A Michigan LLC contractor has 8 employees with a total annual payroll of $320,000. If the workers compensation rate is 6.2% and the experience modification factor is 0.85, what is the annual premium?
Correct Answer
B) $16,864
Premium = Payroll × Rate × Experience Mod = $320,000 × 6.2% × 0.85 = $16,864. The experience modification factor reduces the base premium.
Why This Is the Correct Answer
The workers' compensation premium formula is: Premium = Payroll × Rate × Experience Modification Factor. Applying the values: $320,000 × 0.062 × 0.85 = $320,000 × 0.0527 = $16,864. The experience modification factor of 0.85 (below 1.0) reduces the base premium, reflecting a better-than-average safety record for this contractor.
Why the Other Options Are Wrong
Option A: $19,840
$19,840 equals $320,000 × 6.2% = $19,840, which is the base premium before applying the experience modification factor. The candidate who selects this answer correctly calculates the base but forgets to multiply by 0.85.
Option C: $23,400
$23,400 does not result from the correct formula using the given inputs. It may come from using an incorrect rate or misapplying the experience modification factor as an additive rather than multiplicative value.
Option D: $20,400
$20,400 also does not follow from the correct calculation. It is plausible but results from an arithmetic error, possibly applying the mod factor incorrectly (e.g., subtracting 15% of the wrong base or using a rounded rate).
Memory Technique
Remember the three-step P-R-M sequence: Payroll × Rate × Mod. Think of it as 'PRM — Premium Result Method.' Each step reduces or inflates the prior product: start with payroll, apply the rate to get a base premium, then multiply by the mod to get the final premium.
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