Deck 15: Compensation and Retirement Planning

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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.

Question 5

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

Question 6

Dargo Inc., a calendar year corporation, accrued a $75,000 year-end bonus payable to its CEO in 2015. Dargo and the CEO are not related parties. Dargo paid the bonus to the CEO on February 8, 2016. Dargo can deduct the bonus in 2015.

Question 7

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

Question 8

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

Question 9

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.

Question 10

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

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.

Question 12

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.

Question 13

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

Question 14

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

Question 15

Largo Inc., a calendar year corporation, accrued a $45,000 year-end bonus payable to its CEO in 2015. Largo and the CEO are not related parties. Largo paid the bonus to the CEO on April 3, 2016. Dargo can deduct the bonus in 2015.

Question 16

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.

Question 17

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

Question 18

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

Question 19

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.

Question 20

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 21

A Keogh plan for the benefit of a self-employed individual is considered a nonqualified retirement plan.

Question 22

Unreimbursed employment-related business expenses are a miscellaneous itemized deduction.

Question 23

Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.

Question 24

Carl Meyer, age 56, terminated his employment with his corporate employer because he wanted to begin a second career as a freelance photographer. If Carl withdraws funds from his employer-sponsored qualified plan, he will pay the 10% premature withdrawal penalty.

Question 25

Keogh plans allow self-employed individuals to save for retirement on a tax-deferred basis.

Question 26

The 10% penalty imposed on premature withdrawals from qualified retirement plans is intended to discourage participants from withdrawing funds before retirement.

Question 27

Reimbursed employment-related business expenses have no net effect on the employee's taxable income.

Question 28

An employer is allowed to deduct the accrued expense for the employer's liability to pay nonqualified deferred compensation.

Question 29

New companies and those with volatile earnings and uncertain cash flows generally prefer defined-contribution plans to defined-benefit plans.

Question 30

Employees typically recognize compensation income in the year in which they are granted stock options.

Question 31

Contributions to an employer-sponsored qualified retirement plan are deductible by the employer in the year of contribution but are not included in the employees' gross income.

Question 32

Section 401(k) plans allow employees to contribute a portion of their current wages or salary to a tax-exempt retirement account. However, the contributed portion is still taxable compensation to the employee.

Question 33

A Keogh plan maintained for the owner of an unincorporated business must cover all employees of the business on a nondiscriminatory basis.

Question 34

Employers typically use nonqualified deferred compensation plans to provide additional retirement savings for rank-and-file employees.

Question 35

Retired participants in employer-sponsored qualified retirement plans must begin receiving distributions no later than the year following the year in which they reach age 70½.

Question 36

This year, Larry was awarded a bonus by his corporate employer that will be paid in five annual installments beginning in the year Larry retires. The employer's liability for the future payment is unfunded. Even though Larry earned the bonus this year, he does not recognize any current income.

Question 37

Defined-contribution plans provide participants with a targeted retirement benefit, typically in the form of a monthly pension.

Question 38

Profit-sharing plans and employee stock ownership plans are examples of defined-benefit plans.

Question 39

Employees who save for retirement through an employer-sponsored qualified plan never include the earnings on their savings in gross income.

Question 40

Unreimbursed moving expenses are a miscellaneous itemized deduction.

Question 41

A sole proprietor in the 39.6% tax bracket pays her 16-year-old son a reasonable salary of $10,000 for services performed for the proprietorship. Compute the family's tax savings if the son has no other income, is claimed as a dependent on his parents' return, and takes a $6,300standard deduction.

A) $3,590
B) $3,960
C) $2,455
D) None of the above.

Question 42

Julie, a single individual, is employed by Dashell Inc. but doesn't participate in any employer-sponsored retirement plan. Julie's annual contribution to her traditional IRA is deductible.

Question 43

Which of the following statements concerning the client-independent contractor relationship is false?

A) A client may only accept or reject the final results of the work of an independent contractor.
B) An independent contractor is entitled to all the fringe benefits offered to the client's employees.
C) At the end of each tax year, a client issues a Form 1099 to an independent contractor reporting the compensation paid during the year.
D) An independent contractor must pay self-employment taxes.

Question 44

Traditional IRAs but not Roth IRAs are subject to a minimum distribution requirement when the owner reaches age 70½.

