CPM Federal & State Tax Withholding 2 — Questions and Answers
Question 1: An employee claims 'Exempt' on their W-4. Under what condition is this status valid?
- The employee had no federal income tax liability last year and expects none this year (Correct answer)
- The employee earns less than $12,000 annually
- The employee is over age 65
- The employee has more than three dependents
Correct answer: The employee had no federal income tax liability last year and expects none this year
Exempt status on a W-4 is valid only if the employee had zero federal income tax liability in the prior year and expects zero liability in the current year.
Question 2: Which IRS publication provides the income tax withholding tables used by employers?
- Publication 15 (Circular E) (Correct answer)
- Publication 505
- Publication 946
- Publication 334
Correct answer: Publication 15 (Circular E)
IRS Publication 15 (Employer's Tax Guide, also known as Circular E) contains the withholding tables and instructions employers use to determine federal income tax withholding.
Question 3: A supplemental wage payment of $1.5 million is made to an employee. How is withholding applied to the amount exceeding $1 million?
- 37% flat rate on the excess over $1 million (Correct answer)
- 22% flat rate on the entire amount
- Regular withholding method on the full amount
- No withholding is required on supplemental wages
Correct answer: 37% flat rate on the excess over $1 million
For supplemental wages exceeding $1 million in a calendar year, the excess over $1 million is mandatorily withheld at the highest marginal rate (37%).
Question 4: What is the purpose of IRS Form W-4P?
- Withholding certificate for pension or annuity payments (Correct answer)
- Request for federal tax identification number
- Withholding exemption for nonresident aliens
- Certificate for tips reporting
Correct answer: Withholding certificate for pension or annuity payments
Form W-4P is used by recipients of pensions, annuities, and other deferred compensation to direct payers on how much federal income tax to withhold.
Question 5: Under the aggregate method for supplemental wages, how is withholding calculated?
- Add the supplemental and regular wages together and withhold as if it were one payment (Correct answer)
- Apply a flat 22% rate to the supplemental wages only
- Withhold only Social Security and Medicare on supplemental wages
- Treat the supplemental wages as a separate payroll period
Correct answer: Add the supplemental and regular wages together and withhold as if it were one payment
The aggregate method combines supplemental and regular wages to determine the total withholding, then subtracts the tax already withheld on regular wages.
Question 6: A new employee fails to submit a W-4. What withholding rate must the employer apply?
- Single filing status with no adjustments (as if the employee checked 'Single' with no other entries) (Correct answer)
- Married filing jointly with zero allowances
- Highest marginal rate of 37%
- No withholding until a W-4 is received
Correct answer: Single filing status with no adjustments (as if the employee checked 'Single' with no other entries)
IRS regulations require employers to withhold at the Single rate with no adjustments when an employee fails to furnish a valid W-4.
Question 7: Which state approach requires employers to withhold state income tax even when employees claim exempt on their federal W-4?
- States that require a separate state withholding certificate (Correct answer)
- States that automatically mirror the federal W-4
- States with no state income tax
- States that allow voluntary withholding only
Correct answer: States that require a separate state withholding certificate
Many states require their own withholding certificates and may not honor federal exempt claims, so employers must comply with each state's separate withholding rules.
CPM Federal & State Tax Withholding 2
An employee claims 'Exempt' on their W-4.
Under what condition is this status valid?