A Tennessee residential contractor has 12 employees working on various job sites. The annual workers compensation premium is calculated at $4.50 per $100 of payroll for the classification. If the total annual payroll is $480,000, what is the workers compensation premium?
Correct Answer
A) $21,600
Premium = ($480,000 ÷ $100) × $4.50 = 4,800 × $4.50 = $21,600
Why This Is the Correct Answer
The formula is: Premium = (Total Payroll ÷ $100) × Rate. Step 1: $480,000 ÷ $100 = 4,800 units. Step 2: 4,800 × $4.50 = $21,600. The answer is $21,600. This is the standard workers compensation premium calculation used by insurers.
Why the Other Options Are Wrong
Option B: $19,600
Option B ($19,600) is incorrect. This figure does not result from any standard application of the formula. It may represent a calculation error such as using the wrong payroll figure or an arithmetic mistake in the multiplication step.
Option C: $20,800
Option C ($20,800) is incorrect. $20,800 could result from mistakenly using a rate of approximately $4.33 instead of $4.50, or from a rounding or arithmetic error. It is close enough to the correct answer to trap candidates who make small calculation errors.
Option D: $18,400
Option D ($18,400) is incorrect. This figure is significantly below the correct premium, possibly resulting from applying the rate to only a portion of the payroll or using an incorrect base figure such as $80,000 less than the actual payroll.
Memory Technique
Workers comp premium formula = 'per hundred, then rate.' Two steps only: (1) Payroll ÷ 100 to get units. (2) Units × rate = premium. Never skip step 1. Write it as: (P ÷ 100) × R = Premium. For this problem: (480,000 ÷ 100) × 4.50 = 4,800 × 4.50 = $21,600.
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