22 Payroll Practice Questions & Answers

1. 1. Dana is a nonexempt employee paid $18.00 per hour. In one workweek she works 46 hours and receives no bonus or other compensation. The FLSA requires overtime at one and one-half times the regular rate for hours worked over 40 in a workweek. What is Dana's gross pay for that workweek?

   • A.$864.00
   • B.$828.00
   • C.$891.00
   • D.$882.00✓ Answer

   The first 40 hours are paid at the regular rate: 40 x $18.00 = $720.00. The 6 hours over 40 are paid at 1.5 x $18.00 = $27.00 each, or $162.00, for gross pay of $882.00. Paying all 46 hours at the straight rate ($828.00) ignores the required overtime premium.

   Source: FLSA overtime pay requirement; IRS Publication 15 (Circular E), wages subject to withholdingReport a problem with this question

2. 2. Rosa is a nonexempt production worker paid on a piece-rate basis. In one workweek she completes 500 pieces at $1.20 per piece and works 50 hours. Her regular rate is her total workweek earnings divided by total hours actually worked, and the FLSA requires an additional one-half of the regular rate for each hour over 40. What total pay is due for the workweek?

   • A.$660.00✓ Answer
   • B.$720.00
   • C.$690.00
   • D.$600.00

   Piece-rate earnings are 500 x $1.20 = $600.00, and the regular rate is $600.00 / 50 hours = $12.00. Because the piece-rate earnings already compensate all 50 hours at straight time, only the additional half-time premium is owed: 10 overtime hours x 0.5 x $12.00 = $60.00, for total pay of $660.00.

   Source: FLSA regular rate of pay and overtime computation for piece-rate employeesReport a problem with this question

3. 3. Ken is a salaried nonexempt employee who receives $800 per week, and the salary is intended to compensate a 40-hour workweek. In one workweek he actually works 45 hours. Overtime is one and one-half times the regular rate for hours over 40. What is Ken's gross pay for the workweek?

   • A.$950.00✓ Answer
   • B.$900.00
   • C.$850.00
   • D.$800.00

   For a salaried nonexempt employee the regular rate is the salary divided by the hours the salary is intended to cover: $800 / 40 = $20.00 per hour. The salary covers straight time for 40 hours, so the 5 overtime hours are paid at 1.5 x $20.00 = $30.00 each, adding $150.00 for gross pay of $950.00. A salary alone does not make an employee exempt from overtime.

   Source: FLSA regular rate for salaried nonexempt employees; 29 CFR Part 778Report a problem with this question

4. 4. Elena is a nonexempt inside salesperson paid $14.00 per hour plus commissions on sales she closes. In one workweek she works 45 hours, earning $630 in hourly pay and $180 in commissions attributable to that week. Commissions are included in the regular rate, and the FLSA requires an additional one-half of the regular rate for each hour over 40. What is Elena's total pay for the workweek?

   • A.$877.50
   • B.$900.00
   • C.$810.00
   • D.$855.00✓ Answer

   Total straight-time remuneration is $630 + $180 = $810.00, so the regular rate is $810.00 / 45 hours = $18.00, not the $14.00 stated hourly rate. The additional overtime premium is 5 hours x 0.5 x $18.00 = $45.00, for total pay of $855.00. Commissions are compensation for work and must enter the regular rate.

   Source: FLSA regular rate of pay; 29 CFR Part 778, inclusion of commissionsReport a problem with this question

5. 5. Marcus is nonexempt and paid $16.00 per hour. In one workweek he works 44 hours and also earns an $88 production bonus that his employer promised in advance for meeting an output target. His employer has already paid all 44 hours at $16.00. Nondiscretionary bonuses must be included in the regular rate. What is Marcus's total pay for the workweek?

   • A.$824.00
   • B.$836.00
   • C.$792.00
   • D.$828.00✓ Answer

   Straight-time earnings are 44 x $16.00 = $704.00; adding the $88 nondiscretionary bonus gives $792.00 of remuneration, so the regular rate is $792.00 / 44 = $18.00. Because all 44 hours were already paid at straight time, an extra half-time premium is owed on the 4 overtime hours: 4 x 0.5 x $18.00 = $36.00, for total pay of $828.00. A bonus promised in advance to induce performance is nondiscretionary and cannot be left out of the regular rate.

