CPM Federal & State Tax Withholding 3 — Questions and Answers
Question 1: An employer receives a lock-in letter (IRS Notice 2800C) for an employee. What must the employer do?
- Withhold at the rate specified in the notice and disregard any W-4 claiming a lower withholding (Correct answer)
- Immediately terminate the employee
- File Form 941 with the lock-in information
- Request a new W-4 from the employee
Correct answer: Withhold at the rate specified in the notice and disregard any W-4 claiming a lower withholding
A lock-in letter instructs the employer to withhold at a specific rate regardless of any W-4 the employee submits claiming a lower amount, until the IRS releases the lock.
Question 2: What is the nonresident alien withholding adjustment added to wages before using the standard withholding tables?
- An additional amount per pay period specified in Publication 15, based on payroll frequency (Correct answer)
- A flat 30% rate applied to all wages
- No adjustment; nonresident aliens use the same tables
- An exemption equal to one personal allowance
Correct answer: An additional amount per pay period specified in Publication 15, based on payroll frequency
Nonresident aliens must add a specific additional amount (per Publication 15 instructions) to their wages before applying the standard withholding tables to account for their different tax situation.
Question 3: For federal income tax withholding purposes, which of the following is NOT considered a supplemental wage?
- Regular hourly wages paid on the normal payday (Correct answer)
- Signing bonuses paid separately from regular wages
- Commissions paid separately from regular wages
- Severance pay
Correct answer: Regular hourly wages paid on the normal payday
Regular wages paid on the normal payday are not supplemental wages; supplemental wages include bonuses, commissions, overtime, and severance when paid separately.
Question 4: Which form must employers file annually to reconcile federal income tax withholding and FICA taxes?
- Form W-3 (Correct answer)
- Form 941
- Form 944
- Form 945
Correct answer: Form W-3
Form W-3 is the transmittal form filed with the SSA that reconciles all W-2 forms issued and summarizes total wages and taxes withheld for the year.
Question 5: What is backup withholding, and at what rate is it applied?
- Withholding at 24% on payments to payees who fail to provide a correct TIN (Correct answer)
- Withholding at 30% on all nonresident alien payments
- Withholding at 22% on supplemental wages when the flat method is used
- Withholding at 37% on wages exceeding $1 million
Correct answer: Withholding at 24% on payments to payees who fail to provide a correct TIN
Backup withholding at 24% applies to certain payments such as interest, dividends, and non-employee compensation when the payee fails to provide a correct taxpayer identification number.
Question 6: An employee receives a $5,000 bonus paid separately from their regular paycheck. The employer chooses the flat rate withholding method. What federal income tax rate applies?
- 22% (Correct answer)
- 24%
- 12%
- 37%
Correct answer: 22%
The optional flat rate for supplemental wages (when paid separately and total supplemental wages do not exceed $1 million) is 22% for federal income tax withholding.
Question 7: Which states have no state income tax, eliminating the need for state income tax withholding?
- Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming (Correct answer)
- Alaska, California, Nevada, Texas, Washington
- Florida, Georgia, Nevada, Texas, Utah
- Alaska, Colorado, Florida, Oregon, Texas
Correct answer: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming
Nine states currently have no state income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
CPM Federal & State Tax Withholding 3
An employer receives a lock-in letter (IRS Notice 2800C) for an employee.
What must the employer do?