Fundamental Payroll Certification Exam — Questions and Answers

Question 1: Which of the following correctly describes the 'catch-up' FICA deposit rule for large employers?

Employers with $1,000+ undeposited liability must deposit the next banking day
If total undeposited liability is under $100, it may be carried over to the next period (Correct answer)
Employers may deposit on a quarterly basis if cumulative liability is under $2,500
Monthly depositors with under $500 liability may pay with the return

Correct answer: If total undeposited liability is under $100, it may be carried over to the next period

The de minimis rule allows employers to carry over undeposited tax of less than $100 to the next period rather than making a deposit.

Question 2: Under the FLSA, an employer's 'workweek' is defined as:

The period from the first paycheck to the next
Any fixed, regularly recurring period of 168 consecutive hours (Correct answer)
A calendar month divided by four
Monday through Friday only

Correct answer: Any fixed, regularly recurring period of 168 consecutive hours

The FLSA workweek is any fixed, regularly recurring 168-hour (7-day) period established by the employer, which may begin on any day.

Question 3: According to the Fair Labor Standards Act (FLSA) recordkeeping requirements, for how long must an employer retain an employee's payroll records?

Two years
Three years (Correct answer)
One year
Four years

Correct answer: Three years

The FLSA requires employers to preserve payroll records, collective bargaining agreements, sales, and purchase records for at least three years. Records on which wage computations are based, such as time cards, should be retained for two years.

Question 4: What is the potential consequence for an employer who ignores a valid wage garnishment order?

The garnishment order is voided and must be reissued by the court
The debt transfers automatically to the employee's next employer
No liability, provided the employer notifies the employee of the order
The employer may be held personally liable for the amount that should have been withheld (Correct answer)

Correct answer: The employer may be held personally liable for the amount that should have been withheld

An employer who fails to comply with a valid garnishment order can be held liable for the unwithheld amount, effectively making the employer responsible for the employee's debt.

Question 5: A semi-monthly pay schedule results in how many pay periods per year?

26
52
24 (Correct answer)
12

Correct answer: 24

Semi-monthly means twice per month (e.g., the 1st and 15th), totaling 24 pay periods per year.

Question 6: The 'physical presence test' for multi-state payroll withholding generally means:

Only salaried employees are subject to multi-state withholding
Employees must be physically present in the payroll office to receive payment
Withholding is required only in the employer's home state
Withholding is required in any state where the employee physically performs work (Correct answer)

Correct answer: Withholding is required in any state where the employee physically performs work

The physical presence test requires an employer to withhold state income tax for any state in which an employee physically performs services, regardless of where the employer is based.

Question 7: An employer is determining its federal tax deposit schedule for calendar year 2026. The employer's total tax liability reported on its Forms 941 during the lookback period (July 1, 2024, to June 30, 2025) was $55,000. What is this employer's required deposit schedule for 2026?

Quarterly, with Form 941
Semi-weekly (Correct answer)
Annually, with Form 944
Monthly

Correct answer: Semi-weekly

The IRS determines an employer's deposit schedule based on the total taxes reported during a four-quarter lookback period. If the total tax liability during this period is more than $50,000, the employer is a semi-weekly depositor. Since $55,000 is over the threshold, the employer must follow the semi-weekly schedule.

Question 8: An employee has a gross pay of $1,200. Legally required deductions (federal, state, FICA taxes) total $250. The employee also has voluntary post-tax deductions for union dues ($20) and a charitable contribution ($30). For the purpose of calculating a creditor garnishment, what are the employee's disposable earnings?

$1,200
$950 (Correct answer)
$930
$900

Correct answer: $950

Disposable earnings, as defined by the Consumer Credit Protection Act (CCPA) for garnishment purposes, are the gross earnings minus only legally required deductions. Voluntary deductions like union dues and charitable contributions are not subtracted. Therefore, the calculation is $1,200 (Gross Pay) - $250 (Legally Required Deductions) = $950.

Question 9: An employee earns $18/hr and works 46 hours in a workweek. What is their gross pay using the half-time overtime method?

$855.00 (Correct answer)
$918.00
$828.00
$882.00

Correct answer: $855.00

Under the half-time method, total pay = $18 × 46 + ($18/2) × 6 = $828 + $54 = $855 (used when overtime is included in a fixed salary covering fluctuating hours).

Question 10: According to the Fair Labor Standards Act (FLSA) and IRS regulations, what is the minimum period that employers must retain payroll records for each employee after the date of termination?

Four years (Correct answer)
Three years
Seven years
One year

Correct answer: Four years

The IRS and the Fair Labor Standards Act (FLSA) require employers to keep employment tax records for at least four years after the tax becomes due or is paid, whichever is later. This ensures that records are available for audit and to verify compliance with tax and labor laws.

Question 11: When a payroll department must transmit a file containing sensitive employee data (e.g., names, SSNs, bank account numbers) to a third-party benefits provider, which of the following is the most critical security practice?

Sending the file in a password-protected ZIP folder via standard email.
Ensuring the file is only sent during non-business hours.
Verifying the recipient's email address is spelled correctly.
Encrypting the file before sending it via a secure transmission method. (Correct answer)

Correct answer: Encrypting the file before sending it via a secure transmission method.

Encrypting data makes it unreadable to unauthorized individuals. For highly sensitive Personally Identifiable Information (PII) like SSNs and bank details, encrypting the file itself and using a secure transmission protocol are essential best practices to protect the data from interception and breaches.

Question 12: When must an employer provide Form W-2 to employees?

By December 31 of the tax year
By February 15 of the following year
By January 31 of the following year (Correct answer)
By March 31 of the following year

Correct answer: By January 31 of the following year

Employers must furnish Form W-2 to employees by January 31 of the year following the tax year in which wages were paid.

Question 13: A construction company hires workers through a staffing agency. Under the FLSA, both the staffing agency and the construction company may be held responsible for FLSA compliance. This is known as:

Co-employment doctrine
Leased employment
Joint employment (Correct answer)
Dual employment

Correct answer: Joint employment

Joint employment occurs when two or more entities share control over a worker's employment; both can be liable for FLSA violations such as minimum wage or overtime failures.

Question 14: What methodology is employed to assess the worth of a fringe benefit that an employer offers to a worker?

Actual market value
General valuation rule (Correct answer)
Implied benefit value
Actual cash value

Correct answer: General valuation rule

The IRS uses the 'general valuation rule' to determine the value of most fringe benefits provided to employees. This rule states that the value of a fringe benefit is its fair market value (FMV), which is the amount an individual would have to pay in an arm's-length transaction to buy or lease the benefit from an unrelated third party. This ensures the benefit is taxed appropriately as part of the employee's compensation.

Question 15: Which of the following is a valid FLSA exemption from both minimum wage AND overtime requirements?

Retail employees earning commission
Computer employees earning at least $27.63/hour
Outside sales employees (Correct answer)
Seasonal amusement park workers in some circumstances

Correct answer: Outside sales employees

Outside sales employees who primarily make sales away from the employer's place of business are exempt from both minimum wage and overtime under the FLSA.

Question 16: When a payroll tax deposit is remitted via EFTPS, the journal entry includes a credit to:

Federal Income Tax Expense
Payroll Tax Expense
FICA Taxes Payable
Cash (Correct answer)

Correct answer: Cash

Remitting a tax deposit reduces the company's cash and eliminates the related payroll tax liability.

Question 17: An employer has a semiweekly deposit obligation for payroll taxes. For wages paid on Thursday, when is the deposit due?

The following Wednesday (Correct answer)
15 days later
The following Friday
The following Monday

Correct answer: The following Wednesday

For semiweekly depositors, taxes on wages paid Wednesday through Friday are due by the following Wednesday.

Question 18: Under the FLSA, which test is primarily used by the Department of Labor to determine whether a worker is an employee or independent contractor?

The ABC test
The common law control test
The economic reality test (Correct answer)
The IRS 20-factor test

Correct answer: The economic reality test

The DOL uses the economic reality test, which examines whether a worker is economically dependent on the employer or truly in business for themselves.

Question 19: When calculating federal income tax withholding using the wage-bracket method from IRS Publication 15-T, which of the following pieces of information is NOT directly used?

