Calculate the annual workers' compensation premium for a framing contractor with a payroll of $500,000 and a rate of $8.50 per $100 of payroll:
Correct Answer
A) $42,500
Workers' compensation premium = (Payroll ÷ 100) × Rate = ($500,000 ÷ 100) × $8.50 = 5,000 × $8.50 = $42,500. The rate is applied per $100 of payroll.
Why This Is the Correct Answer
Option A is correct because workers' compensation premiums are calculated by dividing the total payroll by 100, then multiplying by the rate per $100. The calculation is: ($500,000 ÷ 100) × $8.50 = 5,000 × $8.50 = $42,500. This follows the standard industry formula where rates are expressed per $100 of payroll to make calculations manageable for large payroll amounts.
Why the Other Options Are Wrong
Option B: $4,250
Option C ($85,000) results from incorrectly multiplying the payroll directly by the rate ($500,000 × $8.50 ÷ 100), forgetting to divide the payroll by 100 first. This treats the rate as if it applies to every dollar rather than every $100 of payroll.
Option C: $85,000
Option D ($425) represents a significant calculation error, likely from dividing by 1,000 instead of 100 ($500,000 ÷ 1,000 × $8.50), or from other fundamental misunderstanding of the workers' compensation premium calculation formula.
Option D: $425
Option B ($4,250) represents a calculation error where someone likely divided the correct answer by 10, possibly by incorrectly applying the rate as $0.85 instead of $8.50, or by misunderstanding the per-$100 basis and dividing by 1,000 instead of 100.
Memory Technique
Remember 'Payroll Per Hundred' - PPH: Payroll ÷ 100, then multiply by rate. Think of it as counting hundreds of dollars in your payroll stack.
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