Fundamental Payroll Payroll Accounting Principles Questions and Answers — 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?
- One year
- Three years
- Four years (Correct answer)
- Seven years
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 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?
- Withhold federal income tax and FICA taxes, and report on Form W-2.
- 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 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 3: Which of the following represents the correct basic journal entry to record a company's payroll expenses and liabilities?
- Debit Cash; Credit Salaries Expense and Payroll Tax Liabilities.
- Debit Salaries Expense and Payroll Tax Expense; Credit Cash and Payroll Tax Liabilities. (Correct answer)
- Debit Payroll Tax Liabilities; Credit Salaries Expense and Cash.
- Debit Salaries Expense; Credit Payroll Tax Expense and Cash.
Correct answer: Debit Salaries Expense and Payroll Tax Expense; Credit Cash and Payroll Tax Liabilities.
The correct journal entry involves debiting (increasing) the expense accounts, which are Salaries Expense and the employer's Payroll Tax Expense. The corresponding credits increase the liability accounts (for taxes withheld and owed) and decrease the asset account (Cash or Wages Payable) for the net pay amount.
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?
- Forfeiture
- Garnishment
- Liquidation
- Escheatment (Correct answer)
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 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?
- Pay the difference to the employees as a non-taxable bonus.
- Allocate the shortfall among the tipped employees and report it on Form W-2. (Correct answer)
- File a special report with the Department of Labor explaining the tip shortfall.
- Withhold additional income tax from the employees to cover the 8% threshold.
Correct answer: Allocate the shortfall among the tipped employees and report it on Form W-2.
If the total tips reported by employees at a large food or beverage establishment are less than 8% of gross receipts, the employer must allocate the difference among the employees who receive tips. This allocated amount is reported in Box 8 of the employee's Form W-2 and on the employer's Form 8027.
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?
- The company is hiring new employees each quarter.
- Employees have been receiving significant overtime pay.
- The payroll tax deposits are being made for an incorrect, lower amount. (Correct answer)
- The employer's FUTA tax rate has increased.
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.
Fundamental Payroll Payroll Accounting Principles Questions and Answers
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?