A Michigan contractor completes $180,000 worth of work in a calendar year. What is the required workers' compensation insurance premium if the rate is 8.5% of payroll and payroll represents 35% of the contract value?
Correct Answer
B) $5,355
Payroll = $180,000 × 35% = $63,000. Premium = $63,000 × 8.5% = $5,355.
Why This Is the Correct Answer
Step 1: Calculate payroll. $180,000 × 35% = $63,000. Step 2: Calculate premium. $63,000 × 8.5% = $5,355. This two-step calculation correctly derives payroll from contract value first, then applies the insurance rate to the payroll base.
Why the Other Options Are Wrong
Option A: $15,300
$15,300 results from applying 8.5% directly to the full $180,000 contract value ($180,000 × 8.5% = $15,300), skipping the step of first calculating the payroll portion. Premiums are based on payroll, not total contract revenue.
Option C: $18,000
$18,000 appears to be 10% of the contract value — no mathematical basis connects this to the given rates. It may be a distractor using a round number from the contract value.
Option D: $6,300
$6,300 could result from applying 10% (not 8.5%) to the $63,000 payroll, or some other incorrect rate. It does not correctly apply the 8.5% rate to the payroll.
Memory Technique
Two steps: (1) Find payroll = Contract × payroll%. (2) Find premium = Payroll × rate%. Never skip step 1. Remember: Insurance is on PAYROLL, not CONTRACT value.
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