A general contractor is calculating their annual overhead costs. If their total annual payroll is $850,000 and the current FICA rate is 7.65%, what is the employer's FICA contribution?
Correct Answer
A) $65,025
The employer's FICA contribution is calculated by multiplying the total payroll by the FICA rate: $850,000 × 0.0765 = $65,025. This represents the employer's portion of Social Security and Medicare taxes.
Why This Is the Correct Answer
The employer's FICA contribution is calculated by multiplying the total annual payroll by the FICA rate. FICA consists of Social Security (6.2%) and Medicare (1.45%) taxes, totaling 7.65%. When you multiply $850,000 by 0.0765, you get exactly $65,025. This represents the employer's mandatory contribution that must be included in overhead cost calculations.
Why the Other Options Are Wrong
Option B: $58,750
This answer ($58,750) appears to use an incorrect FICA rate of approximately 6.91%, which doesn't match the current combined FICA rate of 7.65% for Social Security and Medicare taxes.
Option C: $72,250
This answer ($72,250) uses an inflated rate of approximately 8.5%, which exceeds the actual FICA rate and would overstate the employer's tax obligation in overhead calculations.
Option D: $61,500
This answer ($61,500) uses an incorrect rate of approximately 7.24%, which understates the actual FICA obligation and would result in inaccurate overhead cost projections.
Memory Technique
Remember 'FICA 765' - FICA rate is 7.65%, which you can think of as 765 basis points or moving the decimal two places left from 765.
Reference Hint
Look up payroll taxes and employer contributions in the Business and Finance chapter, specifically sections covering overhead calculations and mandatory employer tax obligations.
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