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.

Accepted Answer

This is the definition of stock appreciation rights. The employee has the right to receive the appreciation in cash or stock, but does not actually own stock in the company.

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.

Accepted Answer

An employee who receives a nonqualified stock option recognizes income only when the option is exercised, not when it is received. The income recognized is the difference between the stock's market value at the time of exercise and the option's strike price.

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.

Accepted Answer

This is true according to the IRS rules for 2021. However, if the employee is over 50 years old, they may be eligible to contribute an additional $1,000 in catch-up contributions, bringing their total contribution limit to $6,000 for the year.

Question 4

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

Accepted Answer

In a defined benefit retirement plan, the employer is responsible for funding the plan and bears the financial risk for the plan investments. This is because the plan guarantees a specific retirement income to the employee, regardless of the performance of the plan investments.

Question 5

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

Accepted Answer

The answer of Briefly contrast the FICA tax on an...

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.

Accepted Answer

The employer payment of the premium is not subject to income tax, whereas a salary increase would be subject to income tax, making the premium payment more financially beneficial for the taxpayer.

Question 7

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

Accepted Answer

The Medicare surtax applies to wages exceeding $200,000, not $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.

Accepted Answer

A sole proprietor must pay employment taxes on income earned by any of his or her children who work for the business if they are under 18 years old or if they are 18-21 years old and the business is not taxed as a corporation.

Question 9

All employee fringe benefits are tax free

Accepted Answer

Not all employee fringe benefits are tax free. Only certain benefits, such as health insurance and retirement plan contributions, are tax free up to certain limits. Others, such as group-term life insurance over $50,000 and personal use of a company car, are taxable.

Question 10

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

Accepted Answer

An employee who receives an incentive stock option (ISO) does not recognize income on the date of grant, exercise, or expiration of the ISO. Instead, income is recognized when the employee sells the stock acquired through the ISO.

Question 11

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

Accepted Answer

Employees are subject to and employers withhold FICA taxes, but only employers pay FUTA taxes; they are not withheld from employees' wages.

Question 12

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

Accepted Answer

Highly-compensated employees are still subject to nondiscrimination rules, whether the health plan is self-insured or not.

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.

Accepted Answer

While there may be costs incurred by the employee in the process of moving, the employer may still provide compensation or benefits that result in income for the employee. Additionally, if the employee negotiates a relocation package or other financial support from the employer, this could offset some or all of the costs incurred.

Question 14

Briefly explain a cafeteria plan for employee fringe benefits.

Accepted Answer

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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.

Accepted Answer

A taxpayer does not have to work out of the country for a complete tax year to be eligible for the foreign earned income exclusion. They must simply meet either the physical presence test or the bona fide residence test, as outlined by the IRS.

Question 16

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

Accepted Answer

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Question 17

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

Accepted Answer

According to the IRS, an occasional holiday party or other celebration that is provided to employees generally qualifies as a tax-exempt de minimis fringe benefit. This means that it is of little value and administratively impractical to account for, and thus does not need to be included in employees' taxable income. However, there are certain limits (such as the cost per person) and conditions that must be met for this to apply, so employers should consult IRS guidelines or a tax professional for more information.

Question 18

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

Accepted Answer

S corporations are structured to avoid double taxation by passing profits and losses directly to shareholders' personal tax returns. However, to avoid paying FICA taxes, S corporations may choose to pay employee-shareholders lower salaries and distribute profits as dividends, which are not subject to FICA taxes. This practice is legal but may attract scrutiny from the IRS if salaries are unreasonably and artificially low.

Question 19

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

Accepted Answer

Independent contractors are responsible for paying self-employment taxes, which cover Social Security and Medicare, instead of FICA taxes which are paid by employees and their employers.

Question 20

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

Accepted Answer

While life insurance provided to employees as a fringe benefit can be tax-exempt, it is only tax-exempt up to $50,000 of coverage per employee under the IRS guidelines. Coverage amounts above $50,000 are subject to inclusion in the employee's gross income for tax purposes, to calculate the cost of coverage that is taxable.

Quiz 4: Employee Compensation