Question 1

_____ 16.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 IR
a.

Accepted Answer

This is true for the tax year 2020. However, for tax years after 2020, the contribution limit may be adjusted for inflation.

Question 2

_____ 5.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

Sole proprietors must pay employment taxes on income earned by their children who work for the business, just like they would for any other employee.

Question 3

Which of the following statements is correct?

Accepted Answer

FICA taxes are split between the employer and employee, but the FUTA tax is solely paid by the employer. Therefore, the correct statement is that the employer pays the FUTA tax and the employer's share of the FICA tax.

Question 4

_____ 12.An employee who receives an incentive stock option normally will recognize no income until the stock acquired with the option is sold.

Accepted Answer

An employee who receives an incentive stock option will not recognize any income until the stock acquired with the option is sold. However, the employee may be subject to alternative minimum tax in the year the option is exercised.

Question 5

_____ 8.If a health plan is self-insured,highly-compensated employees are not affected by the nondiscrimination rules.

Accepted Answer

Highly-compensated employees are subject to nondiscrimination rules in all types of health plans, whether self-insured or fully-insured.

Question 6

_____ 2.An independent contractor pays self-employment taxes instead of FICA taxes.

Accepted Answer

Independent contractors are responsible for paying self-employment taxes, which includes both the employer and employee portions of FICA taxes (Social Security and Medicare) as well as additional taxes to cover the employer portion. This is because independent contractors are considered self-employed and therefore do not have an employer withholding these taxes from their paycheck.

Question 7

_____ 17.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 need to work out of the country for a complete tax year to be eligible for the foreign earned income exclusion. They must meet certain requirements, including being a bona fide resident of a foreign country or physically present in a foreign country for 330 days out of a 12-month period.

Question 8

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

Accepted Answer

The reason listed in option D is incorrect. The company still has to pay FUTA (Federal Unemployment Tax Act) on the wages paid to an independent contractor, just like they would for an employee. The other options are valid reasons why a business might prefer to hire an independent contractor over an employee.

Question 9

_____ 11.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

The statement is incorrect. The direct and indirect costs incurred by the taxpayer and paid by the employer would result in taxable income to the employee.

Question 10

_____ 15.In a defined benefit retirement plan,the employee bears the financial risk for the plan investments.

Accepted Answer

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

Question 11

Taxable compensation received from a business does not include:

Accepted Answer

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

Question 12

_____ 1.Employees are subject to and employers withhold FICA and FUTA taxes.

Accepted Answer

FICA taxes are withheld from employees' wages, but FUTA taxes are paid solely by employers and not withheld from employees' wages.

Question 13

_____ 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

This is because if the employer pays the premium for health insurance, it is not subject to income tax, while if the employee receives a salary increase to purchase health insurance on their own, it would be subject to income tax at the 25% tax bracket. Therefore, the taxpayer would prefer the tax-free benefit of having their employer pay the premium.

Question 14

_____ 3.S corporations have an incentive to pay unusually low salaries to an employee-shareholder to avoid FICA taxes.

Accepted Answer

S corporations are pass-through entities where the profits and losses are passed to the shareholders to report on their personal income tax returns. If an S corporation pays a salary to an employee-shareholder, both the corporation and the employee-shareholder are required to pay FICA taxes (Social Security and Medicare taxes) on the salary. However, if the S corporation pays an unreasonably low salary to the employee-shareholder, the IRS may reclassify some of the profits as wages subject to FICA taxes. Thus, S corporations have an incentive to pay unusually low salaries to avoid FICA taxes.

Question 15

_____ 14.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

Stock appreciation rights provide the employee with the right to receive the appreciation in the value of the company's stock without having to purchase the stock, thus allowing them to benefit from the increase in value.

Question 16

_____ 10.An employee holiday party would be a tax-exempt de minimis fringe benefit.

Accepted Answer

According to the IRS, an employee holiday party can be considered a tax-exempt de minimis fringe benefit if it meets certain criteria, such as being occasional and infrequent and having a low cost per employee. However, if the cost per employee goes above a certain threshold (currently $100), the excess amount may be considered taxable income. It is important for employers to carefully consider the tax implications of providing fringe benefits to their employees.

Question 17

_____ 13.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 recognizes income from a nonqualified stock option only when the option is exercised, not when it is received. The income is the difference between the market price and the strike price at the time of exercise.

Question 18

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

Accepted Answer

Independent contractors can deduct business expenses directly from their income, which can reduce their taxable income.

Question 19

_____ 4.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 is withheld on wages exceeding $200,000, not $150,000.

Question 20

_____ 9.As long as the plan is nondiscriminatory,any life insurance provided employees as a fringe benefit is tax-exempt.

Accepted Answer

Life insurance provided as a fringe benefit is generally taxable to employees, except for the first $50,000 of coverage, which is tax-exempt.

Quiz 4: Employee Compensation

_____ 16.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 IR a.