Chapter 10 Review, Chapter 12 SmartBook

John and Holly employed a household worker for the entire year. They paid the household worker $600 per month in cash. How much do they owe in total taxes for the Part I calculation for social security and Medicare tax?

$1,101.60

Van Winkle received stock options from his employer, RiP, Inc. The options entitled Van to purchase 100 shares of RiP common stock at an exercise price of $20 per share. The options vested when the market price of the stock was $32 per share. Van exercised his options on the vesting date. He sold the stock several months later for $38 per share. What is the total bargain element on Van's stock? a. $600 b. $1,200 c. $2,000 d. $1,800

$1,200 ($32-$20) x 100; $12 x 100 = $1,200

Tyler has a 24 percent marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $5,040. If Tyler pays that same amount for health insurance premiums, he will need $7,000 in order to pay the premiums and the taxes on the compensation. How much of a cash flow savings is available to the company if it pays $5,040 for Tyler's health insurance, rather than $7,000 in compensation assuming the company has a 21 percent tax rate? a. $1,548 b. $2,481 c. $1,960

$1,548 ($7,000-$5040) x (1-.21) = $1,548

Dean earned $180,000 during the current year. Without regard to federal income taxes, how much will his employer withhold from his paycheck for social security taxes and Medicare taxes?

$10,571

Bruce is single and earns $3,000 per month. Bruce claimed two allowances. The federal income tax should be withheld from Bruce's paycheck using the percentage method is _____.

$221.8

Bruce is married filing jointly and earns $950 per week. Bruce claimed five allowances. The federal income tax that should be withheld from Bruce's paycheck using the wage bracket method is _____.

$32

Bruce is married filing jointly and earns $845 per week. Bruce claimed three allowances. The federal income tax that should be withheld from Bruce's paycheck using the wage bracket method is _____.

$38

ABC Company has one employee who was paid $60,000 during the current year. Assume that ABC pays state unemployment taxes and is entitled to the maximum credit of 5.4% subject to a federal unemployment tax rate of 0.6%. How much FUTA will ABC Company owe?

$42

Bruce is single and earns $750 per week. Bruce claimed two allowances. Bruce will have _____ of federal income tax withheld from his paycheck using the percentage method.

$58.11

Tyler earns $80,000 per year and has a 22 percent marginal tax rate. His employer is willing to provide health insurance coverage for Tyler if he will agree to a salary reduction. The insurance will cost the employer $4,680. How much salary should Tyler be willing to forgo to receive the $4,680 in health insurance coverage? a. $4,680 b. $6,000 c. $5,710

$6,000 $4,680/(1-.22) = $6,000

Sam is single and earns $845 per week. Sam claimed two allowances. The federal income tax should be withheld from Sam's paycheck using the wage bracket method is _____.

$70

Employers are generally allowed to deduct reasonable compensation paid to employees, but the level of deductible compensation is limited to a maximum of $______ for the CEO, CFO, and the next three highest paid officers of publicly traded corporations unless certain exceptions are met.

1 million

Dean i single and earned $280,000 during the current year. Without regard to federal income taxes, how much will his employer withhold from his paycheck for social security taxes and Medicare taxes? A. $13,020 B. $14,820 C. $23,940 D. $12,300

A. $13,020

John and Holly employed a household worker for the entire year. They paid the household worker $1,600 per month in cash. How much do they owe in total taxes for the Part I calculation for social security and Medicare tax? A. $2,937.60 B. $244.80 C. $1,468.80 D. John and Holly are not required to report.

A. $2,937.60

Which form is used to report amounts withheld for income, social security, and Medicare taxes for the quarter? A. Form 941 B. Form 941-X C. Form 944 D. Form 941-V

A. Form 941

Employers are required to send the Social Security Administration a copy of employees W-2s no later than A. January 31. B. January 15. C. February 28 (February 29 on leap years). D. December 31.

A. January 31.

Which of the following statements is correct regarding the deductibility of self-employment taxes? A. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FOR AGI. B. Taxpayers are allowed to deduct the employee portion of their self-employment taxes FOR AGI. C. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FROM AGI. D. Taxpayers are allowed to deduct the employee portion of their self-employment taxes FROM AGI.