The employee's marital status from Form W-4
The employee's total gross wages for the pay period
The number of years the employee has worked for the company (Correct answer)
The length of the payroll period (e.g., weekly, bi-weekly)

Correct answer: The number of years the employee has worked for the company

The wage-bracket method determines federal income tax withholding based on the employee's wage level for the pay period, their filing status (e.g., single, married), and adjustments from their Form W-4. The employee's tenure with the company is not a factor in this calculation.

Question 20: How are State Unemployment Tax Act (SUTA) taxes predominantly funded?

By employee pre-tax payroll deductions only.
Entirely by the federal government through FUTA tax credits.
Equally by both employee and employer contributions.
Primarily by employer contributions, though a few states also require employee contributions. (Correct answer)

Correct answer: Primarily by employer contributions, though a few states also require employee contributions.

SUTA, which funds state unemployment benefits, is an employer-paid tax in the vast majority of states. Only a few states (Alaska, New Jersey, and Pennsylvania) also require employees to contribute.

Question 21: An employer has workers classified as independent contractors but controls their daily schedules, provides all equipment, and prohibits them from working for competitors. The IRS would likely reclassify them as:

Leased employees
Statutory employees
Common law employees (Correct answer)
Statutory non-employees

Correct answer: Common law employees

The IRS common law test looks at behavioral, financial, and type-of-relationship factors; high employer control in all three areas indicates employee status.

Question 22: Which IRS form is used by employees to claim exemption from federal income tax withholding?

Form W-2
Form 8809
Form W-4 (Correct answer)
Form 941

Correct answer: Form W-4

Employees use Form W-4 to inform employers of their withholding allowances, including claiming an exemption from withholding.

Question 23: During year-end processing, what is the significance of the 'W-2 cutoff date'?

The date employees must return their W-2 forms to HR
The deadline for finalizing all payroll adjustments that must appear on employee W-2 forms (Correct answer)
The date after which no more W-2s can be filed with the SSA
The IRS deadline for paying fourth-quarter payroll taxes

Correct answer: The deadline for finalizing all payroll adjustments that must appear on employee W-2 forms

The W-2 cutoff date is the last day to make corrections (such as fringe benefit additions or prior-period adjustments) that need to be captured on the current year's W-2s.

Question 24: A company switches from a biweekly to a semimonthly pay schedule. How does this affect the number of pay periods per year?

Decreases from 26 to 24 (Correct answer)
Increases from 24 to 52
Stays the same at 26
Increases from 24 to 26

Correct answer: Decreases from 26 to 24

Biweekly schedules produce 26 pay periods per year, while semimonthly schedules produce only 24.

Question 25: What is the key difference between a Flexible Spending Account (FSA) and a Health Savings Account (HSA)?

FSAs allow higher contribution limits
HSA funds roll over year to year while FSA funds generally do not (Correct answer)
HSAs are employer-funded only
FSAs require HDHP enrollment

Correct answer: HSA funds roll over year to year while FSA funds generally do not

Unlike FSAs which have a 'use-it-or-lose-it' rule, HSA balances roll over indefinitely and can accumulate long-term.

Question 26: A non-exempt employee earns $15/hour and a production bonus of $150 in a week when they work 50 hours. What is the correct regular rate of pay for overtime calculation?

$18.00/hour (Correct answer)
$17.50/hour
$17.00/hour
$15.00/hour

Correct answer: $18.00/hour

Regular rate = ($15 × 50 + $150) / 50 = $900 / 50 = $18.00/hour; non-discretionary bonuses are included in the total compensation before dividing by total hours.

Question 27: A payroll department discovers that an employee was overpaid $300 in the prior period. Which entry corrects the balance sheet if repayment is received in cash?

Debit Cash $300 and credit Wages Expense $300 (Correct answer)
Debit Wages Payable $300 and credit Wages Expense $300
Debit Cash $300 and credit Wages Payable $300
Debit Wages Expense $300 and credit Cash $300

Correct answer: Debit Cash $300 and credit Wages Expense $300

Receiving repayment of an overpayment increases Cash and reduces (credits) the Wages Expense originally overstated.

Question 28: Under which circumstance is an employer required to withhold federal income tax at a flat 22% supplemental rate?

When paying an employee's regular biweekly wages
When an employee's annual wages exceed $200,000
When an employee has not filed a W-4
When paying bonuses or other supplemental wages up to $1 million, if paid separately from regular wages (Correct answer)

Correct answer: When paying bonuses or other supplemental wages up to $1 million, if paid separately from regular wages

Supplemental wages such as bonuses paid separately may be withheld at the flat 22% optional rate instead of using the aggregate method.

Question 29: Which of the following are the two components of the Federal Insurance Contributions Act (FICA) tax that are withheld from an employee's wages?

Social Security and Federal Unemployment (FUTA)
Social Security and Medicare (Correct answer)
Federal Income Tax and State Income Tax
Medicare and State Unemployment (SUTA)

Correct answer: Social Security and Medicare

FICA tax is composed of two separate taxes: a 6.2% Social Security tax and a 1.45% Medicare tax. Both the employee and the employer pay these taxes.

Question 30: An employer wants to offer employees the option to receive their pay via a payroll card. Which of the following is a key compliance consideration?

Payroll cards are prohibited in all states
Employees must have a free option to access their full net pay (Correct answer)
Employees must be paid exclusively by payroll card
The IRS requires payroll cards to be reported on Form W-2

Correct answer: Employees must have a free option to access their full net pay

State and federal consumer protection rules generally require that employees be able to access their full wages without fees, ensuring payroll cards are not a hidden wage reduction.

Question 31: Which document is most useful for reconciling the total wages reported on Form 941 to the general ledger?

The payroll register summary for each quarter (Correct answer)
The prior year W-3 transmittal
The bank statement for the payroll account
The individual employee time cards

Correct answer: The payroll register summary for each quarter

The quarterly payroll register summary provides the gross wage totals by quarter that should match the taxable wages reported on Form 941.

Question 32: A creditor garnishment order requires withholding 25% of an employee's disposable earnings of $700 per week. Federal law limits the garnishment to 25% of disposable earnings OR the amount by which disposable earnings exceed 30× the federal minimum wage ($7.25), whichever is LESS. What is the maximum garnishment?

$82.50
$700.00
$175.00 (Correct answer)
$117.50

Correct answer: $175.00

25% of $700 = $175; disposable earnings exceeding 30 × $7.25 ($217.50) = $700 − $217.50 = $482.50; the lesser amount is $175, so the maximum garnishment is $175.

Question 33: Which account type is subject to the 'use-it-or-lose-it' rule, potentially forfeiting unused year-end balances?

Health Savings Account (HSA)
SIMPLE IRA
Flexible Spending Account (FSA) (Correct answer)
Traditional 401(k)

Correct answer: Flexible Spending Account (FSA)

FSAs generally require employees to spend their elected amount by plan year-end or forfeit unused funds, unless the employer offers a limited grace period or carryover.

Question 34: A company retains payroll tax records for only 2 years and is then audited by the IRS. What is the likely consequence?

Penalties for failure to maintain records for the IRS-required 4-year period (Correct answer)
Penalties for failure to maintain records for the IRS-required 3-year period
No consequence if all taxes were paid correctly
The IRS will reconstruct records at no cost to the employer

Correct answer: Penalties for failure to maintain records for the IRS-required 4-year period

IRS regulations require employment tax records to be kept for at least 4 years after the tax becomes due or is paid.

Question 35: Supplemental wages, such as bonuses, that are paid separately from regular wages can be taxed for federal purposes using a flat rate. For supplemental wages under $1 million, what is this optional flat tax rate?

37%
28%
22% (Correct answer)
15%

Correct answer: 22%

The IRS permits employers to use an optional flat rate of 22% for supplemental wages (like bonuses, commissions, etc.) that are identified separately from regular pay, provided the total of such wages for the employee does not exceed $1 million during the calendar year.

Question 36: An employee earns $3,000 gross. They contribute $200 to a Section 125 medical plan and $150 to a traditional 401(k). What are their FICA-taxable wages?

$3,000 (no reductions apply)
$2,850 (only 401(k) reduces FICA wages)
$2,650 (both deductions reduce FICA)
$2,800 (only Section 125 reduces FICA wages) (Correct answer)

Correct answer: $2,800 (only Section 125 reduces FICA wages)

Section 125 contributions reduce FICA-taxable wages ($3,000 - $200 = $2,800), but traditional 401(k) deferrals do not reduce FICA wages.

