A Michigan contractor has $85,000 in labor costs and $45,000 in material costs for a project. If the workers compensation rate is 8.5% of labor costs, what is the total workers compensation premium?
Correct Answer
C) $7,225
Workers compensation is calculated only on labor costs: $85,000 × 8.5% = $7,225. Material costs are not included in the calculation.
Why This Is the Correct Answer
Option C ($7,225) is correct. Workers' compensation premiums are calculated solely on labor costs, not materials. $85,000 × 8.5% = $85,000 × 0.085 = $7,225.
Why the Other Options Are Wrong
Option A: $11,050
Option A ($11,050) results from applying the 8.5% rate to the combined total of labor and material costs ($130,000 × 0.085 = $11,050). This is incorrect because workers' compensation covers workers — not materials — so only labor costs form the base.
Option B: $7,500
Option B ($7,500) is close to the correct answer but is not derived from the given figures. It may result from rounding or from using a slightly different rate or cost figure.
Option D: $3,825
Option D ($3,825) results from applying the 8.5% rate to material costs only ($45,000 × 0.085 = $3,825). This is the opposite error — calculating on materials while ignoring labor.
Memory Technique
Workers' compensation = Workers only. Comp covers the people doing the work, not the stuff they use. Calculate WC on Labor only, never on materials.
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