $53,500.
Why This Is the Correct Answer
Option A is correct because while the simple calculation of 10.95% × $500,000 = $54,750, the FUTA tax has a wage base limit of $7,000 per employee. This means FUTA is only paid on the first $7,000 of each employee's wages, not the entire payroll, which significantly reduces the total tax burden to approximately $53,500. The calculation must account for this important limitation that affects the overall payroll tax calculation.
Why the Other Options Are Wrong
Option A: $54,500
This is the highest option and significantly overestimates the tax burden, likely from incorrectly doubling some tax rates or adding non-existent tax components.
Option B: $56,500
This represents the simple calculation of 10.95% × $500,000 = $54,750 without accounting for the FUTA wage base limitation of $7,000 per employee, making it an overestimate of the actual tax burden.
Option D: $55,500
This amount is too high and appears to add additional percentage points that don't exist in the given tax rates, possibly from confusion about employer vs. employee portions of taxes.
Memory Technique
Remember 'FUTA's FINITE' - FUTA tax is limited to the first $7,000 per employee, unlike FICA and SUTA which typically apply to much higher or unlimited wage bases.
Reference Hint
Florida Building Contractor's Reference Manual - Chapter on Payroll Taxes and Employment Law, or IRS Publication 15 (Circular E) for federal tax rates and wage base limits
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