Question 45

Jason, a single individual, is employed by KLD Inc. but doesn't participate in any employer-sponsored retirement plan. Jason's annual contribution to his Roth IRA is deductible.

Question 46

Mrs. Connelly, a self-employed individual, maintains a defined-contribution Keogh plan. Regardless of the amount of her self-employment income, Mrs. Connelly may contribute $51,000 to the Keogh plan in 2015.

Question 47

Lansing Corporation, a publicly held company with a 35% marginal tax rate, paid its CEO an annual salary of $2.3 million. Ignoring payroll taxes, calculate the after-tax cost of this payment.

A) $2.3 million
B) $1.495 million
C) $1.95 million
D) $0

Question 48

Which of the following statements regarding employee versus independent contractor status is false?

A) The determination as to whether a worker is an employee or an independent contractor is based on a subjective set of guidelines.
B) An employer has a financial incentive to classify a worker as an independent contractor instead of an employee.
C) The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee.
D) If the IRS reclassifies a worker from independent contractor to employee, the employer can become liable for the employee's share of unpaid payroll taxes.

Question 49

Which of the following statements concerning the employer-employee relationship is true?

A) An employee has the right to direct and control how her duties are performed.
B) An employer generally sets the employee's work schedule.
C) At the end of each tax year, an employer issues a Form 1099 to each employee reporting the compensation paid during the year.
D) An employee must pay self-employment taxes.

Question 50

Any individual taxpayer who earns any amount of compensation or self-employment income can contribute $5,500 to a traditional IRA.

Question 51

Both traditional IRAs and Roth IRAs are tax-exempt accounts.

Question 52

Which of the following statements regarding the foreign earned income exclusion is false?

A) Expatriates may not claim a foreign tax credit for foreign tax paid on excluded income.
B) The exclusion is limited to an inflation-adjusted annual dollar amount.
C) The exclusion is available to any U.S. citizen employed by a foreign company.
D) The exclusion is available to any U.S. citizen working and residing in a foreign country.

Question 53

Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.

Question 54

Lansing Corporation, a publicly held company with a 35% marginal tax rate, paid its CEO an annual salary of $1 million plus a bonus of $1.3 million. The bonus was based a targeted amount of annual gross revenue. Ignoring payroll taxes, calculate the after-tax cost of this payment.

A) $2.3 million
B) $1.495 million
C) $1.95 million
D) $0

Question 55

An individual who wants to roll over the balance in an employer-sponsored qualified retirement plan to an IRA should always choose a Roth IRA over a traditional IRA.

Question 56

Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., an S corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?

A) The IRS can disallow Lessing's $50,000 deduction for the son's salary.
B) The IRS can treat the $50,000 payment as a constructive dividend to the son.
C) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams.
D) The discovery has no tax consequences to Mr. and Mrs. Williams or their son.

Question 57

Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., a regular corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?

A) The IRS can treat the $50,000 payment as a constructive dividend to the son.
B) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams.
C) The IRS can disallow Lessing's $50,000 deduction for the son's salary.
D) Both B. and C. are true.

Question 58

Wallace Corporation needs an additional worker on a multiyear project. It could hire an employee for a $30,000 annual salary. Alternatively, it could engage an independent contractor for a $35,000 annual fee. Which of the following is true?

A) Wallace must withhold payroll tax from the salary or the fee.
B) Wallace must withhold federal and state income tax from the salary or the fee.
C) Wallace must issue a Form W-2 to the employee or the independent contractor.
D) None of the above is true.

Question 59

Which of the following is not a factor considered by the courts when evaluating the reasonableness of an employee's compensation?

A) The number of hours worked and the duties performed by the employee.
B) The amount of compensation paid by other corporate employers in the same line of business to unrelated employees performing the same or similar services.
C) The employee's education and years of experience.
D) All of the above factors are considered.

Question 60

Which of the following statements regarding the tax consequences of wages is false?

A) Cash basis employees must report wages in the year payment is actually or constructively received.
B) Employees may elect whether or not their employer withholds income and payroll taxes from their wages.
C) Whether wages are currently deductible by the employer depends on the type of services rendered by the employee.
D) Wages paid to business employees are either deductible by the employer or treated as a capitalized cost.

Question 61

Mr. Sherman incurred $7,000 of employment-related business expenses. Which of the following statements is true?

