Question 1

Kerry became a bona fide resident of Spain in 2017. She worked in Spain for 180 days in 2017 earning $110,000. Due to a death in the family, Kerry had to leave her position in Spain in December of 2018 and return to the states. She was in Spain for 345 days and earned $125,000 in 2018. If the maximum foreign earned income exclusion amount is $102,100 for 2017 and $103,900 for 2018, how much of Kerry's income in 2017 and 2018 is eligible for the foreign earned income exclusions?

Accepted Answer

The answer of Kerry became a bona fide resident of...

Question 2

James owns a sole proprietorship. James pays his son Albert, age 17, $8,000 and his daughter Chloe, age 19, $11,000 for their work in the business. Both wages are reasonable for the work they perform. How much FICA tax must the sole proprietorship pay on the wages?

Accepted Answer

The answer of James owns a sole proprietorship. James pays...

Question 3

Carol owns a small curio shop that is incorporated as an S corporation. Her three children, Sara, age 16, Mark, age 19, and Corey, age 22, all help in the shop. Which of the children's wages are subject to FICA taxes?

Accepted Answer

All of the children's wages are subject to FICA taxes because the S corporation is required to withhold payroll taxes for all employees, including family members. There is no exemption from FICA taxes based on age or family relationship.

Question 4

Which of the following would not be considered a de minimis fringe benefit?

Accepted Answer

A $10 Christmas bonus is not considered a de minimis fringe benefit because it is cash or a cash equivalent. De minimis fringe benefits are typically low-cost or occasional benefits, but they can't be cash or cash equivalents. The other choices (B, C, and D) are all examples of de minimis fringe benefits.

Question 5

Which of the following is a reason a person would prefer to be an independent contractor?

Accepted Answer

An independent contractor can deduct expenses directly from business income, which can result in lower taxes. This can be a significant advantage as compared to being an employee, who generally cannot deduct work-related expenses. Option A is incorrect because the FICA tax rate is actually higher for independent contractors, as they have to pay both the employer and employee portions. Option C may be true for some independent contractors, but it depends on the type of health insurance plan and other factors. Option D is generally not true, as independent contractors are not typically eligible to participate in the retirement plans of the companies for which they work.

Question 6

During 2018, Lee Corporation paid Nicole a salary of $118,000 and a bonus of $20,000. How much (rounded to the nearest dollar) is Lee Corporation required to withhold from Nicole's compensation for her share of FICA taxes?

Accepted Answer

FICA taxes consist of Social Security tax and Medicare tax. In 2018, the Social Security tax rate is 6.2% on the first $128,400 of wages and the Medicare tax rate is 1.45% on all wages. The bonus is subject to a flat rate of 22% for federal income tax withholding.

Social Security tax = $118,000 x 6.2% = $7,316 (capped at $7,960.80 for 2018)
Medicare tax = ($118,000 + $20,000) x 1.45% = $2,319.50
Total FICA tax = $7,960.80 + $2,319.50 = $10,280.30
However, since the Social Security tax is capped, the correct answer is C) $9,962.

Question 7

Which of the following is not taxable to an employee when paid for by the employer?

Accepted Answer

Payments for business-related expenses, such as seminars, that are for the employer's benefit are not considered taxable income to the employee.

Question 8

During 2018, Jones Corporation paid Joshua a salary of $100,000 and a bonus of $30,000. What is Jones Corporation's deduction (rounded to the nearest dollar) for its share of FICA taxes paid on Joshua's compensation for 2018?

Accepted Answer

Jones Corporation's share of FICA taxes paid on Joshua's compensation for 2018 is equal to the total FICA taxes paid by both Joshua and Jones Corporation, which is calculated as follows: 
$100,000 Salary x 6.2% (Social Security tax rate) = $6,200 Social Security tax paid by Joshua
$130,000 Total compensation (salary + bonus) x 1.45% (Medicare tax rate) = $1,885 Medicare tax paid by Joshua 
Total FICA taxes paid by Joshua = $6,200 + $1,885 = $8,085
Jones Corporation's share of FICA taxes paid = Total FICA taxes paid by Joshua x 7.65% (total FICA tax rate for employer) 
= $8,085 x 7.65% = $618.53, rounded to $619 
Therefore, the deduction for Jones Corporation's share of FICA taxes paid on Joshua's compensation for 2018 is $619, which is closest to answer choice D ($9,846).

