Deck 4: Employee Compensation

Question 1

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

Answer 1

True

Question 2

_____ 10. 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 2

False

Question 3

_____ 6. All employee fringe benefits are tax free

Answer 3

False

Question 4

_____ 7. If a health plan is self-insured, highly-compensated employees are not affected by the nondiscrimination rules.

Question 5

_____ 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 6

____ 17. Self-employed individuals make the deposits to their self-employment taxes in the months of April, July, September, and January.

Question 7

_____ 4. 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 8

_____ 14. In a defined benefit retirement plan, the employer bears the financial risk for the plan investments.

Question 9

_____ 11. An employee who receives an incentive stock option normally recognizes no income until the stock acquired with the option is sold.

Question 10

_____ 8. As long as the plan is nondiscriminatory, any life insurance provided employees as a fringe benefit is tax-exempt.

Question 11

_____ 15. 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.

Question 12

_____ 5. 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.

Question 13

_____ 13. 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 14

_____ 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 15

_____ 16. The Rabbi trust is a type of qualified retirement plan.

Question 16

_____ 19. A person who qualifies for the foreign earned income exclusion can exclude $16,336 of paid housing costs from income.

Question 17

_____ 9. An employee holiday party would be a tax-exempt de minimis fringe benefit.

Question 18

_____ 12. 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 19

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

Question 20

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

Question 21

What is a Keogh plan?

Question 22

George is 34 years old. His employer provides him with $200,000 of group term life insurance as a fringe benefit. The policy costs his employer $25 per month. How much income does George have for the year if?
a. The benefit is provided on a nondiscriminatory basis?
b. The benefit discriminates in favor of key employees, but George is not a key employee?
c. The benefit discriminates in favor of key employees and George is considered a key employee?

Question 23

Tom works two part-time jobs while going to school. He works at a clothing store because he is allowed a 30 percent discount on his clothes purchases and a cellular phone store that allows him a 50 percent discount on his cell phone service. During the year, he purchases clothes valued at $1,000 for $700. The store marks up its clothing 100 percent. He pays $240 ($20 per month) for his discounted cell phone service. How much income in addition to his salaries must he report for these fringe benefits?

Question 24

Briefly explain a cafeteria plan for employee fringe benefits.

Question 25

Maureen is a cash-basis, calendar-year taxpayer and works as a sales manager for Teton Corporation, an accrual basis, calendar-year corporation. Teton's president and 100 percent owner, Tom, (also a cash-basis taxpayer) authorizes a $25,000 bonus for Maureen and a $100,000 bonus for himself on December 22, year 1. The company pays his bonus on February 2, but fails to pay Maureen's bonus until March 30, year 2.
a. How much income do Maureen and Tom recognize in years 1 and 2?
b. What is Teton's compensation deduction for the bonus in years 1 and 2?
c. What is Teton's compensation deduction for the bonus for each year if, instead, both bonuses were paid on February 2 of year 2?

Question 26

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

Question 27

What type of educational expenses may an employer reimburse an employee for on a tax-free basis if the employer does not have a qualified educational assistance plan?

Question 28

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

Question 29

Barry's firm purchases a $31,000 automobile for his business and personal use. Barry uses the auto 80 percent for business and 20 percent for personal use in 2017. Assume that the IRS tables show that the annual lease-value of a $31,000 automobile is $8,250. If the company takes full depreciation deductions for the auto, how much income must Barry recognize?

Question 30

Contrast a qualified defined contribution plan with a qualified defined benefit plan for the employee.

Question 31

Explain a flexible spending arrangement for uninsured health costs and why it is beneficial to a taxpayer.

Question 32

Explain the difference between a phantom stock plan and stock appreciation rights.

Question 33

Samson Company offers its employees a cafeteria plan. Julie is allotted $5,000 to spend on fringe benefits. She chooses a health insurance plan that costs $2,500 per year, a $50,000 whole life insurance policy with a $500 annual premium, and the remaining $2,000 she uses for the company's child and dependent care program. What is Julie's taxable compensation if her salary is $42,000?

Question 34

When is a person eligible to use the foreign earned income exclusion?

Question 35

What relocation expenses are deductible by a self-employed person who changes his primary job location from Nashville to Chicago?

Question 36

George is offered a new job. He lives in Bedford and he travels 27 miles from his home to his old job. How far must this home be from his new job to entitle him to a deduction for his moving expenses?

Question 37

Briefly explain the tax differences between a nonqualified stock option and an incentive stock option.

Question 38

Walter works busy season at Abby's Bed and Breakfast. His employer requires him to live in a spare room so that he is available to assist with breakfast and take care of any other needs of the guests on their arrival or during their stays. The room is valued at $600 per month for the 6 months he works there. During this time, his employer pays Walter a salary of $1,200 per month and gives him an additional $200 per month to help pay the cost of health insurance that he purchases for himself. The employer also supplies him with uniforms for work valued at $700. What is Walter's taxable income for the six months that he works at the bed and breakfast?

Question 39

What are the tax consequences to Sherry and Azores Corporation if the company grants Sherry 1,000 stock appreciation rights when the stock is selling for $23 per share, and she exercises these rights four years later when the stock is selling for $35 per share?

Question 40

Briefly explain the differences in taxation between distributions from a traditional IRA and distributions from a Roth IRA.

