XYZ Contracting has 8 employees and annual payroll of $480,000. What is the approximate annual workers' compensation insurance premium if the rate is $8.50 per $100 of payroll?
Correct Answer
C) $40,800
Premium = ($480,000 ÷ $100) × $8.50 = 4,800 × $8.50 = $40,800.
Why This Is the Correct Answer
Option C ($40,800) is correct. Workers' compensation premiums are calculated per $100 of payroll. The formula is: (Annual Payroll ÷ 100) × Rate = Premium. Applying the formula: ($480,000 ÷ 100) × $8.50 = 4,800 × $8.50 = $40,800. The number of employees (8) is irrelevant to this calculation — it is a distractor.
Why the Other Options Are Wrong
Option A: $48,000
Option A ($48,000) is incorrect. This might result from multiplying $480,000 × 10% = $48,000, misreading the rate as $10.00 per $100 instead of $8.50, or from an arithmetic error. The correct rate of $8.50 per $100 yields $40,800.
Option B: $4,800
Option B ($4,800) is incorrect. This equals $480,000 ÷ 100 = 4,800, which is the number of $100 units in the payroll — but the candidate forgot to multiply by the rate ($8.50). This is the intermediate step, not the final answer.
Option D: $4,080
Option D ($4,080) is incorrect. This appears to be $40,800 divided by 10, suggesting a decimal error — perhaps the candidate calculated $480,000 × $8.50 and then placed the decimal point incorrectly, or divided by 1,000 instead of 100.
Memory Technique
Workers' comp premium formula: PAYROLL ÷ 100 × RATE. Think of it as 'how many $100 bills are in my payroll? Multiply that count by the rate.' $480,000 payroll = 4,800 hundred-dollar bills. Each costs $8.50 in insurance. 4,800 × $8.50 = $40,800. Ignore employee headcount — it's a distractor.
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