Deck 4: Employee Compensation

Question 1

Stock appreciation rights allow an employee to benefit from an increase in the value of the employer's stock without actually purchasing the stock.

Answer 1

True

Question 2

An employee who receives a nonqualified stock option recognizes income when the option is received and when it is exercised regardless of the strike price.

Answer 2

False

Question 3

A single employee who is not covered by an employer's retirement plan may always contribute at least $5,000 of earned income to his or her IRA.

Answer 3

True

Question 4

In a defined benefit retirement plan,the employer bears the financial risk for the plan investments.

Question 5

Briefly contrast the FICA tax on an employee with the self-employment tax paid by an independent contractor.

Question 6

A rational taxpayer in the 25% tax bracket who wants health insurance would prefer the employer pay the $5,000 premium for this health insurance rather than receive a $5,000 increase in salary to purchase health insurance on his own.

Question 7

Employers must withhold the Medicare surtax on any employee who has wages or other compensation (subject to FICA taxes)exceeding $150,000.

Question 8

A sole proprietor never has to pay employment taxes on income earned by any of his or her children who work for the business.

Question 9

All employee fringe benefits are tax free

Question 10

An employee who receives an incentive stock option normally recognizes no income until the stock acquired with the option is sold.

Question 11

Employees are subject to and employers withhold FICA and FUTA taxes.

Question 12

If a health plan is self-insured,highly-compensated employees are not affected by the nondiscrimination rules.

Question 13

If an employer insists that an employee move from New York to California,all direct and indirect costs incurred by the taxpayer and paid by the employer would result in no income to the employee.

Question 14

Briefly explain a cafeteria plan for employee fringe benefits.

Question 15

A taxpayer must work out of the country for a complete tax year,or he or she will not be eligible for the foreign earned income exclusion.

Question 16

What factors are used to determine if a person performing a task is self-employed or is an employee?

Question 17

An employee holiday party would be a tax-exempt de minimis fringe benefit.

Question 18

S corporations have an incentive to pay unusually low salaries to an employee-shareholder to avoid FICA taxes.

Question 19

An independent contractor pays self-employment taxes instead of FICA taxes.

Question 20

As long as the plan is nondiscriminatory,any life insurance provided employees as a fringe benefit is tax-exempt.

Question 21

George is offered a new job.He lives in Bedford and he travels 27 miles from his home to his old job.How far must this home be from his new job to entitle him to a deduction for his moving expenses?

Question 22

Explain a flexible spending arrangement for uninsured health costs and why it is beneficial to a taxpayer.

Question 23

Walter works busy season at Abby's Bed and Breakfast.His employer requires him to live in a spare room so that he is available to assist with breakfast and take care of any other needs of the guests on their arrival or during their stays.The room is valued at $600 per month for the 6 months he works there.During this time,his employer pays Walter a salary of $1,200 per month and gives him an additional $200 per month to help pay the cost of health insurance that he purchases for himself.The employer also supplies him with uniforms for work valued at $700.What is Walter's taxable income for the six months that he works at the bed and breakfast?

Question 24

Briefly explain the differences in taxation between distributions from a traditional IRA and distributions from a Roth IRA.

Question 25

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 2015 if her AGI is $63,000?

Question 26

What relocation expenses are deductible by a self-employed person who changes his primary job location from Nashville to Chicago?

Question 27

When is a person eligible to use the foreign earned income exclusion?

Question 28

What are the tax consequences to Sherry and Azores Corporation if the company grants Sherry 1,000 stock appreciation rights when the stock is selling for $23 per share,and she exercises these rights four years later when the stock is selling for $35 per share?

Question 29

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

A)An independent contractor pays only 7.65 percent FICA tax.
B)An independent contractor can deduct expenses directly from business income.
C)An independent contractor can deduct his or her health insurance directly from business income.
D)An independent contractor can always participate in the retirement plan of the business for which he or she is performing work.

Question 30

What type of educational expenses may an employer reimburse an employee for on a tax-free basis if the employer does not have a qualified educational assistance plan?

Question 31

Explain the difference between a phantom stock plan and stock appreciation rights.

Question 32

What is a Keogh plan?

Question 33

Samson Company offers its employees a cafeteria plan.Julie is allotted $5,000 to spend on fringe benefits.She chooses a health insurance plan that costs $2,500 per year,a $50,000 whole life insurance policy with a $500 annual premium,and the remaining $2,000 she uses for the company's child and dependent care program.What is Julie's taxable compensation if her salary is $42,000?

Question 34

Briefly explain the tax differences between a nonqualified stock option and an incentive stock option.

Question 35

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

A)The independent contractor does not participate in company fringe benefits.
B)The company does not have to pay FICA taxes on the amounts paid to the independent contractor.
C)The company does not have to supply a workplace or tools to the independent contractor.
D)The company only has to pay FUTA on the independent contractor's wages.

Question 36

Contrast a qualified defined contribution plan with a qualified defined benefit plan for the employee.

Question 37

Joe is president and 75 percent owner of JS Corporation.He takes a salary of $825,000 this year.Presidents of comparable companies are generally paid no more than $500,000.Joe is in the 39.6 percent marginal tax bracket and JS Corporation is in the 34 percent marginal tax bracket.What are the income and FICA tax consequences if $325,000 is determined to be excessive wages by the IRS?

Question 38

Warren has $62,400 of net income from his sole proprietorship.How much is his self-employment tax on this income in 2015?

Question 39

Barry's firm purchases a $31,000 automobile for his business and personal use.Barry uses the auto 80 percent for business and 20 percent for personal use in 2015.The IRS tables show that the annual lease-value of a $31,000 automobile is $8,250.If the company takes full depreciation deductions for the auto,how much income must Barry recognize?

