Deck 4: Employee Compensation

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

False

Question 4

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

Question 5

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

Question 6

The Rabbi trust is a type of qualified retirement plan.

Question 7

A person who qualifies for the foreign earned income exclusion can exclude $16,944 of paid housing costs from income.

Question 8

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

Question 9

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

Question 10

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.

Question 11

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

Question 12

Self-employed individuals make the deposits to their self-employment taxes in the months of April, July, September, and January.

Question 13

All employee fringe benefits are tax free

Question 14

A single employee who is not covered by an employer's retirement plan may always contribute at least $6,000 of earned income to his or her IRA.

Question 15

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

Question 16

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 17

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

Question 18

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 19

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

Question 20

A U.S.citizen working in a foreign country with a higher tax rate on income than the U.S.tax rate, is usually better off claiming the foreign tax credit than the foreign earned income exclusion.

Question 21

In 2019 Lindsey decides she no longer wants to work in public accounting and decides to attend massage therapy school so that she may work as a massage therapist.She spends $6,000 for the education, obtains the required training and licensures in 2019, and began working with clients within her new career as a massage therapist in November 2019.For Susie, is the massage therapy school a work-related education expense?

A)Yes, the education is required by her potential employers and the law.
B)Yes, the education is required to meet the minimum educational requirements of the trade.
C)No, the education is not required by her potential employers or the law
D)No, the education is required to meet the minimum educational requirements of the trade.

Question 22

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 23

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 24

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 25

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

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

Question 26

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 27

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?

A)0
B)$612
C)$842
D)$1,454

Question 28

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 29

Manuel's employer provides him with $80,000 of group term life insurance coverage for the year at no cost.The amount from the group term life insurance premium table for someone who is 40 years old is $0.10.How much must Manuel include in income as a result of this benefit if he is 40 years old and is not considered a key employee?

A)0
B)$3
C)$8
D)$36
E)$96

Question 30

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 31

Tim is an employee of Lenux Corporation.Lenux purchased a car with a fair market value of $50,000 for use by Tim on his business trips.The annual lease-value of this vehicle is $13,250.In the current year, 70 percent of the miles driven by Tim in this vehicle were on business and 30 percent were for his personal use.How much, if any, taxable income does Tim have from his use of this vehicle?

A)0
B)$3,975
C)$13,250
D)$15,000

Question 32

Tavis works for a company that sponsors a flexible spending arrangement (FSA) as part of the cafeteria plan.Tavis's annual salary is $150,000 before any reduction for contributions to the FSA.Tavis elects to fund his FSA by reducing his salary by $2,500 to pay for medical and dental expenses not covered by insurance.Tavis pays $2,420 in qualified expenses through the FSA.The unused $80 is retained by the plan.Tavis received no distributions from this plan.Tavis's employer also paid $470 for premiums on a $240,000 face value group term life insurance policy for him.The group term life insurance rate is $0.15 per month per $1,000.Tavis is a key employee but it is not a discriminatory plan.How much gross income must Tavis report on his tax return?

A)$148,050
B)$147,932
C)$147,842
D)$147,580

Question 33

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 34

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 35

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 36

George's cafeteria 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?

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 37

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 38

Which of the following fringe benefit 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)Excess capacity services (such as unsold airplane seats)

Question 39

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)The itemized deduction for unreimbursed business expenses is suspended.

Question 40

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 41

ABC Corporation awarded John 1,000 options in 2015; each option allows him to purchase one share of ABC Corporation stock for $20.The ABC stock is selling for $18 per share at the grant date.In 2017, John exercises the options when the stock's selling price was $40 per share.In 2019, John sells the stock for $50 per share.What is ABC Corporation's deduction if they are nonqualified stock options?

A)$0
B)$18,000 in 2017
C)$20,000 in 2017
D)$40,000 in 2019

Question 42

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 43

Harris Corporation granted Tyler 1,000 stock appreciation rights in 2014 when the stock was selling for $25 per share.In 2019, when the stock is selling for $60 per share, Tyler exercises these rights.How much income does Tyler recognize and in which year?