Question 37: Under COBRA, who is responsible for paying the premium for continuation coverage?

The federal government
The employer only
The former employee, up to 102% of the group plan cost (Correct answer)
The insurance carrier directly

Correct answer: The former employee, up to 102% of the group plan cost

Under COBRA, the qualified beneficiary generally pays the full group plan premium plus up to a 2% administrative fee.

Question 38: Under the FLSA, an employer and employee agree to pay a salary that covers all hours worked, regardless of how many. This arrangement is known as:

Piece-rate method
Blended rate method
Fluctuating workweek method (Correct answer)
Fixed salary method

Correct answer: Fluctuating workweek method

The fluctuating workweek method allows overtime to be paid at a 0.5 multiplier on the regular rate, which decreases as hours increase, provided the salary is fixed and the agreement is clear.

Question 39: An employee's paycheck shows gross pay of $4,000, pre-tax deductions of $300, employee FICA of $286.65, FIT withholding of $420, and post-tax deductions of $100. What is the net pay?

$3,293.35
$2,993.35
$2,893.35 (Correct answer)
$2,893.65

Correct answer: $2,893.35

$4,000 − $300 (pre-tax) − $286.65 (FICA) − $420 (FIT) − $100 (post-tax) = $2,893.35.

Question 40: An employee who did not provide a Form W-4 started work in 2024. What withholding status must the employer use?

Single with zero allowances
No withholding until W-4 is submitted
Single or Married filing separately at the default rate per Publication 15-T (Correct answer)
Married filing jointly with standard deduction

Correct answer: Single or Married filing separately at the default rate per Publication 15-T

Per IRS rules, employers must withhold at the default rate for employees without a W-4, which since 2020 is treated as Single with no other adjustments per Publication 15-T.

Question 41: Employer-provided group-term life insurance becomes taxable to the employee when coverage exceeds what amount?

$50,000 (Correct answer)
$100,000
$25,000
$75,000

Correct answer: $50,000

The cost of employer-provided group-term life insurance exceeding $50,000 in coverage must be included in the employee's taxable wages.

Question 42: A new employee fails to submit a Form W-4. What withholding rate must the employer apply?

Zero withholding
The highest marginal tax rate
10% flat rate
The single filer rate at standard withholding (Correct answer)

Correct answer: The single filer rate at standard withholding

If an employee does not provide a Form W-4, the employer must withhold as if the employee is single with no adjustments.

Question 43: What is the maximum amount of wages subject to the Social Security (OASDI) tax for 2024?

$147,000
$176,100
$168,600 (Correct answer)
$160,200

Correct answer: $168,600

The Social Security wage base for 2024 is $168,600; wages above this amount are not subject to OASDI tax.

Question 44: A commissioned salesperson earns $800 salary plus $1,500 commission paid on the same check. If the employer uses the aggregate method for supplemental wages, the withholding is computed on:

$800 only using normal withholding
$2,300 combined as if it were their regular wages (Correct answer)
$800 at regular rate, $1,500 at 37%
$1,500 only at 22%

Correct answer: $2,300 combined as if it were their regular wages

The aggregate method combines regular and supplemental wages into one amount and applies normal withholding tables as if it were a single regular paycheck.

Question 45: According to the Internal Revenue Service (IRS), for how long must an employer keep records related to employment taxes after the date the tax is due or is paid, whichever is later?

At least 4 years. (Correct answer)
At least 2 years.
At least 1 year.
At least 7 years.

Correct answer: At least 4 years.

The IRS requires employers to keep all records of employment taxes, such as FICA and federal income tax withholding, for a minimum of four years after filing the 4th quarter for the year.

Question 46: An employee's disposable earnings are $300 per week. The federal minimum wage is $7.25/hour. What is the maximum creditor garnishment amount?

$150.00
$75.00 (Correct answer)
$82.50
$217.50

Correct answer: $75.00

25% of $300 = $75; amount above 30x $7.25 = $300 - $217.50 = $82.50; the lesser figure of $75 is the maximum that can be garnished.

Question 47: Which pay frequency results in the highest per-paycheck gross amount for a $60,000 annual salary?

Semimonthly
Weekly
Biweekly
Monthly (Correct answer)

Correct answer: Monthly

Monthly pay has only 12 periods per year, so each check equals $60,000 ÷ 12 = $5,000, the largest single paycheck amount.

Question 48: Under the FLSA, which type of employee is NOT entitled to overtime pay?

Exempt salaried executive (Correct answer)
Non-exempt hourly employee
Part-time employee earning $10/hr
Temporary worker paid hourly

Correct answer: Exempt salaried executive

Exempt employees—such as bona fide executives, administrators, and professionals meeting salary and duties tests—are not entitled to overtime under FLSA.

Question 49: Which payroll register column is used to verify the accuracy of the general ledger payroll entry?

Hire date column
Department code column
Total gross wages column (Correct answer)
Net pay column

Correct answer: Total gross wages column

The total gross wages column in the payroll register should agree with the Wages Expense debit in the general ledger journal entry.

Question 50: Which statement about an IRS federal tax levy on wages is TRUE?

It is limited to 25% of disposable earnings under the CCPA
It remains in effect until the employer receives an IRS levy release (Correct answer)
It automatically expires after 180 days if unpaid
It takes priority over all child support orders regardless of when each was established

Correct answer: It remains in effect until the employer receives an IRS levy release

A federal tax levy continues until the IRS issues a release (Form 668-D) or the liability is fully satisfied; employers must keep withholding until that release is received.

Question 51: A Health Savings Account (HSA) can only be opened by an employee enrolled in which type of health plan?

PPO
HMO
High-Deductible Health Plan (HDHP) (Correct answer)
Any employer-sponsored health plan

Correct answer: High-Deductible Health Plan (HDHP)

HSA eligibility requires enrollment in a qualified High-Deductible Health Plan (HDHP) as defined by the IRS.

Question 52: A company uses a payroll service bureau. Who is ultimately responsible for ensuring payroll taxes are filed correctly and on time?

The state tax authority
The IRS
The employer (Correct answer)
The payroll service bureau

Correct answer: The employer

Even when using a service bureau, the employer retains legal responsibility for accurate and timely payroll tax compliance.

Question 53: An employee's wages are $1,500 for the pay period. Using the percentage method, which IRS table does the employer consult to determine withholding under the 2020+ W-4?

Publication 15-A Employer's Supplemental Tax Guide
Publication 15-B Employer's Tax Guide to Fringe Benefits
Form W-4 Employee's Withholding Certificate Tables
Publication 15-T Percentage Method Tables for Automated Payroll Systems (Correct answer)

Correct answer: Publication 15-T Percentage Method Tables for Automated Payroll Systems

Publication 15-T contains the Percentage Method Tables for Automated Payroll Systems used to calculate federal income tax withholding.

Question 54: How does a payroll system typically handle a mid-period pay rate change for an hourly employee?

Calculates pay at the old rate for hours before the change and the new rate for hours after (Correct answer)
Averages the old and new rates for the entire period
Applies the new rate retroactively to the entire period
Applies the new rate starting only in the next full pay period

Correct answer: Calculates pay at the old rate for hours before the change and the new rate for hours after

Most payroll systems support split-rate processing, applying each rate only to the hours worked while that rate was in effect.

Question 55: An employee has a voluntary Roth 401(k) contribution of $400 per pay period. How does this affect FICA and federal income tax withholding?

Reduces both FICA and FIT taxable wages
Reduces FICA taxable wages only
Reduces FIT taxable wages only
Does not reduce FICA or FIT taxable wages (Correct answer)

Correct answer: Does not reduce FICA or FIT taxable wages

Roth 401(k) contributions are made on an after-tax basis, so they do not reduce federal income taxable wages or FICA wages.

Question 56: Under the Consumer Credit Protection Act (CCPA), what is the maximum amount that may be garnished from an employee's disposable earnings for ordinary debt (not child support)?

The lesser of 25% of disposable earnings or the amount by which earnings exceed 30 times the federal minimum hourly wage (Correct answer)
15% of disposable earnings
10% of disposable earnings
50% of disposable earnings

Correct answer: The lesser of 25% of disposable earnings or the amount by which earnings exceed 30 times the federal minimum hourly wage

For ordinary debt, the CCPA limits garnishment to the lesser of 25% of disposable earnings or the amount exceeding 30 times the federal minimum wage per week.

