CPS Regulatory Compliance & Standards 3 — Questions and Answers
Question 1: Which of the following best describes the 'economic reality' test used to determine worker classification?
- Whether the worker uses the employer's tools and equipment
- Whether the worker is economically dependent on the employer or operates independently (Correct answer)
- Whether the worker is paid hourly vs. salary
- Whether the work is performed on the employer's premises
Correct answer: Whether the worker is economically dependent on the employer or operates independently
The economic reality test examines whether, as a matter of economic reality, the worker is economically dependent on the employer for work, indicating employee status.
Question 2: Under IRS regulations, what is the standard mileage rate primarily used for when applied to business travel in payroll?
- Calculating taxable fringe benefits for company cars
- Reimbursing employees for business use of personal vehicles (Correct answer)
- Determining FICA taxes on vehicle allowances
- Setting the maximum auto allowance before withholding applies
Correct answer: Reimbursing employees for business use of personal vehicles
The IRS standard mileage rate provides a simplified method for employers to reimburse employees for business use of their personal vehicles tax-free.
Question 3: An employer fails to deposit payroll taxes on time. Under the Trust Fund Recovery Penalty (TFRP), who can be held personally liable?
- Only the CEO and CFO
- Any responsible person who willfully failed to collect or pay over the taxes (Correct answer)
- Only the payroll manager who processed the checks
- Only officers listed on the corporate charter
Correct answer: Any responsible person who willfully failed to collect or pay over the taxes
The TFRP can be assessed against any 'responsible person' — anyone with authority over financial decisions — who willfully failed to remit trust fund taxes.
Question 4: The Davis-Bacon Act requires payment of prevailing wages on what type of projects?
- Any private construction project exceeding $100,000
- Federal and federally assisted construction contracts over $2,000 (Correct answer)
- State-funded road projects regardless of amount
- Federal service contracts over $10,000
Correct answer: Federal and federally assisted construction contracts over $2,000
The Davis-Bacon Act applies to federal and federally assisted construction contracts exceeding $2,000, requiring payment of locally prevailing wages.
Question 5: Which section of the Internal Revenue Code governs cafeteria plans that allow employees to choose between taxable and nontaxable benefits?
- Section 401(k)
- Section 125 (Correct answer)
- Section 105
- Section 132
Correct answer: Section 125
IRC Section 125 governs cafeteria plans, allowing employees to select among qualifying benefits and pay for them with pre-tax dollars.
Question 6: Under COBRA, what is the maximum continuation coverage period for a qualifying event that is the covered employee's termination or reduction in hours?
- 12 months
- 18 months (Correct answer)
- 29 months
- 36 months
Correct answer: 18 months
For termination or reduction in hours, COBRA generally provides up to 18 months of continuation coverage for qualified beneficiaries.
Question 7: The McNamara-O'Hara Service Contract Act (SCA) establishes wage and fringe benefit requirements for employees working under federal service contracts exceeding what dollar threshold?
- $2,000
- $2,500
- $10,000 (Correct answer)
- $25,000
Correct answer: $10,000
The SCA applies to federal service contracts exceeding $2,500, requiring contractors to pay service employees the locally prevailing wage and fringe benefit rates.
CPS Regulatory Compliance & Standards 3
Which of the following best describes the 'economic reality' test used to determine worker classification?