Fundamental Payroll Payroll Accounting Principles Questions and Answers

Question 1

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?

Accepted Answer

Four years

Answer

One year

Answer

Three years

Answer

Seven years

Question 2

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?

Accepted Answer

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

Answer

Withhold federal income tax and FICA taxes, and report on Form W-2.

Answer

Withhold FICA taxes only and report on Form W-2 and Form 1099-MISC.

Answer

Withhold federal income tax only and report on Form 1099-MISC.

Question 3

Which of the following represents the correct basic journal entry to record a company's payroll expenses and liabilities?

Accepted Answer

Debit Salaries Expense and Payroll Tax Expense; Credit Cash and Payroll Tax Liabilities.

Answer

Debit Cash; Credit Salaries Expense and Payroll Tax Liabilities.

Answer

Debit Payroll Tax Liabilities; Credit Salaries Expense and Cash.

Answer

Debit Salaries Expense; Credit Payroll Tax Expense and Cash.

Question 4

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?

Accepted Answer

Escheatment

Answer

Forfeiture

Answer

Garnishment

Answer

Liquidation

Question 5

A large restaurant employs 50 people. During a pay period, the total reported tips from all employees are less than 8% of the restaurant's gross receipts. What is the employer required to do?

Accepted Answer

Allocate the shortfall among the tipped employees and report it on Form W-2.

Answer

Pay the difference to the employees as a non-taxable bonus.

Answer

File a special report with the Department of Labor explaining the tip shortfall.

Answer

Withhold additional income tax from the employees to cover the 8% threshold.

Question 6

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?

Accepted Answer

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

Answer

The company is hiring new employees each quarter.

Answer

Employees have been receiving significant overtime pay.

Answer

The employer's FUTA tax rate has increased.