A contractor hires 3 workers as independent contractors, paying each $2,400 per month. If reclassified as employees, what would be the total monthly unemployment tax liability assuming a 2.7% state rate?
Correct Answer
C) $194.40
Total monthly wages = 3 × $2,400 = $7,200. Unemployment tax is typically paid only on the first $7,000 per employee annually. Monthly portion: ($7,000 ÷ 12) × 3 employees × 2.7% = $1,750 × 3 × 0.027 = $194.40.
Why This Is the Correct Answer
The correct answer properly recognizes that unemployment tax is only paid on the first $7,000 of annual wages per employee, not the full salary. The calculation correctly determines the monthly taxable portion ($7,000 ÷ 12 = $583.33 per employee), multiplies by 3 employees ($1,750 total), and applies the 2.7% rate to get $194.40. This reflects the wage base limitation that caps unemployment tax liability.
Why the Other Options Are Wrong
Option A: $259.20
This amount is too low and appears to calculate tax on only 2 employees rather than 3, or uses an incorrect wage base calculation.
Option B: $216.00
This amount suggests applying the full 2.7% rate to an inflated wage base, possibly double-counting or miscalculating the number of employees subject to tax.
Option D: $129.60
This incorrectly applies the 2.7% tax rate to the full monthly wages of $7,200 ($7,200 × 0.027 = $194.40), but then adds extra amount, ignoring the annual wage base cap of $7,000 per employee.
Memory Technique
Remember '7-12-27': $7,000 wage base, divide by 12 months, multiply by 2.7% rate. The wage base cap is key - you don't tax the full high salaries.
Reference Hint
Chapter on Employment Law and Payroll Taxes - look for sections on SUTA (State Unemployment Tax Act) wage base limitations
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