A contractor's total project cost is $85,000 with materials costing $32,000 and labor costs of $53,000. If the workers compensation rate is 8.5% of labor costs, what is the workers compensation premium?
Correct Answer
B) $4,505
Workers compensation premium = Labor costs × Rate = $53,000 × 0.085 = $4,505
Why This Is the Correct Answer
Workers compensation premiums are calculated based on labor costs only, not total project cost. $53,000 × 0.085 = $4,505. This is the correct application of the rate to the correct base.
Why the Other Options Are Wrong
Option A: $7,225
$7,225 is wrong because it applies the 8.5% rate to the total project cost ($85,000 × 0.085 = $7,225). Workers comp is based on labor costs only, not total project cost.
Option C: $3,186
$3,186 is wrong because it appears to apply 9.95% to materials only or some other incorrect combination. The rate applies solely to labor costs.
Option D: $2,720
$2,720 is wrong because it applies the rate to only the materials cost ($32,000 × 0.085 = $2,720). Materials are excluded from workers comp premium calculations.
Memory Technique
Think 'Workers Comp = Workers (Labor) only.' Strip out materials and any other costs — only payroll/labor is the base for workers compensation premiums.
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Previous Question
A contractor has 12 employees with a total annual payroll of $480,000. If the workers compensation rate is $12.75 per $100 of payroll, what is the annual premium?
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