   Source: FLSA regular rate of pay; 29 CFR Part 778, nondiscretionary bonusesReport a problem with this question

6. 6. Luis is a nonexempt employee paid $20.00 per hour. In one workweek he actually works 36 hours and is also paid 8 hours of holiday pay for a plant closure, so 44 hours appear on his check. At year end his employer also gives him a bonus whose amount and payment were decided solely by management, with no advance promise. Under the FLSA, how much overtime premium does the employer owe for that workweek?

   • A.$120.00
   • B.$130.00
   • C.$0✓ Answer
   • D.$40.00

   Overtime under the FLSA is based on hours actually worked, and holiday, vacation and sick hours are paid but not worked, so Luis worked only 36 hours and no overtime premium is owed even though 44 hours were paid. A truly discretionary bonus, where both the fact and the amount are decided by the employer near the end of the period, is also excluded from the regular rate.

   Source: FLSA hours worked and regular rate of pay; 29 CFR Part 778, discretionary bonuses and pay for time not workedReport a problem with this question

7. 7. An employer pays its nonexempt staff every two weeks. In the first week of a pay period an employee works 46 hours and in the second week 34 hours. Which statement correctly describes the employer's federal overtime obligation?

   • A.Overtime is owed for the 6 hours over 40 in the first workweek; the workweek is a fixed, regularly recurring period of 168 hours and two workweeks may not be averaged.✓ Answer
   • B.No overtime is owed because the employer chose a biweekly pay period, which sets the overtime threshold at 80 hours.
   • C.No overtime is owed because the 80 hours in the pay period average to 40 hours per week.
   • D.Overtime is owed only for hours worked beyond 8 in any single day, so the employer must review the daily records.

   The FLSA overtime threshold applies to each single workweek, defined as a fixed and regularly recurring period of seven consecutive 24-hour periods, and hours may not be averaged across two workweeks regardless of how often the employer pays. The FLSA also imposes no daily overtime requirement; a state may require more, and the rule more favorable to the employee then applies.

   Source: FLSA workweek definition and overtime pay requirement; 29 CFR Part 778Report a problem with this question

8. 8. A bookkeeper is asked whether a newly hired office manager is exempt from the FLSA's overtime requirement. Which statement best describes how exempt status is determined?

   • A.Exempt status means no federal income tax or FICA is withheld from the employee's pay.
   • B.Exempt status requires that the employee be paid on a salary basis, at or above the salary level set in the regulations, and actually perform exempt executive, administrative or professional duties; a job title alone does not create exemption.✓ Answer
   • C.Any employee paid a fixed salary rather than an hourly wage is exempt from overtime.
   • D.Exempt status is a choice the employer and employee may make in the offer letter, and once agreed it governs.

   The white-collar exemptions require all three tests to be met at once: salary basis, the salary level in effect under the regulations, and a duties test tied to the work actually performed. Because the test is factual, neither a title nor an agreement between the parties can make a nonexempt employee exempt, and exempt status has nothing to do with tax withholding.

   Source: FLSA executive, administrative and professional exemptions (salary basis, salary level and duties tests)Report a problem with this question

9. 9. A company engages a graphic designer, sets her daily schedule, requires her to work on company premises with company equipment, trains her in company methods, reimburses all her costs, and signs a contract stating she is an independent contractor. Under the IRS common-law test, how should her status be evaluated?

   • A.The facts of behavioral control, financial control and the type of relationship are weighed together with no single factor controlling, and here the strong behavioral and financial control point to employee status despite the contract.✓ Answer
   • B.She is an independent contractor because she is paid for finished designs rather than for time.
   • C.The signed contract controls, so she is an independent contractor for federal employment tax purposes.
   • D.She is an independent contractor because the company issues her an information return for nonemployee compensation rather than a wage statement.

   The IRS groups common-law evidence into three categories, behavioral control, financial control and the type of relationship, and the determination rests on the whole relationship rather than any single factor. Because the right to control how the work is done is the substance of the test, a label in a contract or the form on which payments are reported cannot convert an employee into a contractor; a firm or worker unsure of the answer may request an IRS determination on Form SS-8.