Question 41

Kerry became a bona fide resident of Spain in 2016. She worked in Spain for 180 days in 2016 earning $110,000. Due to a death in the family, Kerry had to leave her position in Spain in December of 2017 and return to the states. She was in Spain for 345 days and earned $125,000 in 2017. How much of Kerry's income in 2016 and 2017 is eligible for the foreign earned income exclusions?

Question 42

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 43

During 2017, Jackson Corporation paid Brittany a salary of $110,000. How much is Jackson Corporation's deduction (rounded to the nearest dollar) for its share of FICA taxes paid on Brittany's compensation?

A) $8,942
B) $8,415
C) $7,347
D) $6,820

Question 44

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 45

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 46

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 47

During 2017, Lee Corporation paid Nicole a salary of $118,000 and a bonus of $20,000. How much (rounded to the nearest dollar) is Lee Corporation required to withhold from Nicole's compensation for her share of FICA taxes?

A) $9,027
B) $9,065
C) $9,348
D) $10,557

Question 48

Bill was awarded 3,000 options; each option allows him to purchase one share of BK's stock for $15. The stock is currently selling for $12 per share. Three years later, Bill exercises the options when the stock's selling price is $21 per share. Two years later, Bill sells the stock for $20 per share. What are Bill's and BK's tax consequences for these transactions if the options are:
a. Incentive stock options
b. Nonqualified stock options

Question 49

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 50

Jose worked at an architectural firm as an employee for the first four months of 2017 before he established his own business. He earned $53,300 at the architectural firm. His net income from his sole proprietorship was $78,000. Determine Jose's self-employment tax for 2017.

Question 51

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 52

George's flexible spending 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 53

Which of the following statements is correct?

A) All FICA taxes are paid by the employer.
B) The employee pays one-half of the FUTA tax.
C) The employer pays the FUTA tax and the employer's share of the FICA tax.
D) The employee pays the FUTA tax and the employee's share of the FICA tax.

Question 54

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 55

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 56

Warren has $62,400 of net income from his sole proprietorship. How much is his self-employment tax on this income in 2017?

Question 57

Taxable compensation received from a business does not include:

A) The employee's share of FICA taxes
B) The employer's share of FICA taxes
C) Bonuses paid to the employee
D) Reimbursements for personal expenses

Question 58

Carole, age 38, is single and works as a physical therapist. She is covered by her employer's retirement plan. What is the maximum deductible contribution she can make to a traditional IRA in 2017 if her AGI is $64,000?

Question 59

Match the basic limitation on contributions to the retirement plans for 2017 with the retirement plan. Limitations may be used more than once. Assume all taxpayers are under age 50, unless stated otherwise.
1. _____ Roth IRA
2. _____ 401(k) plan
3. _____ Defined benefit retirement plan
4. _____ Defined contribution retirement plan
5. _____ Nonqualified deferred compensation plan
6. _____ IRA (taxpayer over age 50)
7. _____ Spousal IRA
8. _____ Keogh plan (defined contribution)
a. No limit
b. $5,500
c. $6,500
d. $18,000
e. $54,000
f. $215,000

Question 60

During 2017, Jones Corporation paid Joshua a salary of $100,000 and a bonus of $30,000. What is Jones Corporation's deduction (rounded to the nearest dollar) for its share of FICA taxes paid on Joshua's compensation for 2017?

A) $6,200
B) $7,985
C) $9,232
D) $9,771

Question 61

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 62

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 63

In 2017 Lindsey accepts a job in a new state. She spends $4,000 for packing and moving household goods, $1,200 to break the lease on her apartment, and $1,500 to store the household goods for 45 days. In April she drove her car 1,400 miles to her new home and spent $250 for motels and $80 for meals while traveling to the new home. The 2017 standard mileage rate for business miles is 53.5 cents per mile and the rate for moving is 17 cents per mile. What are Susie's deductible moving expenses?

A) $4,516
B) $5,488
C) $6,098
D) $7,216

Question 64

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 65

Manuel's employer provides him with $80,000 of group term life insurance coverage for the year at no cost. 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 66

In 2014 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 2016 Shawn exercises the options when the market price is $40 per share. In 2017, 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 2014
B) $10,000 in 2014
C) $25,000 in 2016
D) $27,000 in 2017

Question 67

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

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

Question 68

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 69

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) Unreimbursed expenses are deductible as an itemized deduction.

Question 70

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 71

In 2012, 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 2015, Trevor exercises the options when the market price was $38 per share. Trevor sells the stock in 2017 for $42 per share. How much income or gain does Trevor recognize and in which year?

A) $110,000 capital gain in 2017 only
B) $95,000 income in 2012 only
C) $90,000 income in 2015 and $20,000 capital gain in 2017
D) $90,000 income in 2015 only

Question 72

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 73

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 74

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 75

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) Qualified moving expenses

Question 76

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 77

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 78

Kaylee obtained a new job in another state. She incurred the following moving expenses: $\begin{array}{ll}\text {Transportation of furniture and household goods}&\$1,000\\\text { Air fare for Kaylee}&300\\\text {Air fare for Kavlee's husband and children }&900\\\text { House-hunting trip }&1,100\end{array}$
Kaylee's employer reimburses her $3,300 for the above expenses. Assuming that Kaylee meets the time and distance tests, how much income does Kaylee have as a result of this reimbursement of her moving expenses?

A) 0
B) $900
C) $1,100
D) $2,000

Question 79

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 80

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.