CPP Payroll Tax Compliance 4 — Questions and Answers
Question 1: Which of the following wages is exempt from FUTA tax?
- Wages paid to a spouse employed by the business owner's sole proprietorship (Correct answer)
- Commissions paid to a full-time sales employee
- Overtime premiums paid to hourly workers
- Tips reported by employees earning more than $20 per month
Correct answer: Wages paid to a spouse employed by the business owner's sole proprietorship
Wages paid to a spouse working in a spouse-owned sole proprietorship are specifically exempt from FUTA under IRC Section 3306.
Question 2: What is the wage base limit for Social Security (OASDI) taxes in payroll tax compliance planning?
- It is adjusted annually by the SSA based on national average wage index (Correct answer)
- It is fixed at $142,800 permanently
- It matches the Medicare wage base
- It is set by each state individually
Correct answer: It is adjusted annually by the SSA based on national average wage index
The Social Security wage base is announced annually by the Social Security Administration and increases each year based on wage inflation.
Question 3: An employer issues a $500 gift card to each employee for the holidays. How is this treated for payroll tax purposes?
- It is taxable wages subject to income tax withholding and FICA (Correct answer)
- It is a de minimis fringe benefit and fully excluded from income
- It is excluded only if given at a company party
- It is subject to FICA but not income tax withholding
Correct answer: It is taxable wages subject to income tax withholding and FICA
Cash-equivalent gifts such as gift cards are always considered taxable wages and cannot qualify as de minimis fringe benefits regardless of value.
Question 4: What is a Credit Reduction State in the context of FUTA?
- A state that borrowed federal unemployment funds and has not fully repaid them, reducing the 5.4% SUTA credit (Correct answer)
- A state that offers employers a reduced SUTA rate for good experience ratings
- A state where the FUTA wage base is lower than the federal limit
- A state that participates in a reciprocal unemployment tax agreement
Correct answer: A state that borrowed federal unemployment funds and has not fully repaid them, reducing the 5.4% SUTA credit
If a state borrows from the federal unemployment trust fund and fails to repay by November 10, employers in that state face a reduced FUTA credit, increasing their net FUTA liability.
Question 5: Which IRS form is used to correct errors made on a previously filed Form 941?
- Form 941-X (Correct answer)
- Form 943-X
- Form W-2c
- Form 1096
Correct answer: Form 941-X
Form 941-X, the Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund, is used to correct errors on a previously filed Form 941.
Question 6: Under the Lookback Rule, a new employer with no prior tax history is classified as which type of depositor?
- Monthly depositor (Correct answer)
- Semi-weekly depositor
- Next-day depositor
- Annual depositor
Correct answer: Monthly depositor
New employers with no prior filing history are automatically classified as monthly depositors until their tax liability history establishes a different schedule.
Question 7: What penalty applies when an employer willfully fails to collect or pay over payroll taxes?
- 100% of the unpaid trust fund taxes (Trust Fund Recovery Penalty) (Correct answer)
- 25% of the total tax liability
- Failure-to-deposit penalty up to 15%
- Criminal prosecution only with no civil penalty
Correct answer: 100% of the unpaid trust fund taxes (Trust Fund Recovery Penalty)
The Trust Fund Recovery Penalty (TFRP) equals 100% of the unpaid withheld taxes and can be assessed personally against responsible individuals.
CPP Payroll Tax Compliance 4
Which of the following wages is exempt from FUTA tax?