Question 40

Tom works two part-time jobs while going to school.He works at a clothing store because he is allowed a 30 percent discount on his clothes purchases and a cellular phone store that allows him a 50 percent discount on his cell phone service.During the year,he purchases clothes valued at $1,000 for $700.The store marks up its clothing 100 percent.He pays $240 ($20 per month)for his discounted cell phone service.How much income in addition to his salaries must he report for these fringe benefits?

Question 41

Which of the following is not a purpose of a per diem allowance?

A)Eliminate the substantiation requirement for business expenses.
B)Reduce the amount an employer must reimburse for employee business expenses.
C)Eliminate paper work for certain employee business expenses.
D)Reduce reimbursement disagreements between employer and employee.

Question 42

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?

A)None of the wages are subject to FICA taxes.
B)Corey's wages only
C)Mark and Corey's wages only.
D)All their wages are subject to FICA taxes.

Question 43

Jan has a company car for both business and personal use.Which of the following statements is correct regarding the use of the car?

A)The company can never deduct full depreciation on the car because Jan uses it for personal trips.
B)The company only has to charge Jan 30 cents per mile for any of her personal mileage.
C)If the car cost less than $15,000,the company does not have to charge Jan anything for her personal use.
D)If Jan lives in a high-crime area and only uses the car for commuting to work,she has income equal to $1.50 per one-way trip.

Question 44

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?

A)Howard recognizes income in year 1 and Clyde takes a deduction in year 1.
B)Howard recognizes income in year 1 and Clyde takes a deduction in year 2.
C)Howard recognizes income in year 2 and Clyde takes a deduction in year 1.
D)Howard recognizes income in year 2 and Clyde takes a deduction in year 2.

Question 45

Which one of the following employee benefits can a staff accountant exclude from income?

A)A single ticket to a Marlins game
B)Frequent commuting use of the employer's automobile
C)Membership in Bodyworks Athletic Club
D)All of the above

Question 46

The contribution limit for a defined contribution plan for 2015 is:

A)$5,500
B)$18,000
C)$53,000
D)$210,000

Question 47

All of the following expenditures qualify for reimbursement under an educational reimbursement plan except:

A)Tuition
B)Private tutoring
C)Fees
D)Books

Question 48

Which type of retirement plan guarantees a specific amount of income for the person upon retirement?

A)Defined benefit plan
B)Defined contribution plan
C)401(k)plan
D)An ESOP

Question 49

Qualified deferred compensation plans have the following characteristics except:

A)Taxation of earnings is postponed.
B)Employee taxation occurs when payment is received.
C)Employee contributions are made on an after-tax basis.
D)Employer deducts contributions when made.

Question 50

If an employee is reimbursed through an accountable plan which of the following is not true?

A)All reimbursements are included in income.
B)A reimbursement equal to the expense is not included in income.
C)A reimbursement in excess of expense is included in income.
D)Unreimbursed expenses are deductible as an itemized deduction.

Question 51

Which of the following is a characteristic of an incentive stock option?

A)The issuer recognizes compensation expense if the strike price is below the stock's selling price when the option is granted.
B)The issuer recognizes a compensation deduction when the option is exercised.
C)The option holder recognizes compensation income when the option is exercised.
D)The option holder recognizes capital gain when the stock acquired with the option is sold.

Question 52

Which type of retirement plan would not be available to a corporation with 3,000 employees?

A)ESOP
B)401(k)
C)SIMPLE plan
D)Profit sharing plan

Question 53

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

A)On-premises exercise facilities
B)Whole life insurance policy premium
C)On-premises childcare
D)Employer subsidized meals

Question 54

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

A)A $10 Christmas bonus
B)A holiday turkey
C)A company picnic
D)Free morning coffee

Question 55

George is allowed to select fringe benefits equal to 10 percent of his annual salary of $75,000.Which of the following would be taxable if selected?

A)$4,000 health insurance premium
B)$5,000 of childcare under a dependent care program
C)$1,500 country club membership
D)Discount on company products equal to the gross profit percentage.

Question 56

Which of the following fringe benefits does not impose a limit on the amount eligible as a tax-free benefit?

A)A child and dependent care program
B)Group term life insurance premiums
C)Education assistance plan
D)Qualified moving expenses

Question 57

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?

A)Wilma will pay an additional tax on the $500,000 recharacterized as dividend.
B)Wilma will be eligible for a refund of Medicare taxes.
C)WT will lose a deduction for the $500,000 recharacterized as a dividend.
D)WT will be eligible for a refund of a portion of FICA taxes it paid.

Question 58

What is a phantom stock plan?

A)A purchase of stock by an unnamed party.
B)A cash payment equal to the stock's increase in fair market value over the prior year.
C)A stock option that is given to only a few employees.
D)Employee compensation hypothetically invested in stock for a period of time after which the employee receives the fair market value of the stock.

Question 59

Which of the following is a working condition fringe benefit?

A)Flowers for an ill employee
B)A holiday cocktail party
C)A subscription to a professional journal
D)A bus pass

Question 60

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

A)A $200 gift certificate given to each employee at Christmas
B)Personal use of a company automobile
C)Housing provided by the employer in lieu of a $400 housing allowance
D)$150 for a business-related seminar

Question 61

Which of the following are characteristics of a Roth IRA?

A)Most distributions made before age 59½ are subject to a 10 percent penalty tax.
B)There are no minimum distributions required for a Roth IRA.
C)Neither is a characteristic.
D)Both are characteristics.

Question 62

Which of the following are characteristics of a traditional IRA?

A)Most distributions made before age 59½ are subject to a 10 percent penalty tax.
B)A taxpayer must begin taking distributions from the IRA by age 75½.
C)Neither is a characteristic.
D)Both are characteristics.