A contractor's quarterly payroll is $180,000. If the current Unemployment Insurance (UI) rate is 3.4% on the first $7,000 of each employee's wages, and they have 12 employees, what is the maximum UI tax liability for the quarter?
Correct Answer
C) $2,856
UI tax is calculated on the first $7,000 per employee annually. For 12 employees: 12 × $7,000 = $84,000 taxable wages maximum per year. Quarterly maximum would be $21,000 per quarter (assuming even distribution). $21,000 × 0.034 = $714. However, if each employee earns more than $5,250 per quarter, the full $7,000 per employee applies: 12 × $7,000 × 0.034 = $2,856 annually, or about $714 per quarter.
Why This Is the Correct Answer
UI tax applies to the first $7,000 of each employee's annual wages. Maximum annual UI tax per employee = $7,000 × 3.4% = $238. For 12 employees the annual maximum = 12 × $238 = $2,856. The question asks for the maximum quarterly liability. Since the $7,000 wage base is annual, if all 12 employees have already earned $7,000 by the end of Q1, the entire $2,856 is owed in Q1. Thus $2,856 is the maximum the contractor could owe in a single quarter (when all wage bases are consumed in that quarter).
Why the Other Options Are Wrong
Option A: $1,428
$1,428 = $2,856 ÷ 2, implying only half the employees hit their wage base in the quarter. That is not the maximum; the maximum is when all 12 hit the $7,000 base in Q1.
Option B: $6,120
$6,120 = $180,000 × 3.4%, which incorrectly applies the UI rate to the full quarterly payroll rather than to the capped $7,000 per employee. UI has a wage base cap — you never apply the rate to unlimited wages.
Option D: $714
$714 = $2,856 ÷ 4, representing one quarter of the annual maximum spread evenly across all four quarters. This would be correct for an even distribution scenario, but the question asks for the maximum possible in one quarter, which is $2,856 (all bases consumed in Q1).
Memory Technique
UI formula: (# of employees) × ($7,000 wage cap) × (rate) = annual max. For the maximum in one quarter, the full annual amount can be owed if all employees hit $7,000 in that quarter. Think: 12 × 7K × 3.4% = $2,856 is the ceiling — it all hits at once if everyone earns fast.
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