Question 57: A payroll accountant is performing a quarterly reconciliation of the general ledger. They notice that the balance in the FICA Taxes Payable liability account is steadily increasing and does not clear to zero after each tax deposit. Which of the following is the most likely cause?

The company is hiring new employees each quarter.
The payroll tax deposits are being made for an incorrect, lower amount. (Correct answer)
The employer's FUTA tax rate has increased.
Employees have been receiving significant overtime pay.

Correct answer: The payroll tax deposits are being made for an incorrect, lower amount.

The FICA Taxes Payable account is credited for the amount withheld from employees plus the employer match. It is debited when the tax deposit is made to the IRS. If the account balance doesn't return to zero (or near zero) after deposits, it indicates that the deposits being made are less than the liability being accrued, suggesting underpayment.

Question 58: The Social Security tax rate for employees under FICA is:

12.4%
2.9%
1.45%
6.2% (Correct answer)

Correct answer: 6.2%

Employees pay 6.2% of covered wages for Social Security; employers match this amount.

Question 59: What is the FLSA record-keeping requirement for payroll records of non-exempt employees?

Three years (Correct answer)
Five years
Two years
One year

Correct answer: Three years

The FLSA requires employers to retain payroll records, including hours worked and wages paid, for at least three years.

Question 60: Which of the following tests is used by the IRS to help determine worker status for federal tax purposes, focusing on behavioral control, financial control, and the relationship of the parties?

The Economic Reality Test
The Common Law Test (Correct answer)
The ABC Test
The Salary Basis Test

Correct answer: The Common Law Test

The IRS uses the Common Law Test to determine worker status. This test examines evidence across three main categories: Behavioral Control (does the company control how the worker does the job?), Financial Control (does the business control the financial aspects of the worker's job?), and the Type of Relationship (are there written contracts or benefits?).

Question 61: What is 'imputed income' in the context of year-end payroll processing?

Income earned by an employee from a second employer during the year
Wages deferred through pre-tax benefit contributions
Overtime pay calculated and paid during the year-end bonus review
The taxable fair market value of non-cash fringe benefits added to an employee's gross wages (Correct answer)

Correct answer: The taxable fair market value of non-cash fringe benefits added to an employee's gross wages

Imputed income is the fair market value of non-cash benefits — such as employer-provided group term life insurance over $50,000 — that must be included in an employee's taxable wages at year-end.

Question 62: How many pay stubs must an employer typically retain under federal record-keeping requirements?

5 years
2 years
3 years (Correct answer)
1 year

Correct answer: 3 years

The FLSA requires payroll records to be retained for at least 3 years.

Question 63: By what date must employers furnish Form W-2 to employees?

February 15
January 31 (Correct answer)
February 28
January 15

Correct answer: January 31

Employers must furnish W-2 forms to employees by January 31 of the year following the tax year.

Question 64: Which form is used to correct errors on a previously issued and filed Form W-2?

Form W-2R
Form W-2c (Correct answer)
Form 941-X
Form 1099-C

Correct answer: Form W-2c

Form W-2c (Corrected Wage and Tax Statement) is the designated IRS form for correcting errors on a previously issued W-2.

Question 65: Which agency must employers notify when an employee's wages are subject to a child support income withholding order?

The IRS
The Department of Labor
The Social Security Administration
The state child support enforcement agency (Correct answer)

Correct answer: The state child support enforcement agency

Employers must remit withheld child support payments to the state child support enforcement agency, which then disburses funds to the custodial parent.

Question 66: An employee is classified as exempt from overtime. Under the FLSA, which of the following is NOT a requirement for the executive exemption?

Primary duty is management
Has authority to hire or fire
Regularly directs the work of two or more full-time employees
Must be paid on an hourly basis (Correct answer)

Correct answer: Must be paid on an hourly basis

The FLSA executive exemption requires a salary basis of at least the threshold amount, not hourly pay; hourly payment typically disqualifies the exemption.

Question 67: A company records $10,000 of gross payroll. Employee withholdings total $3,000. What is the net pay liability recorded?

$13,000
$3,000
$10,000
$7,000 (Correct answer)

Correct answer: $7,000

Net pay is gross wages minus all employee withholdings: $10,000 − $3,000 = $7,000 owed to employees.

Question 68: Which form is used to report an employer's quarterly federal tax obligations for income, Social Security, and Medicare taxes?

Form 941 (Correct answer)
Form 944
Form W-3
Form 940

Correct answer: Form 941

Form 941, the Employer's Quarterly Federal Tax Return, reports withheld income taxes and FICA taxes each quarter.

Question 69: Under the Fair Labor Standards Act (FLSA), which of the following payroll-related records must be preserved for at least two years, as opposed to the more common three-year requirement?

The employee's name, address, and Social Security number.
Collective bargaining agreements.
Payroll registers summarizing wages paid each pay period.
Time cards and wage rate tables. (Correct answer)

Correct answer: Time cards and wage rate tables.

While the FLSA requires most primary payroll records to be kept for three years, supplementary records on which wage computations are based, such as time cards, work schedules, and wage rate tables, are only required to be kept for two years.

Question 70: Under the FLSA's administrative exemption, which of the following best describes the 'discretion and independent judgment' requirement?

The employee must hold a college degree in a related field
The employee must make decisions on matters of significance, not just apply established guidelines (Correct answer)
The employee must approve purchases over $500
The employee must supervise at least two full-time workers

Correct answer: The employee must make decisions on matters of significance, not just apply established guidelines

Discretion and independent judgment means the employee compares and evaluates possible courses of action and makes decisions that genuinely affect the business, not just following set procedures.

Question 71: An employer wants to give a non-exempt employee a net bonus of $1,000. To ensure the employee receives this exact amount after taxes, the employer must perform which type of calculation?

An annualized wage calculation
A wage-bracket calculation
A percentage method calculation
A gross-up calculation (Correct answer)

Correct answer: A gross-up calculation

A gross-up calculation is used to determine the gross amount of wages that must be paid to an employee to result in a specific net pay amount after all applicable taxes are withheld. This is common for bonuses or awards where the employer wants the employee to receive the full intended value.

Question 72: A tipped employee who earns $2.13/hour in direct wages must receive enough tips to bring their total to at least:

$10.00/hour
$7.25/hour (Correct answer)
$8.00/hour
$5.12/hour

Correct answer: $7.25/hour

Under the FLSA, if tips do not bring the employee's total hourly earnings to the federal minimum wage of $7.25/hour, the employer must make up the difference.

Question 73: When processing a federal tax levy (IRS Form 668-W), the amount EXEMPT from levy is determined by:

The CCPA 25% rule
The employee's gross wages
The number of exemptions claimed on the employee's statement of exemptions and filing status (Correct answer)
A flat dollar amount set by Congress

Correct answer: The number of exemptions claimed on the employee's statement of exemptions and filing status

The IRS provides Publication 1494 tables; the exempt amount from a federal tax levy is based on the employee's filing status and number of dependents claimed on the levy exemption statement.

Question 74: If an employee has not received Form W-2 by February 15, what is the recommended course of action?

Reconstruct wages using bank statements and file without a W-2
Contact the employer first, then the IRS if still unresolved (Correct answer)
File a complaint immediately with the Department of Labor
Request the employer to issue a W-2c immediately

Correct answer: Contact the employer first, then the IRS if still unresolved

Employees should first contact their employer; if the W-2 is still not provided, they may call the IRS, which can contact the employer on the employee's behalf.

Question 75: Federal Administrative Wage Garnishment (AWG) for defaulted student loans is capped at what maximum percentage of disposable pay?

25%
15% (Correct answer)
10%
20%

Correct answer: 15%

Under the Higher Education Act, AWG for defaulted federal student loans cannot exceed 15% of the employee's disposable pay per pay period.

Question 76: Which federal agency is primarily responsible for enforcing FLSA recordkeeping requirements?

EEOC
IRS
SSA
Department of Labor Wage and Hour Division (Correct answer)

Correct answer: Department of Labor Wage and Hour Division

The Department of Labor's Wage and Hour Division enforces FLSA provisions, including recordkeeping requirements.

Question 77: Under the IRS Accountable Plan rules, which reimbursement must be included in an employee's taxable wages?