A)$0
B)$25,000 in 2014
C)$35,000 in 2019
D)$60,000 in 2019

Question 44

Five years ago, Devin Corporation granted Laura nonqualified stock options to buy 1,000 shares of Devin stock at $22 per share exercisable for six years.At the date of grant, the stock was selling for $19 per share.Laura exercised the options this year when the market price was $28 per share.How much income must Laura recognize from the exercise of the options?

A)zero
B)$3,000
C)$6,000
D)$22,000

Question 45

Brianna received 600 shares of her employer's stock as a bonus.She must return the stock to the company if she leaves before the 4-year vesting period ends.The fair market value of the stock at the time it was issued was $15,000.After 4 years, the stock vests when its fair market value is $32,000.Two years after vesting, Brianna sells the stock for $44,000.If Brianna makes no special election, how much income or gain does she recognize when she sells the stock?

A)$44,000
B)$32,000
C)$29,000
D)$12,000

Question 46

ABC Corporation awarded John 1,000 options in 2015; each option allows him to purchase one share of ABC Corporation stock for $20.The ABC stock was selling for $18 per share at the grant date.In 2017, John exercised the options when the stock's selling price was $40 per share.In 2019, John sells the stock for $50 per share.How much income does John recognize in 2017 when he exercised the options if they are incentive stock options?

A)$0
B)$18,000
C)$20,000
D)$40,000

Question 47

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 48

ABC Corporation awarded John 1,000 options in 2015; each option allows him to purchase one share of ABC Corporation stock for $20.The ABC stock was selling for $18 per share at the grant date.In 2017, John exercised the options when the stock's selling price was $40 per share.In 2019, John sells the stock for $50 per share.How much gain does John recognize in 2019 when he sells the stock if they are incentive stock options?

A)$0
B)$10,000
C)$20,000
D)$30,000

Question 49

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 50

In 2014, Hu Corporation granted incentive stock options to Trevor to buy 5,000 shares of Hu stock at $20 per share exercisable for six years.At the date of grant, the stock was selling for $19 per share.In 2017, Trevor exercises the options when the market price was $38 per share.Trevor sells the stock in 2019 for $42 per share.How much income or gain does Trevor recognize and in which year?

A)$110,000 capital gain in 2019 only
B)$95,000 income in 2014 only
C)$90,000 income in 2017 and $20,000 capital gain in 2019
D)$90,000 income in 2017 only

Question 51

Susie worked as a counselor at a wilderness camp for inner city children for six weeks during the summer.Her weekly benefits included a $200 salary, lodging in a private cabin valued at $60, and meals in the camp dining facilities worth $70.Susie was required by her employer to be available at all times during the 6-week period in case of emergencies.How much must Susie include in her gross income?

A)$1,200
B)$1,560
C)$1,620
D)$1,980

Question 52

Elizabeth received the following benefits from her employer this year: -$5,000 year-end bonus for exceeding sales expectations
-$400 cash as a length-of-service award
-$2,400 for insurance premiums paid by her employer for a disability income policy
-$5,100 for tuition paid by her employer for courses not related to her job under an educational assistance plan
How much must Elizabeth include in gross income?

A)$5,000
B)$5,400
C)$10,100
D)$12,900

Question 53

ABC Corporation awarded John 1,000 options in 2015; each option allows him to purchase one share of ABC Corporation stock for $20.The ABC stock is selling for $18 per share at the grant date.In 2017, John exercises the options when the stock's selling price was $40 per share.In 2019, John sells the stock for $50 per share.What is ABC Corporation's deduction if they are incentive stock options?

A)$0
B)$18,000
C)$20,000
D)$40,000

Question 54

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.

Question 55

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 56

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 57

In 2016 Martinez Corporation granted nonqualified stock options to Shawn to buy 1,000 shares of Martinez stock at $15 per share exercisable for six years.At the date of grant, the stock was selling for $10 per share.In 2018 Shawn exercises the options when the market price is $40 per share.In 2019, Shawn sells the 1,000 shares of stock for $42 per share.How much is the deduction that Martinez Corporation is allowed and in which year?