A. Taxpayers are allowed to deduct the employer portion of their self-employment taxes FOR AGI.

What type of information is needed from an employee in order for the employer to withhold the correct amount of income tax from her paycheck? (Check all that apply.) A. The number of withholding allowances to claim B. Whether the employee earns a salary or she earns wages C. Whether the employee is single or married D. The age of the employee E. Whether or not the employee wants an additional amount withheld

Answers: A, C, E

Estimated taxes can be used to pay tax on taxable income from which of the following? (Check all the apply.) A. Interest B. Tips C. Alimony D. Salaries or wages E. Earnings from self-employment F. Dividends

Answers: A, C, E, F

Which of the following are necessary for the employer to know when determining the amount of tax to withhold under either the percentage method or the wage bracket method? (Check all that apply.) A. If the employee has another form of income (second job, investment income, etc.) B. Employee's marital status C. The number of exemptions claimed on the Form W-4 D. If the employee itemizes his/her deductions E. Pay period of the company (weekly, monthly, etc.)

Answers: B, C, E

Which one of the following statements is INCORRECT when referring to flexible spending accounts (FSAs)? a. Any money in the account at year end may be withdrawn and is taxable to the employee when received. b. The money in the account is set aside "before-tax" meaning that the money in the account is not subject to income tax. c. The money in the account must be used for qualified medical-related expenses or dependent care. d.Any money remaining in the account after the first two and a half months following the year end will be forfeited by the employee.

Any money in the account at year end may be withdrawn and is taxable to the employee when received.

Which one of the following statements is INCORRECT when referring to flexible spending accounts (FSAs)? a. The money in the account must be used for qualified medical-related expenses or dependent care. b. Any money remaining in the account after the first two and a half months following the year end will be forfeited by the employee. c. Any money in the account at year end may be withdrawn and is taxable to the employee when received. d.The money in the account is set aside "before-tax" meaning that the money in the account is not subject to income tax.

Any money in the account at year end may be withdrawn and is taxable to the employee when received.

ABC Company has state wages of $160,000 subject to FUTA and SUTA. ABC made timely deposits to its state fund. How much FUTA will ABC Company owe per employee? A. $960 B. $42 C. $9,600 D. $8,640

B. $42

Dean earned $80,000 during the current year. Without regard to federal income taxes, how much will his employer withhold from his paycheck for social security taxes and Medicare taxes? A. $12,240 B. $6,120 C. $4,960 D. $6,840

B. $6,120

How much of a self-employed taxpayer's self-employment tax may be deducted for AGI? A. Self-employment tax is deductible to the extent of the self-employment income. B. The employer portion of self-employment tax is deductible. C. All of the self-employment tax is deductible. D. None of self-employment tax is deductible.

B. The employer portion of self-employment tax is deductible.

Bruce is single and earns $1,750 semi-monthly. Bruce claimed two allowances. How much federal income tax should be withheld from Bruce's paycheck using the percentage method? A. $182.92 B. $168 C. $140.94 D. $105.3

C. $140.94

Rick withheld taxes from his employees' paychecks and deposited them on time, but did not use the electronic deposit system for his federal payroll tax deposits. What penalty, if any, is Rick subject to? A. 2% B. 15% C. 10% D. Rick is not subject to a penalty. E. 5%

C. 10%

Estimated tax payments are reported on what form? A. 1040 B. W-2C C. 1040ES D. W-2

C. 1040ES

An employer must withhold what percent of certain taxable payments if a payee fails to give an employer the correct TIN. A. 25% B. 15% C. 24%

C. 24%

How often are employers required to report payroll-related information to employees? A. Weekly B. Annually C. On each paycheck D. Monthly

C. On each paycheck

Payees can avoid backup withholding by furnishing a correct TIN to the payer on what form? A. W-3 B. W-4 C. W-9 D. W-2

C. W-9

Employer payments to the federal government consisting of income, social security, and Medicare taxes withheld from employee paychecks are called A. EFTPS. B. FICA taxes. C. payroll tax deposits.

C. payroll tax deposits.

A _____ _____ allows employees to choose their fringe benefit package up to a determined amount from a menu of options. The employee may receive cash in lieu of forgone benefits.

Cafeteria plan

Dean is single and earned $40,000 of wages and $10,000 in tips during the current year. Without regard to federal income taxes, how much will his employer withhold from his paycheck for social security taxes and Medicare taxes? A. $4,275 B. $3,060 C. $3,100 D. $3,825

D. $3,825

At the end of the year, the employer is required to summarize all of an employee's earnings and taxes on a A. Form W-3. B. Form W-4. C. Form W-9. D. Form W-2.

