CPS Client Advisory Services 3 — Questions and Answers
Question 1: A client's employee is subject to both a child support withholding order and a creditor garnishment. Which obligation takes priority under federal law?
- The creditor garnishment, because it was received first
- The child support withholding order, regardless of receipt date (Correct answer)
- Both are paid pro rata from the disposable earnings
- The employer chooses which to honor based on the higher amount
Correct answer: The child support withholding order, regardless of receipt date
Federal law under Title III of the Consumer Credit Protection Act and CCPA give child support and alimony orders priority over other garnishments.
Question 2: When a client terminates an employee who has an outstanding payroll advance, what is the correct payroll treatment?
- The advance becomes a non-taxable gift to the terminated employee
- The employer may deduct the outstanding balance from the final paycheck subject to state law limits (Correct answer)
- The advance must be reported on a Form 1099-C as cancelled debt
- Federal law requires the employer to forgive all advances upon termination
Correct answer: The employer may deduct the outstanding balance from the final paycheck subject to state law limits
Employers may generally recover outstanding advances from the final paycheck, but state wage payment laws may restrict deductions below minimum wage.
Question 3: A client wants to provide employees with a $150 monthly transit pass benefit. How should this be treated for payroll tax purposes?
- Fully taxable as additional wages in each pay period
- Excluded from income up to the monthly IRS transit benefit limit (Correct answer)
- Reported on Form 1099-MISC as a miscellaneous benefit
- Subject only to FUTA, not FICA or federal income tax withholding
Correct answer: Excluded from income up to the monthly IRS transit benefit limit
Employer-provided transit passes are excluded from income up to the IRS qualified transportation fringe benefit monthly limit (e.g., $315/month in 2024).
Question 4: A payroll advisor is helping a client calculate the Additional Medicare Tax. Who is responsible for withholding the 0.9% Additional Medicare Tax?
- The employee pays it entirely through their annual tax return
- The employer must withhold it once wages to an employee exceed $200,000 in the calendar year (Correct answer)
- Both employer and employee each pay 0.45% once the $200,000 threshold is met
- The employer pays the full 0.9% as a matching contribution
Correct answer: The employer must withhold it once wages to an employee exceed $200,000 in the calendar year
Employers must withhold the 0.9% Additional Medicare Tax on wages paid to an individual employee exceeding $200,000 in a calendar year; there is no employer match.
Question 5: Which IRS form must a client file to report backup withholding on payments made to vendors who failed to provide a valid TIN?
- Form 945 (Correct answer)
- Form 941
- Form 944
- Form 1096
Correct answer: Form 945
Form 945 is used to report and remit backup withholding and other nonpayroll federal income tax withholding to the IRS.
Question 6: A client's employee works in a state with no income tax but lives in a state that has income tax. Where should the client withhold state income tax?
- Only in the state where the employer is headquartered
- Generally in the resident state, since the work state has no tax to withhold (Correct answer)
- In both states equally, regardless of reciprocity agreements
- No withholding is required because one state has no tax
Correct answer: Generally in the resident state, since the work state has no tax to withhold
When the work state has no income tax, the employer typically withholds for the employee's resident state, which taxes its residents on all income.
Question 7: A client is audited and assessed a Trust Fund Recovery Penalty. Against whom can the IRS assess this penalty?
- Only the corporation as a legal entity
- Any responsible person who willfully failed to collect or pay over trust fund taxes (Correct answer)
- Only the CEO, regardless of actual payroll involvement
- The external payroll service provider exclusively
Correct answer: Any responsible person who willfully failed to collect or pay over trust fund taxes
The Trust Fund Recovery Penalty can be assessed against any responsible person—officer, owner, bookkeeper, or payroll manager—who willfully failed to pay trust fund taxes.
CPS Client Advisory Services 3
A client's employee is subject to both a child support withholding order and a creditor garnishment.
Which obligation takes priority under federal law?