A)$5,000 in 2016
B)$10,000 in 2016
C)$25,000 in 2018
D)$27,000 in 2019

Question 58

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 59

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 60

The contribution limit for a defined contribution plan for 2019 is:

A)$6,000
B)$19,000
C)$56,000
D)$225,000

Question 61

Carl, age 44, wants to contribute the maximum allowed to a Roth IRA.He is single and his AGI is $124,000.How much can he contribute to the Roth IRA?

A)$6,000
B)$5,200
C)$2,000
D)$800 AGI Phase-Out Ranges for 2019 IRAs
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Phase-out range }$
$\begin{array}{lcc} \hline & \text { Single } & \text { Married filing jointly } \\\text { Traditional } & \$ 64,000-\$ 74,000 & \$ 103,000-\$ 123,000 \\\text { Roth } & \$ 122,000-\$ 137,000 & \$ 193,000-\$ 203,000\end{array}$

Question 62

Megan accepts an assignment working in Germany for the first 9 months of 2019 from Ferguson Corporation.Ferguson Corporation paid Megan's salary of $78,000 plus an additional $7,000 bonus.Megan paid $5,000 to the German government in taxes on this income.During 2019, Megan also earned $9,000 of interest income from corporate bonds and $4,000 of dividend income from U.S.corporations.The maximum foreign earned income exclusion for 2019 is $105,900.How much should Megan include in her gross income on her U.S.tax return for 2019?

A)$98,000
B)$20,000
C)$13,000
D)zero

Question 63

What is the maximum deductible contribution that Erick (age 32 and single) can make in 2019 to an Individual Retirement Account(s) if he earns $62,000 and is not covered by an employer-sponsored retirement plan?

A)$7,000 ($6,000 plus an extra $1,000 catch-up contribution) to a traditional IRA and zero to a Roth IRA.
B)$6,000 to a traditional IRA but only $1,500 additional to a Roth IRA
C)$6,000 to a traditional IRA
D)$4,500 to a traditional IRA due to the income limitation
AGI Phase-Out Ranges for 2019 IRAs
$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { Phase-out range }$
$\begin{array}{lcc} \hline & \text { Single } & \text { Married filing jointly } \\\text { Traditional } & \$ 64,000-\$ 74,000 & \$ 103,000-\$ 123,000 \\\text { Roth } & \$ 122,000-\$ 137,000 & \$ 193,000-\$ 203,000\end{array}$

Question 64

During 2019, Kyle has net income of $200,000 from consulting as an independent contractor.How much must Kyle pay for self-employment tax (rounded to the nearest dollar)?

A)$30,600
B)$21,836
C)$21,722
D)$15,300
$\begin{array}{|l|r|r|}\hline \text { Social Security and Medicare Taxes } & \mathbf{2 0 1 9} & \mathbf{2 0 1 8} \\\hline \text { FICA Social Security tax rate } & 6.2 \% & 6.2 \% \\\hline \text { SECA Social Security tax rate } & 12.4 \% & 12.4 \% \\\hline \text { FICA Medicare tax rate } & 1.45 \% & 1.45 \% \\\hline \text { SECA Medicare tax rate } & 2.9 \% & 2.9 \% \\\hline \text { Social Security income limit } & \$ 132,900 & \$ 128,400 \\\hline \text { Medicare tax income limit } & \text { None } & \text { None } \\\hline \text { Total SECA rate below SS income limit } & 15.3 \% & 15.3 \% \\\hline \begin{array}{l}\text { Deductible SECA rate below SS income } \\\text { limit }\end{array} & 7.65 \% & 7.65 \% \\\hline\end{array}$

Question 65

All of the following are retirement plans that can be offered by a corporation except:

A)401(k)
B)Keogh Plan
C)A SEP
D)Defined contribution plan

Question 66

Tom, a calendar-year taxpayer, worked in Japan from July 1, 2018 through June 30, 2019.He earned $80,000 in 2018 and $90,000 in 2019 while in Japan.The maximum foreign earned income exclusion amount is $103,900 for 2018 and $105,900 for 2019.Which of the following statements is true?