D. Form W-2.

Supplemental wages includes all of the following except A. vacation pay. B. commissions. C. taxable fringe benefits. D. salary.

D. salary.

Which of the following statements is CORRECT regarding compensation expense for employers in publicly traded corporations? a. Companies are only allowed to pay compensation of $1 million each to the top four executives. b. The tax deductible compensation is limited to $2 million for the CEO and $1 million for the next four most highly paid employees. c. Most performance-based compensation contracts in effect on November 2, 2017 are excluded from the limit. d. Deductible compensation expense must be considered reasonable under the facts and circumstances of the employment.

Deductible compensation expense must be considered reasonable under the facts and circumstances of the employment.

What is the advantage of having a cafeteria plan over a standard package of benefits? a. In a cafeteria plan, the employee can choose the benefits that are best suited to his or her situation. b. In a cafeteria plan, any cash received in lieu of benefits is a nontaxable fringe benefit. c. In a cafeteria plan, an employee can receive a higher level of benefits than is offered in a standard plan. d.In a cafeteria plan, the employer chooses the benefits package that will be received by each employee.

In a cafeteria plan, the employee can choose the benefits that are best suited to his or her situation.

Concerning employees, which of the following statements is INCORRECT when considering fringe benefits? a. Taxable fringe benefits are generally available to all employees on a nondiscriminatory basis. b. Employees must pay FICA tax in addition to income tax on taxable fringe benefits. c. Taxable fringe benefits are taxed at ordinary rates. d.Taxable fringe benefits are treated like cash compensation.

Taxable fringe benefits are generally available to all employees on a nondiscriminatory basis.

How is the amount of the employer's tax deduction for restricted stock determined? a. The amount of the deduction equals the fair market value of the stock on the grant date. b. The amount of the deduction equals the ordinary income that is recognized by the employees. c. The amount of the deduction equals the fair market value of the stock on the vesting date. d. The employer does not receive a tax deduction for issuing restricted stock to its employees.

The amount of the deduction equals the ordinary income that is recognized by the employees.

Which of the following fringe benefits are nontaxable fringe benefits for the recipient? (Check all that apply.) a. A below-market loan provided to an employee who needed an advance on his pay b. The cost of meals and lodging that is for the convenience of the employer c. Employer-paid premiums on a $50,000 group-term life insurance policy d. Employer-paid health insurance e. Season tickets for the local NFL team

The cost of meals and lodging that is for the convenience of the employer Employer-paid premiums on a $50,000 group-term life insurance policy Employer-paid health insurance

Which one of the following characteristics applies to taxable fringe benefits? a. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. b. Employees are not subject to FICA tax on taxable fringe benefits. c. Employers are not allowed a deduction for taxable fringe benefits as they are not treated the same as cash compensation. d. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level.

The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee.

The difference between the exercise price and the market value of the acquired shares on the date of exercise is called the _____ _____.

bargain element

_____-_____ compensation can provide motivational effects to employees and cash flow benefits to the company.

equity-based

True or false: Employers do not have to withhold taxes on employee tips.

false

True or false: Self-employed taxpayers pay the employee portion of the FICA tax burden through self-employment taxes, but they are exempt from paying the employer portion.

false

True or false: Supplemental wages are subject to social security and Medicare tax, but not FUTA taxes.

false

Accounts in which employees are allowed to set aside a portion of their before-tax salary to pay either health and/or dependent-care benefits are called: a. flexible spending accounts b. medical expense accounts c. cafeteria plan accounts d.Patient Protection and Affordable Care accounts

flexible spending accounts

By making a Section 83(b) election, the employee is taxed on the value of the restricted stock on the _____ date, rather than the _____ date.

grant vest

For both incentive stock options and nonqualified stock options, there are no tax consequences on either the _____ date or the _____ date.

grant vest

Taxable fringe benefits are subject to both federal _____ tax and _____ tax.

income FICA

Employees pay _____ taxes on their salary, wages, and other compensation at a current rate of 1.45% (2.35% for higher income taxpayers).

medicare

Self-employed persons pay FICA taxes on the _____ earnings from their business while employees pay FICA taxes on _____.

net wages

Nontaxable fringe benefits are very attractive to employees because after-tax cost for these benefits is _____. the cost of the benefits is _____ (nondeductible/deductible) for the employer.

