A contractor's annual revenue is $1,850,000. Their workers compensation insurance has a rate of $4.50 per $100 of payroll, and their annual payroll is $425,000. What is their annual workers compensation premium?
Correct Answer
D) $19,125
Annual premium = ($425,000 ÷ $100) × $4.50 = 4,250 × $4.50 = $19,125
Why This Is the Correct Answer
$19,125 is correct. Workers' comp premium is calculated on payroll, not revenue. Formula: (Payroll ÷ 100) × Rate = ($425,000 ÷ 100) × $4.50 = 4,250 × $4.50 = $19,125. Revenue is irrelevant — it is a deliberate distractor.
Why the Other Options Are Wrong
Option A: $20,125
$20,125 is incorrect. This result would require a payroll of approximately $447,222 at $4.50/$100, or a different rate applied to $425,000. The arithmetic does not align with the given inputs.
Option B: $21,125
$21,125 is incorrect. This is not derivable from the given payroll and rate. It may result from a calculation error such as rounding payroll units incorrectly or applying the rate to a wrong base figure.
Option C: $18,125
$18,125 is incorrect. This would require a payroll of approximately $402,778 — not $425,000. A candidate might arrive here by making an arithmetic error in the division step or misreading the payroll figure.
Memory Technique
Workers' comp formula: (Payroll ÷ 100) × Rate. Think of it as 'cents per dollar of payroll per $100 block.' Revenue is for business planning — insurance is for people (payroll). Always base insurance on payroll.
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