A) If his employer reimbursed him for these expenses, Mr. Sherman must include the reimbursement in gross income.
B) If his employer reimbursed him for $6,000 of the expenses, Mr. Sherman is allowed a $1,000 above-the-line deduction.
C) If his employer reimbursed him for $6,000 of the expenses, Mr. Sherman is allowed a $1,000 itemized deduction not subject to the 2% AGI floor.
D) If his employer reimbursed him for $6,000 of the expenses, Mr. Sherman is allowed a $1,000 miscellaneous itemized deduction.

Question 62

Mr. Wang's corporate employer transferred him from its Seattle office to its San Jose office. Mr. Wang incurred $18,000 of moving expenses to relocate his household to San Jose. Which of the following statements is true?

A) If his employer paid him a $15,000 moving allowance, Mr. Wang is allowed a $3,000 above-the-line deduction.
B) If his employer paid him a $15,000 moving allowance, Mr. Wang is allowed a $3,000 itemized deduction not subject to the 2% AGI floor.
C) If his employer paid him a $15,000 moving allowance, Mr. Wang is allowed a $3,000 miscellaneous itemized deduction.
D) Mr. Wang is not allowed any deduction for unreimbursed moving expenses.

Question 63

Tony's marginal income tax rate is 28%, and he pays FICA tax on his entire salary (7.65% rate in 2015). Tony's employer offered him a choice between $5,000 additional salary or a nontaxable fringe benefit. Tony would have to pay $3,400 to purchase the benefit directly. Which of the following statements is true?

A) The fringe benefit and the additional salary have the same after-tax value.
B) The fringe benefit is worth $183 more than the additional salary.
C) The additional salary is worth $200 more than the fringe benefit.
D) None of the above is true.

Question 64

This year, Nilo Inc. granted incentive stock options (ISO) to 230 employees. For financial statement purposes, Nilo recorded a $179,200 expense for the estimated value of the ISOs. As a result of this transaction, Nilo has a:

A) Temporary favorable book/tax difference
B) Temporary unfavorable book/tax difference
C) Permanent favorable book/tax difference
D) Permanent unfavorable book/tax difference

Question 65

Six years ago, HOPCO granted Ms. Cardena a nonqualified option to purchase 1,000 shares of HOPCO stock at $12 per share. On date of grant, the market price was $10 per share. This year, Ms. Cardena exercised the option when the market price was $33 per share. Compute HOPCO's deduction resulting from the exercise.

A) $0
B) $12,000
C) $23,000
D) None of the above.

Question 66

Four years ago, Acnex Inc. granted Ms. Cardena an incentive stock option (ISO) to purchase 1,000 shares of Acnex stock at $44 per share. On date of grant, the market price was $42 per share. This year, Ms. Cardena exercised the option when the market price was $75 per share. Which of the following statements is true?

A) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $31,000 deduction this year.
B) Ms. Cardena recognizes $31,000 ordinary income, but Acnex is allowed no deduction this year.
C) Ms. Cardena recognizes no ordinary income, and Acnex is allowed no deduction this year.
D) Ms. Cardena recognizes no ordinary income, but Acnex is allowed a $31,000 deduction this year.

Question 67

Harold Biggs is provided with $200,000 coverage under his employer's group-term life insurance plan. Which of the following statements is true?

A) The value of $50,000 coverage is included in Harold's gross income.
B) The value of $150,000 coverage is included in Harold's gross income.
C) The value of $200,000 coverage is included in Harold's gross income.
D) Harold's life insurance coverage is a nontaxable fringe benefit.

Question 68

In 2008, Mr. Delgado exercised an option to purchase 1,000 shares of his employer's stock for $29 per share when the market price was $65 per share. This year, Mr. Delgado sold the stock for $80 per share. Which of the following statements is false?

A) If the option was an ISO, Mr. Delgado recognized a $51,000 gain on sale.
B) If the option was nonqualified, Mr. Delgado recognized a $15,000 gain on sale.
C) If the option was an ISO, Mr. Delgado has a $36,000 AMT preference item this year.
D) None of the above is false.

Question 69

Six years ago, Linus Corporation granted Pauline a nonqualified option to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the option when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

A) $135,000 gain
B) $10,000 loss
C) $35,000 loss
D) No gain or loss on sale

Question 70

Lawrence is a U.S. citizen who has worked in his employer's Paris office for the past five years. Compute Lawrence's 2015 AGI if his only item of income was his $130,000 salary.