nothing, 0, zero deductible

Restricted stock is taxed to employees at ______. a. ordinary rates on the full market value of the shares on the date the restricted stock vests b. long-term capital gains rates on the full market value of the shares on the date the restricted stock is sold c. long-term capital gains rates on the full market value of the shares on the date the restricted stock vests d.ordinary rates on the full market value of the shares on the date the restricted stock is sold

ordinary rates on the full market value of the shares on the date the restricted stock vests

In order for employers to determine the amount of tax to withhold, they will use either a(n) _____ method or a(n) _____ _____ method with a withholding table. (Enter one word per space.)

percentage wage bracket

Employees who receive compensation in the form of ____ stock do not have to pay for it, but forfeit ownership if they quit before the _____ date.

restricted vest

The type of compensation where employees receive a fixed amount regardless of the amount of hours worked is called a(n) _____. The type of compensation that is based on number of hours worked is called _____. Both types of compensation are taxed at to employees as _____ income and are subjected to _____ tax which includes Social Security and Medicare.

salary hourly ordinary FICA

Sole proprietors and independent contractors pay _____ _____ taxes on their net profit which represents both the employee and employer component of FICA and Medicare.

self employment

Employees pay _____ _____ taxes on their salary, wages, and other compensation at a current rate of 6.2%.

social security

True or false: An employee is able to increase or decrease the amount of tax withheld from his salary through information supplied on Form W-4.

true

True or false: Employees prefer to receive ISOs rather than NQOs because any gain on the subsequent sale of the stock may be taxed as a long-term capital gain if the required holding periods are met. a. True b. False

true

Employees receiving restricted stock are taxed on the fair market value of the shares on the _____ date (absent an election).

vesting

Payroll taxes not paid on a timely basis are subject to deposit penalties of at least _____%.

2%

Which of the following choices are characteristics of stock options? (Check all that apply.) a. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. b. The employee will receive the stock on the vesting date without having to pay for it. c. Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. d. If the market price is below the strike price, the employee may purchase the stock at FMV and sell it to the company for the option price. e. Employees may choose NOT to exercise their options if the market value of the shares is below the strike price.

Employees may exercise their options by paying the strike price to the employer anytime between the vesting and expiration dates. Employees may choose NOT to exercise their options if the market value of the shares is below the strike price.

Why do employees prefer ISOs to NQOs? a. ISOs result in gains that are exempt from taxation in the year the employee disposes of the stock. b. Employees who sell stock that was purchased with NQOs will recognize ordinary income on the entire realized gain regardless of holding period. c. Employees who meet the required holding period for ISOs will treat the difference between the sales proceeds and exercise price as a long-term capital gain. d. The bargain element is NOT taxed for ISOs which results in a lower gain to the employee when the stock is sold.

Employees who meet the required holding period for ISOs will treat the difference between the sales proceeds and exercise price as a long-term capital gain.

Which of the following statements is INCORRECT regarding the timing of employer deductions for compensation and the employees' inclusion of compensation in gross income? a. Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation. b. Employers using the cash method of accounting must deduct salaries and wages in the year they pay the employees. c. Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method. d. When the employer and the employee are related, the employer must deduct wages expense in the same year the employee reports it as gross income.

Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method.

Which of the following statements is correct regarding employers' treatment of salaries and wages? a. Employers using the cash method of accounting must deduct salaries and wages in the year the employees earn the compensation. b. When the employer and the employee are related parties, both parties must use the accrual method to recognize the deduction and the income. c. Employers must deduct the compensation the same year that the employees include the amounts in gross income regardless of the accounting method. d. Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation.

Employers using the accrual method of accounting must deduct salaries and wages in the year the employees earn the compensation.

Which of the following choices is NOT an advantage of equity-based compensation? a. Equity-based compensation is exempt from taxation for the employees. b. Equity-based compensation motivates employees to take ownership in their company. c. If the company's stock price increases after options are granted, the employees may benefit greatly. d. Equity-based compensation allows companies to reward employees without incurring cash outflows.

Equity-based compensation is exempt from taxation for the employees.

Employees must pay which of the following taxes on taxable fringe benefits? (Choose all that apply.) a. gift tax b. FICA taxes c. sales and use tax d.federal income tax

FICA taxes federal income tax

Which of the following fringe benefits are nontaxable fringe benefits for the recipient? (Check all that apply.) a. Cash received in lieu of other benefits included in a cafeteria plan b. Providing mass transit passes to employees who take the subway to work c. Reimbursement of the cost of moving household goods across the country due to a change in employment d.The cost of lodging provided to an apartment manager who is required to live on the premises

Providing mass transit passes to employees who take the subway to work The cost of lodging provided to an apartment manager who is required to live on the premises While the other fringe benefits that an employee can choose in a cafeteria plan may NOT be taxable, cash is taxable. moving expense are only allowed if related to military relocation

Stock options <<<--->>> Employees must use cash to purchase the employer's stock once the vesting date is reached.