A hotel receipt reimbursed at the actual amount spent
A $200 expense reimbursement with no business-purpose documentation (Correct answer)
A $50 per diem that does not exceed the federal GSA rate
A mileage reimbursement at the IRS standard rate with receipts

Correct answer: A $200 expense reimbursement with no business-purpose documentation

Accountable plan reimbursements must have a business connection, adequate substantiation, and return of excess amounts; without documentation, the reimbursement becomes taxable wages.

Question 78: Which of the following deductions is correctly subtracted from gross wages to arrive at 'disposable earnings'?

After-tax life insurance deductions
Voluntary 401(k) deferrals
Mandatory state disability insurance contributions (Correct answer)
Employee-elected health insurance premiums

Correct answer: Mandatory state disability insurance contributions

Only legally required deductions — such as mandatory state disability insurance — reduce gross wages to reach disposable earnings; voluntary elections do not.

Question 79: A retail employee works at Store A for 30 hours and at Store B (a sister company under common ownership and control) for 20 hours in the same workweek. How many overtime hours must be paid?

10 hours — combined hours exceed 40 (Correct answer)
5 hours — overtime is split proportionally
0 hours — each store counts separately
20 hours — the second employer owes all excess

Correct answer: 10 hours — combined hours exceed 40

When employers are considered joint employers or are under common control, their hours are aggregated; 50 combined hours means 10 overtime hours must be paid.

Question 80: A multistate employer must withhold state income tax based on which state's rules when an employee lives in one state but works in another?

Always the state where the employer is incorporated
Generally the state where the work is performed, subject to reciprocity agreements (Correct answer)
The state with the lower tax rate
Always the state where the employee lives

Correct answer: Generally the state where the work is performed, subject to reciprocity agreements

State income tax withholding is generally required in the state where services are performed, but reciprocity agreements between states may allow withholding in the employee's resident state instead.

Question 81: Which form might an employee use to report tips received to an employer?

Form 1096
Form 940
Form 4070 (Correct answer)
Form 8109

Correct answer: Form 4070

Employees who receive $20 or more in tips in a calendar month are required to report these tips to their employer. The IRS Form 4070, 'Employee's Report of Tips to Employer,' is the specific form designed for this purpose. This allows the employer to accurately report the employee's total wages, including tips, for tax withholding and FICA purposes.

Question 82: Which IRS publication does an employer consult to determine the exempt amount shielded from a federal tax levy?

Publication 4681 (Canceled Debts)
Publication 15 (Employer's Tax Guide)
Publication 505 (Tax Withholding)
Publication 1494 (Tables for Figuring Amount Exempt from Levy) (Correct answer)

Correct answer: Publication 1494 (Tables for Figuring Amount Exempt from Levy)

IRS Publication 1494 provides tables based on the employee's filing status and pay period to calculate the exempt amount that remains protected from the levy.

Question 83: Which of the following factors is most critical in determining whether a worker is classified as an employee versus an independent contractor?

The worker's preference for classification
The degree of control and independence in the work relationship (Correct answer)
The issuance of a Form 1099-NEC at year-end
The duration of the working relationship

Correct answer: The degree of control and independence in the work relationship

The primary determinant of worker status is the degree of control the business has over the worker. If the business has the right to control what the worker does and how the job is done, the worker is generally considered an employee.

Question 84: Medicare tax is levied at what rate on all covered wages with no wage base limit?

2.9%
1.45% (Correct answer)
0.9%
6.2%

Correct answer: 1.45%

Employees pay 1.45% for Medicare on all covered wages, with no cap, and employers match that 1.45%.

Question 85: An employee is paid on a piece-rate basis, earning $0.50 per unit and producing 900 units in a 45-hour week. What is their regular rate of pay for FLSA overtime purposes?

$9.00 (Correct answer)
$0.50
$7.50
$10.00

Correct answer: $9.00

Total earnings $450 ÷ 45 hours worked = $10.00 regular rate of pay.

Question 86: What does Code W in Box 12 of Form W-2 report?

Wages subject to Additional Medicare Tax surcharge
W-4 withholding exemption claim amounts
Employer and employee contributions to a Health Savings Account (HSA) (Correct answer)
Wages subject to workers' compensation insurance

Correct answer: Employer and employee contributions to a Health Savings Account (HSA)

Code W in Box 12 reports employer contributions to an employee's HSA, including amounts contributed through payroll deduction on the employee's behalf.

Question 87: What is the standard quarterly deadline for an employer to file Form 941, Employer's QUARTERLY Federal Tax Return, assuming the due date does not fall on a weekend or holiday?

The 15th day of the month following the end of the quarter.
The last day of the month following the end of the quarter. (Correct answer)
The 10th business day following the end of the quarter.
The first day of the month following the end of the quarter.

Correct answer: The last day of the month following the end of the quarter.

Form 941 is due by the last day of the month that follows the end of the quarter. For example, for the first quarter (January-March), the deadline is April 30th. For the second quarter (April-June), it's July 31st, and so on.

Question 88: Which statement best describes the difference between wages payable and wages expense?

Wages payable is an income statement account; wages expense is a balance sheet asset
Both are balance sheet accounts but on opposite sides
Wages expense is an income statement account; wages payable is a balance sheet liability (Correct answer)
Both are income statement accounts but in different periods

Correct answer: Wages expense is an income statement account; wages payable is a balance sheet liability

Wages expense flows through the income statement reducing net income, while wages payable is a balance sheet liability representing amounts owed but not yet paid.

Question 89: The Federal Unemployment Tax Act (FUTA) tax is paid by:

The federal government as a subsidy
Both the employer and employee equally
The employer only (Correct answer)
The employee only through payroll deduction

Correct answer: The employer only

FUTA tax is solely an employer expense; it is not deducted from employee wages, unlike FICA taxes which are shared.

Question 90: A 'reciprocity agreement' between two states means that:

The states use identical tax forms and rates
Both states share tax revenue equally
Employees working across state lines pay income tax only to their state of residence (Correct answer)
Employers pay double the normal tax rate

Correct answer: Employees working across state lines pay income tax only to their state of residence

A state reciprocity agreement allows residents who work in a neighboring state to have income tax withheld only for their home state, avoiding double-state taxation.

Question 91: An employee was hired on March 1, 2023, and their employment was terminated on May 15, 2025. According to USCIS regulations for Form I-9, what is the earliest date the employer can legally destroy this employee's Form I-9?

May 15, 2028
May 15, 2026 (Correct answer)
March 1, 2025
March 1, 2026

Correct answer: May 15, 2026

The rule for Form I-9 retention is to keep the form for three years after the date of hire OR one year after the date of termination, whichever date is later. Three years from the hire date (March 1, 2023) is March 1, 2026. One year from the termination date (May 15, 2025) is May 15, 2026. The later of these two dates is May 15, 2026.

Question 92: A SIMPLE IRA plan may be established by employers with no more than how many employees?

250
100 (Correct answer)
25
50

Correct answer: 100

SIMPLE IRA plans are available to employers with 100 or fewer employees who earned at least $5,000 in the prior year.

Question 93: An employee who works in two states during the same pay period is subject to income tax withholding based on:

A flat federal rate that replaces state withholding
Only the state where the employer is headquartered
Only the state where the employee lives
Reciprocity agreements and nexus rules of each state (Correct answer)

Correct answer: Reciprocity agreements and nexus rules of each state

Multi-state withholding is governed by each state's nexus rules and any reciprocity agreements between states, which may allow withholding only in the residence state.

Question 94: Employer-provided group-term life insurance coverage exceeding $50,000 is:

Fully excluded from income
Taxable income to the employee based on IRS Table I rates (Correct answer)
Subject only to state income tax
A non-taxable fringe benefit

Correct answer: Taxable income to the employee based on IRS Table I rates

The cost of employer-provided group-term life insurance exceeding $50,000 must be included in the employee's gross income using the rates from IRS Table I.

Question 95: An employee's W-2 Box 1 (Federal wages) is lower than Box 3 (Social Security wages). Which of the following most likely explains the difference?

The employee received a discretionary bonus
The employee had excess FICA withheld
The employee received nontaxable fringe benefits
The employee made traditional 401(k) elective deferrals (Correct answer)

Correct answer: The employee made traditional 401(k) elective deferrals

Traditional 401(k) deferrals reduce federal income taxable wages (Box 1) but not Social Security/Medicare wages (Boxes 3 and 5), creating a lower Box 1 than Box 3.

