Calculate the workers' compensation premium for a Virginia roofing contractor with $500,000 in annual payroll and a rate of $12.50 per $100 of payroll:
Correct Answer
C) $62,500
Premium = ($500,000 ÷ $100) × $12.50 = 5,000 × $12.50 = $62,500
Why This Is the Correct Answer
The formula for workers' compensation premium is: (Total Payroll ÷ $100) × Rate. Calculation: ($500,000 ÷ $100) × $12.50 = 5,000 × $12.50 = $62,500. This is the standard industry calculation method used by insurance carriers.
Why the Other Options Are Wrong
Option A: $6,250
$6,250 results from incorrectly dividing payroll by $1,000 instead of $100: ($500,000 ÷ $1,000) × $12.50 = $6,250. This uses the wrong divisor, making the premium 10 times too small.
Option B: $125,000
$125,000 results from multiplying payroll directly by the rate without dividing by 100 first: $500,000 × $12.50% = $62,500 — or possibly $500,000 × 0.25 = $125,000 via a different error. This does not apply the 'per $100' correctly.
Option D: $40,000
$40,000 does not result from any standard application of this formula and likely represents a misapplication of the rate (e.g., using $8 instead of $12.50 per $100).
Memory Technique
Workers' comp formula: Payroll ÷ 100, then × rate. Think of it as 'how many $100 chunks in the payroll?' $500,000 ÷ 100 = 5,000 chunks. Each chunk costs $12.50. 5,000 × $12.50 = $62,500.
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