Question 1

Employers must withhold state and federal income tax from compensation paid to independent contractors.

Accepted Answer

Employers are not required to withhold state and federal income tax from compensation paid to independent contractors, as independent contractors are responsible for paying their own taxes through estimated tax payments.

Question 2

Olan Inc.provides an on-site day care center free of charge to employees who have pre-school children.Employees who enroll their children may exclude the value of this fringe benefit from gross income.

Accepted Answer

This statement is true. Under Section 125 of the Internal Revenue Code, employers can provide certain benefits to employees on a tax-free basis, including on-site daycares for preschool children. This means that employees who enroll their children in the on-site daycare can exclude the value of this benefit from their gross income, which reduces their taxable income.

Question 3

The value of a nontaxable fringe benefit is different for each employee because employees have different financial needs and consumption preferences.

Accepted Answer

The value of a nontaxable fringe benefit, such as health insurance or a company car, may vary for each employee based on their individual circumstances and preferences. For example, an employee with a family may value health insurance more than a single employee, while a salesperson may place a higher value on a company car than an employee who primarily works from home.

Question 4

A stock option is the right to purchase the stock of a corporate employer at a stated price for an indefinite period of time.

Accepted Answer

A stock option grants the right to purchase a company's stock at a set price for a limited period of time, not indefinitely.

Question 5

Stock options are a form of compensation that requires a substantial cash outlay by the corporate employer.

Accepted Answer

Stock options are not a form of compensation that requires a substantial cash outlay by the corporate employer. They are a form of equity compensation where employees are granted the right to purchase company shares at a predetermined price, typically lower than the market price. The cost to the employer is the difference between the exercise price and the market price at the time the employee exercises the option.

Question 6

Wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.

Accepted Answer

According to the IRS, wages paid by an employer to an employee who is the employer's child under age 18 are not subject to federal FICA and unemployment taxes.

Question 7

Self-employed individuals are allowed to deduct the cost of health insurance for themselves and their families only as an itemized deduction.

Accepted Answer

Self-employed individuals can deduct the cost of health insurance for themselves and their families as an above-the-line deduction, meaning it reduces their adjusted gross income (AGI) without being subjected to itemization limitations. This is allowed under certain conditions outlined by the IRS.

Question 8

In 2017,Largo Inc.,a calendar year corporation,accrued a $45,000 year-end bonus payable to its CEO.Largo and the CEO are not related parties.Largo paid the bonus to the CEO on April 3,2018.Dargo can deduct the bonus in 2017.

Accepted Answer

The answer of In 2017,Largo Inc.,a calendar year corporation,accrued a...

Question 9

Employees don't include the value of any compensatory fringe benefits in gross income because the benefit doesn't consist of a direct cash payment.

Accepted Answer

Employees must include the value of most compensatory fringe benefits in their gross income, unless specifically excluded by law, regardless of whether the benefits are provided in cash or another form.

Question 10

An S corporation generated $160,000 ordinary taxable income this year.The shareholders must pay both income and self-employment tax on their pro rata shares of this income.

Accepted Answer

S corporation shareholders must pay income tax on their pro rata shares of the corporation's income, but they do not pay self-employment tax on this income.

Question 11

A shareholder-employee of an S corporation prefers to receive a greater salary rather than a greater pro-rata share of corporate taxable income.

Accepted Answer

A shareholder-employee of an S corporation might prefer a greater pro-rata share of corporate taxable income over a greater salary because the distribution is not subject to payroll taxes, whereas salary is subject to payroll taxes.

Question 12

An employee recognizes taxable income if his employer provides group-term life insurance coverage in excess of $50,000.

Accepted Answer

According to IRS regulations, any employer-provided group-term life insurance coverage in excess of $50,000 is considered taxable income to the employee.

Question 13

The classification of a worker as an employee or an independent contractor determines how much payroll tax a company must pay.

Accepted Answer

The classification of a worker as an employee or an independent contractor determines how much payroll tax a company must pay. Independent contractors are responsible for their own taxes, while employers are responsible for withholding and paying taxes for their employees.

Question 14

In 2017,Dargo Inc.,a calendar year corporation,accrued a $75,000 year-end bonus payable to its CEO.Dargo and the CEO are not related parties.Dargo paid the bonus to the CEO on February 8,2018.Dargo can deduct the bonus in 2017.

Accepted Answer

According to the accrual method of accounting, expenses are recognized when incurred, regardless of when they are paid. In this case, Dargo Inc. accrued the bonus payable to its CEO in 2017, so it can deduct it in 2017, even if it is paid in 2018. Therefore, the statement is true.

Question 15

The IRS is less likely to raise the issue of reasonable compensation during the audit of a publicly held corporation than a closely held corporation.

Accepted Answer

This is because publicly held corporations have more regulation and oversight in terms of executive compensation, making it less likely for the IRS to question the reasonableness of compensation during an audit. Closely held corporations, on the other hand, have more flexibility in executive compensation and therefore may be scrutinized more closely by the IRS.

Question 16

A cafeteria plan allows employees to select between a variety of nontaxable fringe benefits or taxable cash compensation.

Accepted Answer

A cafeteria plan, also known as a flexible spending account or Section 125 plan, allows employees to choose from a variety of nontaxable fringe benefits, such as health and dental insurance, dependent care assistance, and retirement savings plans, or taxable cash compensation. This allows employees to customize their compensation package to meet their individual needs and preferences.

Question 17

Mr.Hazel,the principal executive officer of a publicly held corporation,received $2.5 million compensation this year.The compensation consisted of an $800,000 salary and a $1.7 million bonus because Mr.Hazel met a performance goal established by outside members of the board of directors.The corporation is allowed to deduct the entire amount of Mr.Hazel's compensation.

Accepted Answer

The corporation is allowed to deduct the entire amount of Mr. Hazel's compensation, as it is within the limit set by the Internal Revenue Service (IRS) for deductibility of executive compensation.

Question 18

Self-employed individuals have fewer opportunities than employees to underpay income and payroll taxes.

Accepted Answer

This statement is false. Both self-employed individuals and employees have opportunities to underpay income and payroll taxes, but the methods may differ due to the different tax structures and deductions available to each. It is important for all taxpayers to accurately report their income and pay the appropriate amount of taxes.

Question 19

The value of employer-provided health insurance is excluded from the employee's gross income.

Accepted Answer

Employer-provided health insurance is considered a tax-free benefit and is therefore excluded from the employee's gross income.

Question 20

An independent contractor is not entitled to the same fringe benefits as an employee.

Accepted Answer

As an independent contractor, one is not considered an employee and therefore is not entitled to receive the same fringe benefits that an employee would receive. Independent contractors are responsible for their own benefits and liabilities.

Quiz 15: Compensation and Retirement Planning