A contractor's workers' compensation insurance has a rate of $8.50 per $100 of payroll for a specific classification. If the monthly payroll is $125,000, what is the monthly workers' comp premium?
Correct Answer
D) $10,625.00
Workers' comp premium = (Payroll ÷ $100) × Rate = ($125,000 ÷ $100) × $8.50 = 1,250 × $8.50 = $10,625.00. The rate is applied per $100 of payroll.
Why This Is the Correct Answer
Workers' compensation insurance premiums are calculated by dividing the total payroll by $100, then multiplying by the rate per $100 of payroll. With a monthly payroll of $125,000 and a rate of $8.50 per $100, the calculation is ($125,000 ÷ $100) × $8.50 = 1,250 × $8.50 = $10,625.00. This is the standard method used throughout the insurance industry for workers' comp premium calculations.
Why the Other Options Are Wrong
Option B: $1,062.50
This answer of $8,500.00 incorrectly applies the rate directly to a portion of the payroll rather than following the proper formula of dividing payroll by $100 first, then multiplying by the rate.
Option C: $1,470.59
This answer of $1,062.50 appears to be the result of incorrectly dividing the final answer by 10, possibly from confusion about the rate application or a calculation error in the division step.
Memory Technique
Remember 'Divide by 100, then Multiply' - think 'D100M' for workers' comp calculations. The rate is always per $100 of payroll, never a direct percentage.
Reference Hint
Look up workers' compensation insurance calculations in the Business and Finance chapter, specifically the section on insurance premium calculations and payroll-based rates.
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