Restricted stock <<<--->>> Employees receive the stock on the vesting date without having to pay for it.

Which of the following characteristics apply to taxable fringe benefits? (Check all that apply.) a. The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. b. Employers may NOT discriminate between employees, but must offer the same taxable fringe benefits to all employees regardless of compensation level. c. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit. d. Employers treat the taxable fringe benefits the same as cash compensation.

The cost of the taxable fringe benefit is deductible to the employer, not the value of the benefit to the employee. Employees are taxed on the value of the benefit, rather than the cost paid for the benefit. Employers treat the taxable fringe benefits the same as cash compensation.

What is the tax treatment for the employer when restricted stock is granted to employees? a. The deduction equals the ordinary income recognized by the employee and is deducted on the vesting date regardless of the Sec. 83(b) election. b. The deduction equals the ordinary income recognized by the employee and the timing is based on whether or not Sec. 83(b) is elected. c. The deduction equals the ordinary income recognized by the employee and is deducted on the grant date regardless of the Sec. 83(b) election. d. The employer does NOT receive a tax deduction for issuing restricted stock to employees.

The deduction equals the ordinary income recognized by the employee and the timing is based on whether or not Sec. 83(b) is elected.

Which of the following choices is a characteristic of restricted stock? a. The employee is not required to pay for the stock but rather is given the shares on the grant date. b. Employees must purchase the stock on the vesting date regardless of the market price. c. Employees may purchase the stock on the grant date, but can NOT sell their shares until the vesting date. d. Employees must use cash to purchase the employer's stock once the vesting date is reached.

The employee is not required to pay for the stock but rather is given the shares on the grant date. The employee may sell the stock immediately after the vesting date or retain it, but there is NO required holding period.

Which of the following statements is INCORRECT when describing the advantages and disadvantages of making a Section 83(b) election for restricted stock? a. The election allows the employee to potentially convert part of the ordinary income resulting from receiving the stock to long-term capital gain. b. The market value of the stock is taxed at the lower capital gains rate on the grant date. c. The market value of the stock is taxed as ordinary income on the grant date, providing a tax advantage if the value increases after that date. d. If employment is terminated before the vesting date, the employee can NOT recoup the tax that was paid on the grant date or receive the stock.

The market value of the stock is taxed at the lower capital gains rate on the grant date.

Why are nontaxable fringe benefits attractive to both the employer and the employees? a. The net after-tax cost to employees is zero, but the employer receives NO tax deduction for the cost of the benefit. b. The net after-tax cost to employees is zero and the employer may provide the benefits on a discriminatory basis. c. The net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit. d.The employees are NOT taxed on the benefit until it is used/received and the employer receives a tax deduction for the cost of providing the benefit.

The net after-tax cost to employees is zero and the employer receives a tax deduction for the cost of the benefit.

Which of the following statements is correct when describing the tax treatment to the employees of stock options? a. The bargain element is taxed as ordinary income on the vesting date for both ISOs and NQOs. b. The bargain element is taxed as ordinary income on the grant date for ISOs. c. There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs. d. The bargain element is taxed as ordinary income on the grant date for NQOs.

There are no tax consequences on the grant date or the vesting date for both ISOs and NQOs.

Which one of the following choices describes disadvantages to the company of offering equity-based compensation? a. In order to offer equity-based compensation, the company incurs a large cash outflow because it must first purchase the shares on the open market. b. There is an opportunity cost of selling the stock to employees at a discounted price, rather than selling it for fair market value on the market. c. The stock price on the market is likely to drop significantly if it is known that some individuals are buying at a discounted price. d. The number of shares outstanding decreases which causes earnings per share to be overstated.

There is an opportunity cost of selling the stock to employees at a discounted price, rather than selling it for fair market value on the market. The number of shares outstanding increases which causes earnings per share to be diluted.

How are salaries and wages taxed? (Check all that apply.) a. They are subject to FICA tax. b. They are taxed as ordinary income. c. They are taxed as capital gains. d. They are taxed when received, rather than when earned. e. They are taxed when earned, rather than when the money is received.

They are subject to FICA tax. They are taxed as ordinary income. They are taxed when received, rather than when earned.