Question 96: Which of the following is considered a pre-tax deduction that reduces an employee's taxable wages?

Traditional 401(k) contributions (Correct answer)
After-tax life insurance premiums
Roth 401(k) contributions
Garnishments

Correct answer: Traditional 401(k) contributions

Traditional 401(k) contributions are pre-tax, reducing the employee's federal taxable income, unlike Roth 401(k) contributions which are made after-tax.

Question 97: Under IRS rules, how long must payroll records generally be retained?

7 years after the tax period
Indefinitely
2 years from the date records were created
4 years after the due date of the related tax (Correct answer)

Correct answer: 4 years after the due date of the related tax

IRS regulations require employers to retain payroll records for at least 4 years after the due date of the related tax or the date the tax was paid, whichever is later.

Question 98: Which penalty applies when an employer intentionally disregards the requirement to file correct information returns?

$60 per return
$310 per return
No penalty if the error is corrected
$570 per return (Correct answer)

Correct answer: $570 per return

The penalty for intentional disregard of information return filing requirements is $570 per return (indexed for inflation), with no annual cap.

Question 99: An employee has gross earnings of $2,000 for a pay period. They contribute $100 to a pre-tax 401(k) plan and have a $50 pre-tax deduction for health insurance. What are the employee's taxable wages for Social Security and Medicare (FICA) taxes?

$2,000
$1,850 (Correct answer)
$1,900
$1,950

Correct answer: $1,850

FICA taxable wages are calculated by subtracting qualifying pre-tax deductions from gross pay. Both 401(k) contributions and health insurance premiums are typically exempt from FICA taxes. Therefore, the calculation is $2,000 (Gross) - $100 (401k) - $50 (Health Insurance) = $1,850.

Question 100: Which statement about backup withholding is correct?

It applies to payees who have not provided a correct TIN on Form W-9, at a rate of 24% (Correct answer)
It is imposed at the same rate as the federal supplemental withholding rate
It applies only to non-resident aliens
It applies to employees who have not submitted a W-4

Correct answer: It applies to payees who have not provided a correct TIN on Form W-9, at a rate of 24%

Backup withholding at 24% is required when a payee fails to provide a correct taxpayer identification number (TIN) on Form W-9.

Question 101: According to the Fair Labor Standards Act (FLSA), for how long must an employer retain basic payroll records, such as employee names, addresses, rates of pay, and hours worked?

Two years from the last date of employment.
Three years from the last date of entry. (Correct answer)
Four years for federal tax purposes.
One year from the date of the record.

Correct answer: Three years from the last date of entry.

The FLSA requires employers to preserve basic payroll records for at least three years from the last date of entry. This includes records with employee identifying information, total wages, hours worked, and deductions.

Question 102: A child support order alone consumes the full CCPA maximum withholding for an employee. The employer then receives a creditor garnishment. What is the correct employer action?

Increase total withholding beyond the CCPA limit to satisfy both
Withhold nothing additional for the creditor and notify the issuing court (Correct answer)
Divide the maximum withholding proportionally between both orders
Apply the creditor garnishment and reduce the child support amount

Correct answer: Withhold nothing additional for the creditor and notify the issuing court

When existing orders already reach the CCPA maximum, no additional amount can be withheld; the employer must notify the creditor's court that the withholding limit is exhausted.

Question 103: What happens to unclaimed wages that an employer holds for an extended period?

They are forfeited to the employer
They become subject to state unclaimed property (escheat) laws (Correct answer)
They must be remitted to the IRS
They are donated to charity

Correct answer: They become subject to state unclaimed property (escheat) laws

Most states require employers to turn over unclaimed wages to the state after a dormancy period under escheat or abandoned property statutes.

Question 104: An employee's W-4 (2020 or later) shows $200 in Step 3 credits. How does this affect withholding calculation using the Percentage Method?

It reduces annual taxable wages by $200
It has no effect until year-end
It increases tentative withholding by $200
It reduces tentative withholding by $200 (Correct answer)

Correct answer: It reduces tentative withholding by $200

Step 3 credits on the 2020+ W-4 reduce the tentative withholding amount calculated from the bracket tables, not the taxable wage base.

Question 105: An employee earns $3,200 semimonthly. What is their annualized salary?

$83,200
$38,400
$76,800 (Correct answer)
$72,000

Correct answer: $76,800

Semimonthly pay periods = 24 per year; $3,200 × 24 = $76,800.

Question 106: An employee earns $52,000 annually. If paid biweekly, what is the gross pay per pay period?

$2,166.67
$1,000.00
$2,000.00 (Correct answer)
$4,333.33

Correct answer: $2,000.00

Biweekly means 26 pay periods per year; $52,000 ÷ 26 = $2,000.00 per pay period.

Question 107: An employer provides a 42-year-old employee with a $150,000 group-term life insurance policy and pays the entire premium. Based on IRS regulations, what is the value of the coverage that is subject to FICA taxes?

$42,000
$150,000
$50,000
$100,000 (Correct answer)

Correct answer: $100,000

The IRS allows the cost of the first $50,000 of employer-provided group-term life insurance coverage to be excluded from an employee's income. The cost of coverage exceeding $50,000 is considered a taxable benefit and must be included in the employee's wages for tax purposes. Therefore, the taxable portion of the coverage is $100,000 ($150,000 total coverage - $50,000 exclusion).

Question 108: Which of the following is reported in Box 12 of Form W-2 using Code DD?

Deferred compensation
Dependent care benefits
Non-qualified plan distributions
Cost of employer-sponsored health coverage (Correct answer)

Correct answer: Cost of employer-sponsored health coverage

Code DD in Box 12 of Form W-2 reports the cost of employer-sponsored health coverage under an employer-sponsored plan.

Question 109: Under the Electronic Federal Tax Payment System (EFTPS), by what time must a tax deposit be initiated on the due date to be considered timely?

5:00 p.m. local time
Close of business on the due date
8:00 p.m. ET the day before (Correct answer)
Midnight EST

Correct answer: 8:00 p.m. ET the day before

EFTPS payments must be initiated by 8:00 p.m. Eastern Time the day before the due date to be credited on time.

Question 110: A non-exempt employee is paid bi-weekly. During a pay period, they worked 85 hours. Their regular rate of pay is $20 per hour. What is their gross pay for this pay period?

$1,700
$1,750 (Correct answer)
$1,600
$1,850

Correct answer: $1,750

The employee worked 80 regular hours and 5 overtime hours. Regular pay is 80 hours * $20/hour = $1,600. The overtime rate is $20 * 1.5 = $30/hour. Overtime pay is 5 hours * $30/hour = $150. Total gross pay is $1,600 (regular) + $150 (overtime) = $1,750.

Question 111: Which IRS form is served on an employer to levy an employee's wages for unpaid federal taxes?

Form 1099-MISC
Form 941
Form 668-W (Correct answer)
Form W-4

Correct answer: Form 668-W

IRS Form 668-W (Notice of Levy on Wages, Salary, and Other Income) is the instrument served on employers to collect delinquent federal taxes from employee earnings.

Question 112: Under the CCPA, what is the maximum garnishment percentage of disposable earnings for child support when the employee IS supporting another spouse or dependent and is NOT in arrears?

65%
60%
50% (Correct answer)
55%

Correct answer: 50%

CCPA allows up to 50% of disposable earnings for child support when the employee supports a current spouse or dependent and is not more than 12 weeks in arrears.

Question 113: Under the FLSA, which of the following is considered 'hours worked' for overtime calculation purposes?

Time an employee spends waiting on-call at the employer's premises (Correct answer)
Bona fide meal breaks of 30 minutes where employees are completely relieved of duties
Commute time from home to the regular worksite
Vacation time taken during the workweek

Correct answer: Time an employee spends waiting on-call at the employer's premises

On-call time at the employer's premises is hours worked because the employee cannot use that time effectively for personal purposes.

Question 114: Which federal law establishes limits on the amount of employee wages that can be garnished and prohibits termination due to a single garnishment?

Uniform Commercial Code (UCC)
Consumer Credit Protection Act (CCPA) (Correct answer)
Employee Retirement Income Security Act (ERISA)
Fair Labor Standards Act (FLSA)

Correct answer: Consumer Credit Protection Act (CCPA)

Title III of the CCPA limits wage garnishment amounts and protects employees from discharge solely because their wages are garnished for one debt.