Question 9

Bill was awarded 3,000 options; each option allows him to purchase one share of BK's stock for $15. The stock is currently selling for $12 per share. Three years later, Bill exercises the options when the stock's selling price is $21 per share. Two years later, Bill sells the stock for $20 per share. What are Bill's and BK's tax consequences for these transactions if the options are:
a. Incentive stock options
b. Nonqualified stock options

Accepted Answer

The answer of Bill was awarded 3,000 options; each option...

Question 10

Carole, age 38, is single and works as a physical therapist. She is covered by her employer's retirement plan. What is the maximum deductible contribution she can make to a traditional IRA in 2018 if her AGI is $65,000?
AGI Phase-Out Ranges for 2018 IRAs

Accepted Answer

The answer of Carole, age 38, is single and works...

Question 11

Which of the following statements is correct?

Accepted Answer

The employer is responsible for paying the FUTA tax and their share of the FICA tax. The employee is responsible for paying their share of the FICA tax. Option A is incorrect because employees also pay FICA taxes. Option B is incorrect because the employer is responsible for paying the full amount of FUTA taxes. Option D is also incorrect because the employer is responsible for paying their share of the FICA tax.

Question 12

Jose worked at an architectural firm as an employee for the first four months of 2018 before he established his own business. He earned $53,300 at the architectural firm. His net income from his sole proprietorship was $78,000. Determine Jose's self-employment tax for 2018.

Accepted Answer

The answer of Jose worked at an architectural firm as...

Question 13

Taxable compensation received from a business does not include:

Accepted Answer

The answer of Taxable compensation received from a business does...

Question 14

George's flexible spending plan allows him to select fringe benefits equal to 10 percent of his annual salary of $75,000. Which of the following would be taxable if selected?

Accepted Answer

The $4,000 health insurance premium and $5,000 of childcare under a dependent care program would not be taxable if selected as fringe benefits. However, the $1,500 country club membership would be taxable as it is not considered a qualified fringe benefit. The discount on company products equal to the gross profit percentage is not a fringe benefit and therefore is not applicable to this question.

Question 15

Howard is a cash-basis, calendar-year taxpayer. He works for Clyde Corporation, an accrual-basis, calendar-year corporation. Clyde authorizes a $10,000 bonus for Howard on December 20, year 1. It pays the bonus on March 31 of year 2. Which of the following is correct?

Accepted Answer

Howard, being a cash-basis taxpayer, recognizes income when it is actually or constructively received. Since he receives the bonus in year 2, he will recognize it in year 2. Clyde Corporation, being an accrual-basis taxpayer, would typically recognize expenses when they are incurred. However, for tax purposes, the IRS requires that the payment must also meet the "all events test" and economic performance has occurred. Since the bonus is paid in year 2, this is when Clyde can take the deduction, aligning the deduction with the year of payment.

Question 16

Warren has $62,400 of net income from his sole proprietorship. How much is his self-employment tax on this income in 2018?

Accepted Answer

The answer of Warren has $62,400 of net income from...

Question 17

During 2018, Jackson Corporation paid Brittany a salary of $110,000. How much is Jackson Corporation's deduction (rounded to the nearest dollar) for its share of FICA taxes paid on Brittany's compensation?

Accepted Answer

The answer of During 2018, Jackson Corporation paid Brittany a...

Question 18

Which of the following is a taxable fringe benefit when paid by the employer?

Accepted Answer

Whole life insurance policy premiums paid by an employer are considered a taxable fringe benefit to the employee, unlike certain other benefits that may be tax-exempt under specific conditions.

Question 19

Which of the following is not a reason for a business to prefer to hire an independent contractor rather than an employee?

Accepted Answer

Option A, B and C are all potential reasons why a company may prefer to hire an independent contractor over an employee. Option D is incorrect because companies are still required to pay FUTA (Federal Unemployment Tax Act) taxes on wages paid to independent contractors.

Question 20

Wilma is CEO of and owns 100 percent of WT Enterprises, a cash-basis, calendar-year corporation. The company has always been profitable but over the last five years Wilma's salary has increased from over $400,000 per year to over $1,000,000 and it has failed to pay dividends. Which of the following will not occur if the IRS determines that $500,000 of her salary is unreasonable?

Accepted Answer

The answer of Wilma is CEO of and owns 100...

Quiz 4: Employee Compensation