Question 1

When stock options are exercised they are converted into actual employer stock.

Accepted Answer

When stock options are exercised, the option holder has the right to purchase actual employer stock at the set exercise price. Once the purchase is made, the options are converted into actual stock.

Question 2

Employer's expense for stock options is typically recognized earlier for book than tax purposes.

Accepted Answer

This is because for book purposes, the expense is recognized as the stock options vest, while for tax purposes the expense is recognized when the options are exercised.

Question 3

Employers receive a deduction for compensation paid to and employment taxes paid on behalf of employees.

Accepted Answer

This is true. Under the tax code, employers can deduct compensation paid to employees as well as employment taxes paid on their behalf, such as Social Security and Medicare taxes.

Question 4

The employee's income for restricted stock is typically measured on the grant date.

Accepted Answer

The employee's income for restricted stock is typically measured on the vesting date, not the grant date.

Question 5

One purpose of Form W-4 is to determine an employee's withholding.

Accepted Answer

Form W-4 is used by employers to determine the amount of federal income tax to withhold from an employee's paycheck.

Question 6

Employers computing taxable income under the accrual method may deduct wages accrued as compensation expense in one year and paid in the subsequent year, as long as the company makes the payment within 2½ months after the employer's year-end.

Accepted Answer

Employers using the accrual method can deduct wages accrued in one year but paid in the subsequent year as long as payment is made within 2½ months after the employer's year-end.

Question 7

An employee can indicate whether they want an additional amount withheld for payroll taxes on the Form W-4.

Accepted Answer

An employee can indicate on the Form W-4 whether they want an additional amount withheld for payroll taxes. This can help ensure that they do not owe a large sum at tax time.

Question 8

Employees will always prefer to receive incentive stock options over nonqualified stock options.

Accepted Answer

Incentive stock options (ISOs) offer tax advantages over nonqualified stock options (NSOs), which make them more desirable for employees. ISOs are taxed at the long-term capital gains rate if the shares are held for at least one year after exercising the option and two years after the grant date. In contrast, NSOs are taxed as ordinary income upon exercise, which can result in a higher tax rate for the employee.

Question 9

The use of restricted stock is rising relative to the use of stock options.

Accepted Answer

Restricted stock has become increasingly popular as a way to compensate employees. The use of stock options has declined in recent years, partly due to changes in accounting regulations and tax laws. Restricted stock is seen as a more transparent and straightforward method of rewarding employees, as the value is determined at the time of grant and there is no need to set an exercise price. Additionally, restricted stock aligns employee and shareholder interests, as employees only benefit if the company's stock price increases.

Question 10

The date on which stock options are given to the employee is called the exercise date.

Accepted Answer

The date on which stock options are given to the employee is called the grant date, not the exercise date. The exercise date is the date on which the employee chooses to buy or sell the stock as per the terms of the stock option agreement.

Question 11

An employer always receives a deduction for total compensation paid to a CEO.

Accepted Answer

The deduction for total compensation paid to a CEO is subject to certain limitations and restrictions under the tax code. Therefore, the employer may not always receive a full deduction for CEO compensation.

Question 12

Employees complete a Form W-2 to specify their income tax withholding.

Accepted Answer

Employers complete a Form W-2 to report their employees' annual wages and the amount of taxes withheld from their paychecks. Employees receive a copy of the Form W-2 for their records and to file their income tax returns. However, employees do not complete the form themselves.

Question 13

The date on which stock options are no longer subject to forfeiture is called the vesting date.

Accepted Answer

The statement is true. The vesting date is the date on which stock options no longer have any restrictions or conditions attached to them, and the employee can exercise their right to purchase the underlying stock at the specified price.

Question 14

Employers always prefer to award incentive stock options rather than nonqualified stock options.

Accepted Answer

Employers may choose to award either incentive stock options or nonqualified stock options, depending on their specific needs and goals. Incentive stock options come with certain tax advantages for the employee, but also have stricter eligibility requirements and limitations on exercise and sale. Nonqualified stock options may be more flexible for both employer and employee, but come with different tax implications. Ultimately, the decision of which type of stock option to award will depend on the individual circumstances and goals of the employer.

Question 15

An employee's income with respect to restricted stock is the fair market value on the vesting date.

Accepted Answer

An employee's income with respect to restricted stock is the fair market value of the stock on the vesting date, not the original purchase price.

Question 16

Current compensation is usually comprised of salary, wages, and bonuses.

Accepted Answer

Current compensation generally includes salary, wages, and bonuses.

Question 17

One primary purpose of equity compensation is to motivate employees.

Accepted Answer

Equity compensation, such as stock options or restricted stock units, gives employees a financial stake in the company's success and can incentivize them to work hard to increase the value of their equity. This motivation can lead to increased productivity, creativity, and loyalty among employees.

Question 18

Employers computing taxable income receive a deduction for salary and wages paid to employees.

Accepted Answer

Employers can deduct the salary and wages paid to employees as a business expense, reducing their taxable income.

Question 19

Stock options will always provide employees with future compensation.

Accepted Answer

stock options only provide future compensation if the stock price increases, and there is no guarantee that it will. In fact, stock options can also expire worthless if the stock price decreases below the exercise price.

Question 20

On Form W-4, an employee can only claim one allowance for each personal or dependency exemption that will be claimed on the employee's income tax return.

Accepted Answer

The answer of On Form W-4, an employee can only...

Quiz 12: Compensation