Question 115: A tipped employee's direct cash wage is $2.13/hour. If their tips in a week are insufficient to bring total compensation to the federal minimum wage of $7.25/hour, the employer must:

Reduce the employee's scheduled hours
Pay a tip credit make-up to reach $7.25/hour (Correct answer)
File a tip pooling report with the DOL
Allow the employee to keep all future tips to compensate

Correct answer: Pay a tip credit make-up to reach $7.25/hour

The FLSA tip credit requires the employer to pay the difference if the direct wage plus tips do not equal at least the federal minimum wage.

Question 116: What is the purpose of reconciling payroll to the general ledger?

To prepare Form 941
To ensure payroll expense and liability accounts match the amounts processed through payroll (Correct answer)
To calculate employee benefits
To verify employee attendance records

Correct answer: To ensure payroll expense and liability accounts match the amounts processed through payroll

Payroll-to-general-ledger reconciliation confirms that the financial records accurately reflect all payroll transactions, supporting audit readiness and financial accuracy.

Question 117: Using the 'half-time' method for piece-rate overtime, how much additional overtime pay is owed for the 5 overtime hours in the previous question (regular rate = $10.00)?

$25.00 (Correct answer)
$150.00
$75.00
$50.00

Correct answer: $25.00

Under the half-time method, overtime premium = 0.5 × regular rate × OT hours = 0.5 × $10.00 × 5 = $25.00 (piece-rate earnings already include straight-time pay).

Question 118: An auditor selects a sample of payroll checks and traces them back to approved timesheets and pay rates. This procedure is known as:

Observation
Confirmation
Tracing
Vouching (Correct answer)

Correct answer: Vouching

Vouching involves working backward from the output (checks) to source documents (timesheets, pay rates) to verify existence and authorization.

Question 119: Except for whom of the following are all non-exempt workers?

A person whose primary job is to index computer files continuously (Correct answer)
A high school administrator
A manager who has people reporting to her
A computer specialist

Correct answer: A person whose primary job is to index computer files continuously

Non-exempt workers are typically paid hourly and are entitled to overtime pay under the Fair Labor Standards Act (FLSA). Exempt workers, such as computer specialists, administrators, and managers, are generally salaried and meet specific duties tests that exempt them from overtime. A person continuously indexing computer files is likely performing a routine, non-discretionary task, making them non-exempt.

Question 120: During an internal payroll audit, an auditor tests whether terminated employees were removed from payroll promptly. This control primarily prevents which risk?

Inaccurate benefits deductions
Overpayment to former employees or ghost employee fraud (Correct answer)
Incorrect overtime calculations
Failure to issue W-2s on time

Correct answer: Overpayment to former employees or ghost employee fraud

Ensuring timely removal of terminated employees prevents unauthorized payments to individuals no longer employed.

Question 121: Paid time off (PTO) accruals should be recorded when:

The company's fiscal year ends
Employees actually use the PTO
Employees earn the PTO, regardless of whether they take it (Correct answer)
PTO balances exceed the company's policy cap

Correct answer: Employees earn the PTO, regardless of whether they take it

Under the accrual method, PTO is expensed as employees earn it to match the cost with the period the benefit was earned.

Question 122: Which of the following federal income tax withholding methods is best suited for an automated payroll system and is required for employees with annual wages exceeding $100,000?

Aggregate method
Wage-bracket method
Percentage method (Correct answer)
Cumulative method

Correct answer: Percentage method

The percentage method is ideal for automated payroll systems as it uses mathematical formulas rather than tables. It is also required for high-income earners (over approx. $100,000) for whom the wage-bracket tables do not extend.

Question 123: An employer pays all employees a flat daily rate regardless of hours worked. For overtime compliance under the FLSA, the regular rate is computed as:

The daily rate multiplied by 5, divided by 40
The total daily earnings divided by all hours actually worked that day (Correct answer)
Half the daily rate for any day with over 8 hours
The daily rate divided by 8 hours

Correct answer: The total daily earnings divided by all hours actually worked that day

When workers are paid a flat daily rate, the regular rate for any workday is the daily earnings divided by the actual number of hours worked that day.

Question 124: When must an employer furnish Form W-2 to employees?

By January 31 following the tax year (Correct answer)
By December 31 of the tax year
By April 15 following the tax year
By March 15 following the tax year

Correct answer: By January 31 following the tax year

Employers must provide W-2 forms to employees and file with the SSA by January 31 of the year following the tax year.

Question 125: To qualify for the administrative exemption under the FLSA, an employee must meet all of the following criteria EXCEPT:

Hold a degree in business administration. (Correct answer)
Have a primary duty of performing office or non-manual work directly related to business operations.
Exercise discretion and independent judgment with respect to matters of significance.
Be paid on a salary basis at or above the required minimum.

Correct answer: Hold a degree in business administration.

The FLSA's administrative exemption has three main requirements: a salary basis test, a salary level test, and a duties test. The duties test requires that the employee's primary duty is office work related to management or general business operations and includes the exercise of discretion and independent judgment. There is no requirement for a specific academic degree to qualify for this exemption.

Question 126: Reversing entries related to payroll accruals are typically made on:

The date federal tax deposits are due
The first day of the new accounting period (Correct answer)
The date payroll is processed
The last day of the current accounting period

Correct answer: The first day of the new accounting period

Reversing entries are posted on the first day of the new period to automatically cancel the prior accrual once actual payroll is recorded.

Question 127: Form 941 (Employer's Quarterly Federal Tax Return) is generally due:

January 31 for the entire year
By the last day of the month following the end of the quarter (Correct answer)
Within 10 days of the quarter end
On the last day of the quarter

Correct answer: By the last day of the month following the end of the quarter

Form 941 is due by the last day of the month following the end of each quarter (April 30, July 31, October 31, January 31), with a 10-day extension if deposits are timely.

Question 128: After applying the maximum FUTA credit of 5.4% for timely state unemployment tax payments, what is the net FUTA tax rate?

2.0%
1.2%
1.0%
0.6% (Correct answer)

Correct answer: 0.6%

The statutory FUTA rate of 6.0% is reduced by a 5.4% credit when state unemployment taxes are paid on time, resulting in an effective net rate of 0.6%.

Question 129: What is the main advantage of using electronic pay stubs over paper pay stubs?

They reduce printing costs and allow employees to access pay history at any time (Correct answer)
Electronic pay stubs are required by federal law
They eliminate the need for payroll tax withholding
They are accepted in place of Form W-2 at tax time

Correct answer: They reduce printing costs and allow employees to access pay history at any time

Electronic pay stubs lower administrative costs and give employees on-demand access to current and historical earnings and deduction information.

Question 130: Section 125 Cafeteria Plans allow employees to pay for eligible benefits using:

After-tax payroll deductions only
Pre-tax dollars, reducing federal taxable income (Correct answer)
Post-tax dollars that are later reimbursed
Employer matching contributions only

Correct answer: Pre-tax dollars, reducing federal taxable income

Under IRC Section 125, cafeteria plans allow employees to choose among benefits and pay for eligible ones with pre-tax salary reductions, lowering their taxable wages.

Question 131: An employer is required to deposit the employee's share of FICA taxes along with:

The employer's matching FICA contribution (Correct answer)
The employee's FIT withholding only
Post-tax deductions collected from employees
The employer's FUTA tax

Correct answer: The employer's matching FICA contribution

Employers must deposit both the employee's share of FICA taxes withheld and the employer's matching share of FICA taxes at the same time.

Question 132: What IRS notice triggers the requirement for an employer to begin withholding an employee's student loan levies?

IRS Form 668-W (Correct answer)
CP2100 notice
CP503 notice
IRS Form 12153

Correct answer: IRS Form 668-W

IRS Form 668-W (Notice of Levy on Wages, Salary, and Other Income) is the document that instructs an employer to begin withholding wages for an IRS tax levy.

Question 133: After computing gross pay and subtracting all pre-tax deductions, which taxes are deducted in the correct order to arrive at net pay?

Garnishments → FICA → FIT → post-tax deductions
Employee FICA → FIT → State IT → Local IT
Employee FICA and FIT simultaneously → State/Local taxes → voluntary deductions → garnishments (Correct answer)
FIT → State IT → Local IT → Employee FICA

Correct answer: Employee FICA and FIT simultaneously → State/Local taxes → voluntary deductions → garnishments

By convention, mandatory taxes (FICA and FIT) are computed on gross taxable wages and withheld together, followed by state/local taxes, then post-tax voluntary deductions, and finally garnishments in priority order.

