CPS Client Advisory Services 2 — Questions and Answers
Question 1: A client asks why their multistate employee's W-2 shows wages allocated to two different states. What is the best explanation?
- Wages are split based on the employee's seniority in each state
- Wages are apportioned based on the days or time worked in each state (Correct answer)
- The employer arbitrarily divides wages to minimize state tax liability
- W-2 wages are always split equally among all states where the company operates
Correct answer: Wages are apportioned based on the days or time worked in each state
Multistate W-2 wages are apportioned based on the actual days or time the employee worked in each state, per each state's sourcing rules.
Question 2: A small business client wants to pay a household employee $5,000 for the year. What federal payroll tax threshold is relevant?
- $1,000 cash wages threshold for FUTA
- $2,700 cash wages threshold for FICA (Correct answer)
- $600 threshold for 1099-NEC filing
- $7,000 FUTA wage base per employee
Correct answer: $2,700 cash wages threshold for FICA
For 2024, household employers must withhold and pay FICA taxes when cash wages to a household employee reach $2,700 in a calendar year.
Question 3: When advising a client on retroactive pay increases resulting from a union contract settlement, which payroll compliance step is most critical?
- Issue a corrected Form 1099-MISC for the retroactive amount
- Calculate and withhold applicable taxes on the retroactive wages in the current period (Correct answer)
- Spread the retroactive wages evenly across all prior pay periods and amend each
- Treat retroactive pay as a non-taxable reimbursement to avoid back taxes
Correct answer: Calculate and withhold applicable taxes on the retroactive wages in the current period
Retroactive pay is taxable wages subject to withholding in the pay period it is actually paid, not the prior periods it relates to.
Question 4: A client is setting up a SIMPLE IRA plan. What is the employer contribution option that requires no employee election?
- Matching contribution up to 3% of compensation
- Non-elective contribution of 2% of each eligible employee's compensation (Correct answer)
- Profit-sharing contribution based on annual earnings
- Discretionary contribution not to exceed $6,000 per participant
Correct answer: Non-elective contribution of 2% of each eligible employee's compensation
Employers may choose to make a 2% non-elective contribution to all eligible employees regardless of whether the employee contributes.
Question 5: A client's employee claims exempt from federal income tax withholding on their W-4. By what date must a new W-4 be filed to maintain the exempt status each year?
- January 1
- February 15 (Correct answer)
- April 15
- December 31
Correct answer: February 15
Exempt status on a W-4 expires on February 15 each year, and employees must submit a new W-4 by that date to continue claiming exemption.
Question 6: Which form should a payroll advisor recommend a client use to report FUTA tax liability if the annual FUTA tax exceeds $500?
- Form 941
- Form 940 (Correct answer)
- Form 944
- Form 945
Correct answer: Form 940
Form 940 is the Employer's Annual Federal Unemployment (FUTA) Tax Return, used to report and pay FUTA taxes.
Question 7: A client asks about the look-back period used to determine their federal tax deposit schedule. Which period does the IRS use?
- The most recent calendar quarter
- The 12-month period ending the previous June 30 (Correct answer)
- The prior two calendar years averaged together
- The current calendar year to date
Correct answer: The 12-month period ending the previous June 30
The IRS look-back period is the 12-month period from July 1 of the second preceding year through June 30 of the preceding year.
CPS Client Advisory Services 2
A client asks why their multistate employee's W-2 shows wages allocated to two different states.
What is the best explanation?