A)None of the income can be excluded in 2018 or 2019.
B)$52,950 can be excluded in both 2018 and 2019.
C)No exclusion in 2018 but $90,000 can be excluded in 2019.
D)$52,950 can be excluded in 2019.

Question 67

Pablo earns $85,000 from his regular job as a salesman and an additional $60,000 from his sole proprietorship in 2019.What is his self-employment tax (rounded to the nearest dollar)?

A)$21,483
B)$9,180
C)$7,546
D)$5,939
$\begin{array}{|l|r|r|}\hline \text { Social Security and Medicare Taxes } & \mathbf{2 0 1 9} & \mathbf{2 0 1 8} \\\hline \text { FICA Social Security tax rate } & 6.2 \% & 6.2 \% \\\hline \text { SECA Social Security tax rate } & 12.4 \% & 12.4 \% \\\hline \text { FICA Medicare tax rate } & 1.45 \% & 1.45 \% \\\hline \text { SECA Medicare tax rate } & 2.9 \% & 2.9 \% \\\hline \text { Social Security income limit } & \$ 132,900 & \$ 128,400 \\\hline \text { Medicare tax income limit } & \text { None } & \text { None } \\\hline \text { Total SECA rate below SS income limit } & 15.3 \% & 15.3 \% \\\hline \begin{array}{l}\text { Deductible SECA rate below SS income } \\\text { limit }\end{array} & 7.65 \% & 7.65 \% \\\hline\end{array}$

Question 68

Henry is an employee of Argus Corporation.His fringe benefits for the current year included: -$2,500 contributed by Argus to his qualified deferred compensation retirement plan.This year, the retirement plan earned $600 in interest and dividend income.Henry received no distributions from this plan
-A $500,000 face value group term life insurance policy for which Argus paid premiums of $650.Henry is a key employee and it is a discriminatory plan.The uniform monthly premium for $1,000 of group term life insurance is $0.15.
-The use of a company-owned automobile.The annual lease value of this car is $15,000.Henry used it 70% of the time (and miles) for personal use and 30% for business use.
-Free parking in the company parking lot (valued at $100 per month)
How much must Henry include in gross income?

A)zero
B)$10,575
C)$10,568
D)$11,150

Question 69

A taxpayer who is a bona fide resident of a foreign country for an entire tax year may:

A)Exclude up to $105,900 of earned income from gross income.
B)Take a foreign tax credit for foreign taxes paid on the foreign income.
C)Take a deduction for foreign taxes paid on foreign income.
D)Select any one of the above alternatives.

Question 70

Sara, a cash-basis, calendar-year taxpayer, worked overseas for the past three years and is eligible for the foreign earned income exclusion for the income earned from January 1 through January 31, 2019 before she returned to the United States.She was paid $30,000 including bonuses for this month's work but she did not have to pay any foreign taxes on this income.The maximum foreign earned income exclusion for 2019 is $105,900.What is her foreign earned income exclusion for 2019?

A)She has no exclusion, as she paid no foreign taxes.
B)$8,994
C)$30,000
D)$103,900

Question 71

During 2019, Zach has net income from his sole proprietorship of $35,000.He also earned $106,600 as an employee in 2019.How much self-employment tax must Zach pay?

A)$5,355
B)$4,905
C)$4,945
D)$4,199
$\begin{array}{|l|r|r|}\hline \text { Social Security and Medicare Taxes } & \mathbf{2 0 1 9} & \mathbf{2 0 1 8} \\\hline \text { FICA Social Security tax rate } & 6.2 \% & 6.2 \% \\\hline \text { SECA Social Security tax rate } & 12.4 \% & 12.4 \% \\\hline \text { FICA Medicare tax rate } & 1.45 \% & 1.45 \% \\\hline \text { SECA Medicare tax rate } & 2.9 \% & 2.9 \% \\\hline \text { Social Security income limit } & \$ 132,900 & \$ 128,400 \\\hline \text { Medicare tax income limit } & \mathrm{None} & \mathrm{None} \\\hline \text { Total SECA rate below SS income limit } & 15.3 \% & 15.3 \% \\\hline \text { Deductible SECA rate below SS income limit } & 7.65 \% & 7.65 \% \\\hline\end{array}$