CPS Tax Planning & Compliance 2 — Questions and Answers
Question 1: An employee claims exempt from federal income tax withholding on their W-4. Under what condition is this allowable?
- The employee had no federal income tax liability last year and expects none this year (Correct answer)
- The employee earns below $12,000 annually
- The employee is a part-time worker
- The employee has filed a state tax return showing zero liability
Correct answer: The employee had no federal income tax liability last year and expects none this year
Exempt status is valid only when the employee had zero federal income tax liability the prior year and anticipates zero liability in the current year.
Question 2: Which IRS form must an employer use to report an employee's annual wages and tax withholdings?
- Form 941
- Form 940
- Form W-2 (Correct answer)
- Form 1099-NEC
Correct answer: Form W-2
Form W-2, Wage and Tax Statement, is issued by employers to employees and the IRS to report annual wages and withheld taxes.
Question 3: A company pays an independent contractor $650 during the tax year. What is the employer's reporting obligation?
- File Form 1099-NEC because all contractor payments must be reported
- No reporting required since the payment is below the $600 threshold (Correct answer)
- No reporting required since the payment is below the $600 threshold
- File Form W-2 since the contractor is paid by the company
Correct answer: No reporting required since the payment is below the $600 threshold
Form 1099-NEC is required only when a contractor is paid $600 or more in a tax year; $650 exceeds the threshold and must be reported.
Question 4: What is the FUTA tax rate after applying the maximum credit for state unemployment taxes paid on time?
- 6.0%
- 0.6% (Correct answer)
- 5.4%
- 1.2%
Correct answer: 0.6%
The gross FUTA rate is 6.0%, but employers who pay state unemployment taxes timely receive a 5.4% credit, leaving a net rate of 0.6%.
Question 5: For 2024, the Social Security wage base is $168,600. An employee has already earned $170,000 from a prior employer. Their new employer should:
- Withhold Social Security tax on all wages paid
- Not withhold Social Security tax since the annual wage base is already exceeded (Correct answer)
- Withhold only Medicare tax on wages paid
- File Form 4137 to recapture excess withholding
Correct answer: Not withhold Social Security tax since the annual wage base is already exceeded
Once an employee's total wages from all employers exceed the Social Security wage base, no additional Social Security withholding is required from the new employer.
Question 6: Which payroll tax deposit schedule applies to a new employer with no prior tax liability history?
- Annual deposit schedule
- Monthly deposit schedule (Correct answer)
- Semi-weekly deposit schedule
- Quarterly deposit schedule
Correct answer: Monthly deposit schedule
New employers are assigned to the monthly deposit schedule by default until their lookback period tax liability is established.
Question 7: An employer discovers they under-deposited payroll taxes for a deposit period by $200. Under the de minimis rule, what is the maximum shortfall allowed to avoid penalty?
- The greater of $100 or 2% of the required deposit (Correct answer)
- The greater of $200 or 5% of the required deposit
- The greater of $100 or 5% of the required deposit
- The greater of $150 or 3% of the required deposit
Correct answer: The greater of $100 or 2% of the required deposit
The IRS safe harbor allows a shortfall of the greater of $100 or 2% of the required deposit without triggering a failure-to-deposit penalty.
CPS Tax Planning & Compliance 2
An employee claims exempt from federal income tax withholding on their W-4.
Under what condition is this allowable?