   Source: IRS Publication 15-A, common-law rules for employee vs. independent contractor; Form SS-8 determinationReport a problem with this question

10. 10. A business treated a group of installers as independent contractors and is now under employment tax examination. It wants to rely on Section 530 of the Revenue Act of 1978. Which statement about that relief is correct?

    • A.It applies automatically to any business that issued information returns, regardless of how it treated similar workers.
    • B.It relieves the workers of self-employment tax on the amounts they were paid.
    • C.It requires the business to obtain a favorable IRS ruling before the workers are engaged, or the relief is lost.
    • D.It can relieve the business of employment tax liability only if all three requirements are met: it filed all required information returns for the workers, it consistently treated those workers and similar workers as nonemployees, and it had a reasonable basis for doing so.✓ Answer

    Section 530 is relief for the business, not for the worker, and it is all-or-nothing: reporting consistency, substantive consistency and a reasonable basis such as judicial precedent, a prior audit or a long-standing industry practice must all be present. If any prong fails, the business remains exposed to employment tax on the reclassified workers.

    Source: Section 530 of the Revenue Act of 1978, employer relief requirementsReport a problem with this question

11. 11. Which of the following workers is treated as a statutory nonemployee, that is, as self-employed for federal tax purposes, assuming there is a written contract stating the worker is not an employee for federal tax purposes and substantially all pay is based on output rather than hours worked?

    • A.A home worker who works on materials supplied by the company and returns the finished goods according to company specifications.
    • B.A traveling salesperson who solicits orders full time from wholesalers on behalf of a single principal.
    • C.A full-time life insurance sales agent selling primarily for one insurance company.
    • D.A licensed real estate agent paid by commission on sales closed.✓ Answer

    Qualified real estate agents, direct sellers and certain companion sitters are statutory nonemployees when the written-contract and output-based-pay conditions are met, so no employment taxes are withheld and their pay is reported as nonemployee compensation. The other three are classic statutory employees, from whom the employer withholds Social Security and Medicare tax and reports wages on a Form W-2 even though income tax is generally not withheld.

    Source: IRS Publication 15-A, statutory employees and statutory nonemployeesReport a problem with this question

12. 12. On examination, the IRS reclassifies several long-term workers a company treated as independent contractors, and the company cannot establish any relief. Which statement best describes the company's exposure?

    • A.The company can owe the employee share of Social Security and Medicare it failed to withhold as well as its own matching share, the federal income tax it should have withheld, and federal unemployment tax, plus interest and penalties.✓ Answer
    • B.The reclassification applies only going forward, so no tax is owed for the periods already closed by the information returns that were filed.
    • C.The company must reimburse the workers for the self-employment tax they paid, but owes no employment tax itself.
    • D.Only the workers are liable, because each contractor was responsible for reporting and paying tax on the income received.

    Withholding and depositing employment taxes is the employer's legal duty, so when a worker is reclassified the employer becomes liable for the amounts it should have withheld as well as its own matching and unemployment taxes, and the liability reaches back to open periods rather than starting prospectively. Reduced assessment rates are available when the misclassification was unintentional and information returns were filed, but they lessen the amount rather than eliminate the liability.

    Source: IRS Publication 15 (Circular E), employer liability for withheld employment taxes; IRC Section 3509 reduced rates for unintentional misclassificationReport a problem with this question

13. 13. A bookkeeper is explaining who bears each payroll tax. Which statement is correct about the split between employee and employer?

    • A.Federal income tax withheld is a payroll tax expense of the employer because the employer remits it to the government.
    • B.Social Security and Medicare are imposed on both parties, so the employer matches what it withholds from the employee; federal income tax withheld is borne solely by the employee and is never an employer expense; and federal unemployment tax is an employer-only tax that is never withheld from pay.✓ Answer
    • C.Federal unemployment tax is withheld from the employee's wages and matched by the employer.
    • D.The employer may withhold its own share of Social Security and Medicare from the employee's pay if the employment agreement permits it.

