A residential contractor in Arizona must maintain workers' compensation insurance. If a contractor has 2 employees and annual payroll of $85,000, what is the approximate minimum annual premium for workers' compensation coverage for general construction work (assuming a rate of $8.50 per $100 of payroll)?
Correct Answer
D) $7,225
Workers' compensation premium = ($85,000 ÷ $100) × $8.50 = 850 × $8.50 = $7,225.
Why This Is the Correct Answer
Workers' comp premium formula: (Payroll ÷ $100) × Rate = ($85,000 ÷ $100) × $8.50 = 850 × $8.50 = $7,225. The number of employees (2) is given as context but does not change the calculation — the premium is based on payroll, not headcount.
Why the Other Options Are Wrong
Option A: $9,350
$9,350 does not result from the correct formula. This may come from using a higher rate or misplacing the decimal (e.g., using $11.00 per $100 instead of $8.50).
Option B: $6,825
$6,825 is close but incorrect. It may result from dividing by a slightly different denominator or using $8.03 per $100 — a rounding or arithmetic error in applying the formula.
Option C: $8,925
$8,925 may result from using a rate of approximately $10.50 per $100 or from incorrectly treating the number of employees (2) as a multiplier in a non-standard calculation.
Memory Technique
Workers' Comp formula: Payroll ÷ 100 × Rate. Two steps, no exceptions. The number of employees is irrelevant to the calculation — only the total payroll matters.
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