Question 134: Which IRS test is used to determine whether a worker is an employee or an independent contractor for federal tax purposes?

The Safe Harbor Bright-Line Test
The Common Law Control Test (Correct answer)
The ABC Test
The Economic Realities Test

Correct answer: The Common Law Control Test

The IRS applies the Common Law Control Test, examining behavioral control, financial control, and the type of relationship to determine worker classification.

Question 135: What does a debit balance in the Payroll Tax Expense account indicate?

There is an error in the payroll ledger
The company has incurred payroll tax costs that are expensed (Correct answer)
The company has overpaid its payroll taxes
Payroll taxes have been remitted to the IRS

Correct answer: The company has incurred payroll tax costs that are expensed

Payroll Tax Expense is an expense account with a normal debit balance, indicating costs the company has recognized for employer-side taxes.

Question 136: Under IRS rules, how long must employers generally retain payroll records (including W-4 forms and wage records)?

3 years (Correct answer)
1 year
7 years
2 years

Correct answer: 3 years

The IRS requires employers to keep employment tax records for at least 4 years after the tax is due or paid (whichever is later), but the FLSA requires wage records for 3 years — commonly employers retain for 4+ years to satisfy all requirements.

Question 137: Under the FLSA, the standard workweek for overtime purposes is defined as:

The calendar month
Monday through Sunday only
Any 7 consecutive days designated by the employer (Correct answer)
Any 14-day period

Correct answer: Any 7 consecutive days designated by the employer

The FLSA defines a workweek as any fixed, regularly recurring period of 168 consecutive hours (7 consecutive 24-hour periods) established by the employer.

Question 138: What is the primary purpose of an employee completing IRS Form W-4, Employee's Withholding Certificate?

To verify the employee's eligibility to work in the United States.
To allow the employer to determine the correct amount of federal income tax to withhold. (Correct answer)
To enroll the employee in company-sponsored benefits programs.
To report the employee's annual wages and taxes withheld to the Social Security Administration.

Correct answer: To allow the employer to determine the correct amount of federal income tax to withhold.

Form W-4 provides the employer with the employee's filing status, number of dependents, and other adjustments needed to calculate the proper amount of federal income tax to withhold from their pay.

Question 139: When an employee fails to cash a paycheck after a significant period, the employer must eventually turn the funds over to the state. What is this process called?

Escheatment (Correct answer)
Garnishment
Forfeiture
Liquidation

Correct answer: Escheatment

Escheatment is the legal process by which unclaimed property, such as uncashed payroll checks, is turned over to the state government after a specified period of dormancy. The state then holds the funds until the rightful owner or their heirs claim them.

Question 140: A company uses cost centers to allocate payroll. If an employee works 60% in sales and 40% in administration, how should their wages be split in the journal entry?

Recorded entirely in a single clearing account
60% to Sales Wages Expense and 40% to Admin Wages Expense (Correct answer)
100% to the department where they spend most of their time
50/50 between Sales and Admin regardless of actual time

Correct answer: 60% to Sales Wages Expense and 40% to Admin Wages Expense

Payroll costs should be allocated to expense accounts based on the actual percentage of time worked in each department.

Question 141: Under the Additional Medicare Tax rules, a single filer employee must pay an extra 0.9% Medicare surtax on wages exceeding:

$200,000 (Correct answer)
$500,000
$250,000
$100,000

Correct answer: $200,000

Employers must withhold the additional 0.9% Medicare tax on wages paid to an individual that exceed $200,000 in a calendar year, regardless of filing status.

Question 142: A fringe benefit provided to an employee has a fair market value of $200. How does this affect payroll accounting?

It is excluded from income and requires no accounting entry
It is added to gross wages for tax purposes and recorded as wages expense (Correct answer)
It is recorded as a separate non-taxable benefit expense
It reduces the employee's net pay dollar for dollar

Correct answer: It is added to gross wages for tax purposes and recorded as wages expense

Taxable fringe benefits must be included in the employee's gross wages, which increases both wages expense and the related tax withholding obligations.

Question 143: What is the purpose of Form 8809 in payroll compliance?

To report non-employee compensation
To request an extension of time to file information returns (Correct answer)
To request a penalty waiver for late deposits
To correct a previously filed W-2

Correct answer: To request an extension of time to file information returns

Form 8809 is used to request an automatic 30-day extension of time to file information returns such as W-2s and 1099s.

Question 144: An employee passed away on December 15, 2025. The employer pays the employee's final wages to their estate on January 10, 2026. What is the correct tax treatment for this payment?

Withhold FICA taxes only and report on Form W-2 and Form 1099-MISC.
Withhold no taxes and report the full amount on Form 1099-MISC. (Correct answer)
Withhold federal income tax and FICA taxes, and report on Form W-2.
Withhold federal income tax only and report on Form 1099-MISC.

Correct answer: Withhold no taxes and report the full amount on Form 1099-MISC.

Wages paid to a deceased employee's estate or beneficiary in the calendar year *after* the employee's death are not subject to FICA (Social Security and Medicare), FUTA, or federal income tax withholding. The payment is reported as 'Other Income' in Box 3 of Form 1099-MISC issued to the estate or beneficiary.

Question 145: What is the primary purpose of a payroll register?

To file quarterly tax returns
To document each employee's earnings and deductions for a pay period (Correct answer)
To track employee attendance
To store W-2 forms

Correct answer: To document each employee's earnings and deductions for a pay period

A payroll register is a summary record showing each employee's gross pay, deductions, and net pay for a specific pay period.

Question 146: An employee is paid $600 weekly salary plus a $150 non-discretionary bonus. Their regular rate for overtime purposes is:

$18.75/hour (Correct answer)
$16.25/hour
$15.00/hour
$18.00/hour

Correct answer: $18.75/hour

Total compensation = $600 + $150 = $750; regular rate = $750 ÷ 40 hours = $18.75/hour.

Question 147: Which of the following is a key characteristic of a voluntary wage assignment?

It is mandated by a court order.
The employee can typically revoke it at any time. (Correct answer)
The CCPA's percentage limits always apply.
It takes priority over all court-ordered garnishments.

Correct answer: The employee can typically revoke it at any time.

A voluntary wage assignment is an agreement between an employee and a creditor, and unlike a court-ordered garnishment, the employee can usually revoke the authorization in writing at any time. It is not court-ordered, and the CCPA's protections on withholding limits do not apply to these voluntary arrangements.

Question 148: Employee contributions made through a Section 125 cafeteria plan are exempt from which of the following taxes?

Federal income tax only
Federal income tax, Social Security, and Medicare taxes (Correct answer)
State income tax only
Social Security and Medicare taxes only

Correct answer: Federal income tax, Social Security, and Medicare taxes

Section 125 cafeteria plan deductions reduce wages subject to federal income tax, OASDI (Social Security), and HI (Medicare) taxes, providing a triple tax benefit.

Question 149: Which IRS form do employees complete to tell their employer how much federal income tax to withhold from their paychecks?

Form 941
Form W-4 (Correct answer)
Form 1099
Form W-2

Correct answer: Form W-4

Form W-4 (Employee's Withholding Certificate) is completed by employees to indicate their withholding allowances and filing status for federal income tax purposes.

Question 150: Under FUTA, what is the standard tax rate applied to the first $7,000 of each employee's wages?

0.6%
5.4%
2.7%
6.0% (Correct answer)

Correct answer: 6.0%

The gross FUTA rate is 6.0%, but employers in states with no outstanding federal loans receive a 5.4% credit, yielding a net 0.6%.

Question 151: Which category of workers is generally EXEMPT from FLSA overtime requirements?

Salaried executive managers earning $684+/week (Correct answer)
Hourly food service employees
Part-time warehouse workers
Hourly retail clerks earning $8/hour

Correct answer: Salaried executive managers earning $684+/week

The FLSA white-collar exemptions cover executive, administrative, and professional employees who are paid on a salary basis of at least $684/week and meet specific duties tests.

Fundamental Payroll Certification Exam

The Fundamental Payroll Certification (FPC) Exam tests foundational knowledge in payroll concepts, calculations, tax compliance, accounting, and systems administration as defined by the American Payroll Association.

150

Questions

180 min

Time Limit

70%

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