Maroon Corporation expects the employees' income tax rates to increase next year. The employees use the cash method. The company presently pays on the last day of each month. The company is considering changing its policy so that the December salaries will be paid on the first day of the following year. What would be the effect on an employee of the proposed change in company policy for paying its salaries beginning December 2017?

Question

Quizplus · Accepted Answer

Under the cash method of accounting, the employee recognizes the income when it is received or constructively received. Constructive receipt means the employee has the ability to receive the income and it is not subject to any substantial limitation or restriction. In this case, if the company changes its policy to pay the December salaries on the first day of the following year, the employees will not have constructive receipt of the income until 2018 when they actually receive it. Therefore, the employee will not be required to recognize the income until it is received, in 2018.

Maroon Corporation Expects the Employees' Income Tax Rates to Increase