A) $130,000
B) $100,800
C) $29,200
D) $0

Question 71

Jason Inc. maintains a qualified profit-sharing plan for its employees. This year, Jason contributed $2,300 to Ms. Preston's profit-sharing account. Which of the following statements is true?

A) Jason can deduct the contribution, and Ms. Preston must include the contribution in her gross income.
B) Jason can't deduct the contribution, but Ms. Preston must include the contribution in her gross income.
C) Jason can deduct the contribution, but Ms. Preston does not include the contribution in her gross income.
D) Jason can't deduct the contribution, and Ms. Preston does not include the contribution in her gross income.

Question 72

Which of the following statements concerning qualified retirement plans is false?

A) Employer contributions to the plan are not included in the employees' gross income.
B) The plan is tax-exempt so that earnings can accumulate on a before-tax basis.
C) Employer contributions are deductible in the year of payment.
D) None of the above is false.

Question 73

This year, Nilo Inc. granted nonqualified stock options to 230 employees. For financial statement purposes, Nilo recorded a $179,200 expense for the estimated value of the options. As a result of this transaction, Nilo has a:

A) Temporary favorable book/tax difference
B) Temporary unfavorable book/tax difference
C) Permanent favorable book/tax difference
D) Permanent unfavorable book/tax difference

Question 74

An employee receives $110,000 of group term life insurance coverage per year. The cost of this coverage to his employer is $90. The cost based on the IRS's uniform premium table is $1.08 per year per $1,000 of coverage. What amount is taxable to the employee?

A) $64.80
B) $54.00
C) $90.00
D) $118.80

Question 75

Eight years ago, Acnex Inc. granted Ms. Cardena a nonqualified option to purchase 1,000 shares of Acnex stock at $44 per share. On date of grant, the market price was $42 per share. This year, Ms. Cardena exercised the option when the market price was $75 per share. Which of the following statements is true?

A) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $31,000 deduction this year.
B) Ms. Cardena recognizes $31,000 ordinary income, and Acnex is allowed a $44,000 deduction this year.
C) Ms. Cardena recognizes $33,000 ordinary income, and Acnex is allowed a $33,000 deduction this year.
D) Ms. Cardena recognizes $33,000 ordinary income, and Acnex is allowed a $44,000 deduction this year.

Question 76

Six years ago, HOPCO granted Lin Sing a nonqualified option to purchase 1,000 shares of HOPCO stock at $55 per share. On date of grant, the market price was $50 per share. This year, Lin Sing exercised the option when the market price was $64 per share. How much ordinary income does Lin Sing recognize because of the exercise?

A) $0
B) $5,000
C) $9,000
D) $14,000

Question 77

Which of the following statements regarding fringe benefits is false?

A) The general rule is that an employee fringe benefit is taxable unless the benefit is specifically excluded from the employee's gross income.
B) Employers are not allowed to deduct the cost of nontaxable employee fringe benefits.
C) Nontaxable fringe benefits must be provided to employees on a nondiscriminatory basis.
D) None of the above is false.

Question 78

Six years ago, Linus Corporation granted Pauline an incentive stock option (ISO) to purchase 5,000 shares of Linus stock for $13 per share. On date of grant, the market price was $11 per share. Last year, Pauline exercised the option when the market price was $47 per share. This year, she sold the stock for $40 per share. Compute Pauline's gain or loss recognized on sale.

A) $135,000 gain
B) $10,000 loss
C) $35,000 loss
D) No gain or loss on sale

Question 79

Lana, an employee of Compton University, paid $1,500 for professional journal subscriptions and $1,000 of membership dues to academic organizations. These unreimbursed employment-related expenses are Lana's only miscellaneous itemized deduction. Which of the following statements is false?

A) If Lana's AGI is $136,000, none of the expenses are deductible.
B) If Lana's AGI is $87,500, $750 of the expenses is deductible.
C) If Lana's AGI is $42,000, $1,660 of the expenses is deductible.
D) None of these statements is false.

Question 80

Six years ago, HOPCO granted Lin Sing an incentive stock option (ISO) to purchase 1,000 shares of HOPCO stock for $55 per share. On date of grant, the market price was $50 per share. This year, Lin Sing exercised the ISO when the market price was $64 per share. How much ordinary income does she recognize because of the exercise?

A) $0
B) $5,000
C) $9,000
D) $14,000