Fundamental Payroll Certification Fundamental Payroll Employment Taxes and Withholding 5 — Questions and Answers
Question 1: An employee receives a $500 moving expense reimbursement in 2024. How is this treated for payroll tax purposes?
- Excluded from income and not subject to FICA or income tax withholding
- Included in taxable wages and subject to both FICA and income tax withholding (Correct answer)
- Excluded from income tax withholding only; FICA still applies
- Subject to a flat 22% withholding rate only
Correct answer: Included in taxable wages and subject to both FICA and income tax withholding
Since the Tax Cuts and Jobs Act of 2017 suspended the moving expense exclusion (except for military), employer moving expense reimbursements are taxable wages subject to FICA and income tax withholding.
Question 2: Which formula correctly calculates the employee's net pay?
- Gross pay minus pre-tax deductions minus taxes minus post-tax deductions (Correct answer)
- Gross pay minus taxes only
- Taxable wages minus all voluntary deductions
- Gross pay minus post-tax deductions minus taxes
Correct answer: Gross pay minus pre-tax deductions minus taxes minus post-tax deductions
Net pay equals gross pay reduced by pre-tax deductions (which lower taxable wages), then reduced by all applicable taxes, then reduced by any post-tax deductions.
Question 3: Which of the following accurately describes 'backup withholding'?
- Withholding applied when an employee has garnishments
- A 24% withholding rate applied to certain payments like interest and dividends when a TIN is missing or incorrect (Correct answer)
- A withholding method for nonresident aliens at 30%
- The secondary withholding after primary garnishments are satisfied
Correct answer: A 24% withholding rate applied to certain payments like interest and dividends when a TIN is missing or incorrect
Backup withholding at the rate of 24% is required on certain reportable payments (interest, dividends, etc.) when the payee fails to provide a valid TIN or the IRS notifies the payer of an incorrect TIN.
Question 4: What is the Medicare tax rate withheld from an employee's wages (excluding the Additional Medicare Tax)?
- 1.25%
- 1.45% (Correct answer)
- 2.9%
- 0.9%
Correct answer: 1.45%
The employee Medicare tax rate is 1.45% on all wages, with no wage base limit, and the employer matches this amount.
Question 5: An employer discovers they under-deposited payroll taxes by $300 in Q1. What is the IRS safe harbor rule that may prevent a penalty?
- The shortfall is less than the greater of $100 or 2% of the required deposit (Correct answer)
- The shortfall is less than $500 regardless of percentage
- The employer deposited at least 95% of the required taxes by the due date
- The employer makes up the shortfall within 5 business days after the deposit due date
Correct answer: The shortfall is less than the greater of $100 or 2% of the required deposit
The IRS safe harbor rule states that a deposit shortfall will not be penalized if it does not exceed the greater of $100 or 2% of the required deposit amount.
Question 6: Which of the following wages are exempt from FUTA tax?
- Overtime pay for production workers
- Wages paid to a child under age 21 employed by their parent in a sole proprietorship (Correct answer)
- Tips reported by restaurant employees
- Commissions paid to sales employees
Correct answer: Wages paid to a child under age 21 employed by their parent in a sole proprietorship
Wages paid to a child under 21 by a parent in a sole proprietorship or partnership (where each partner is the child's parent) are exempt from FUTA tax.
Question 7: What is the maximum penalty rate for failure to deposit payroll taxes if the deposit is more than 15 days late?
- 2%
- 5%
- 10% (Correct answer)
- 15%
Correct answer: 10%
The failure-to-deposit penalty reaches 10% for deposits made more than 15 days after the due date (15% applies only if the IRS issues a demand notice and the deposit is not made within 10 days).
Fundamental Payroll Certification Fundamental Payroll Employment Taxes and Withholding 5
An employee receives a $500 moving expense reimbursement in 2024.
How is this treated for payroll tax purposes?