    Amounts withheld from an employee are the employee's money held in trust and create only a liability on the employer's books, never an expense, while the employer's own matching Social Security and Medicare and its unemployment taxes are costs of employing labor and are charged to payroll tax expense. Federal unemployment tax is imposed on the employer alone and cannot be deducted from wages.

    Source: IRS Publication 15 (Circular E), employee and employer shares of FICA and employer-only FUTAReport a problem with this question

14. 14. An employee's year-to-date wages will pass the annual Social Security wage base during the current pay period and will also pass the threshold at which the Additional Medicare Tax begins. Which statement correctly describes the withholding that follows?

    • A.Both Social Security and Medicare stop once the annual Social Security wage base is reached.
    • B.Social Security stops once year-to-date wages reach the annual wage base, Medicare continues on all wages because it has no wage base, and the Additional Medicare Tax is withheld from the employee alone on wages above the threshold with no employer match.✓ Answer
    • C.Medicare stops at the wage base but Social Security continues on all wages for the rest of the year.
    • D.Social Security stops at the wage base, and the employer must match the Additional Medicare Tax it withholds.

    Social Security is capped by an annual wage base that resets each calendar year, while Medicare applies to every dollar of covered wages with no ceiling. The Additional Medicare Tax is a withholding obligation on the employee only once wages exceed the statutory threshold, and the employer has no matching share for that portion, so it appears as a liability but adds nothing to payroll tax expense.

    Source: IRS Publication 15 (Circular E), Social Security wage base, uncapped Medicare, and Additional Medicare Tax withholdingReport a problem with this question

15. 15. An employee elects a health insurance premium through a Section 125 cafeteria plan and also makes a traditional 401(k) elective deferral. Which statement correctly describes the effect on the employee's taxable wages?

    • A.Both reduce federal income taxable wages and both reduce Social Security and Medicare wages.
    • B.The cafeteria plan premium reduces wages subject to federal income tax withholding and to Social Security and Medicare tax, while the 401(k) deferral reduces federal income taxable wages but not Social Security and Medicare wages.✓ Answer
    • C.Neither reduces any taxable wage figure because both are voluntary deductions.
    • D.The 401(k) deferral reduces Social Security and Medicare wages, while the cafeteria plan premium reduces only federal income taxable wages.

    Section 125 salary reductions are excluded from wages for income tax withholding and for Social Security, Medicare and federal unemployment purposes, whereas a traditional 401(k) elective deferral is excluded only from income taxable wages and remains fully subject to Social Security and Medicare. This difference is exactly why the federal taxable wage figure and the Social Security and Medicare wage figures on an employee's annual wage statement often do not agree.

    Source: IRS Publication 15 (Circular E) and Publication 15-B, tax treatment of cafeteria plan salary reductions and elective deferralsReport a problem with this question

16. 16. An employer receives a child support withholding order for an employee and, two weeks later, an ordinary creditor garnishment for the same employee. Which statement correctly describes how the employer should handle the two orders?

    • A.The employer may decline to honor either order unless the employee consents in writing to the deduction.
    • B.Child support withholding generally takes priority over an ordinary creditor garnishment, and federal law also limits the portion of the employee's disposable earnings that may be taken.✓ Answer
    • C.The employer pays whichever order was served first in full and returns the second order unpaid.
    • D.The employer records both amounts as payroll tax expense because it is legally compelled to pay them.

    Priority among withholding orders is set by law and by the type of order rather than by the date the papers arrived, and support obligations rank ahead of ordinary creditor garnishments, with federal wage garnishment law capping the share of disposable earnings that may be withheld. A garnishment is money withheld from the employee and remitted to a third party, so it is recorded as a liability and never as an expense of the employer.

    Source: Consumer Credit Protection Act, Title III wage garnishment restrictions; federal income withholding order priority for child supportReport a problem with this question

17. 17. Priya's gross pay for a semimonthly period is $2,000. She pays a $100 health premium through a Section 125 plan that is exempt from income tax withholding and from Social Security and Medicare tax, and defers $80 to a traditional 401(k) that reduces income taxable wages but not Social Security and Medicare wages. Assume Social Security is withheld at 6.2% and Medicare at 1.45% of Social Security and Medicare wages, that her year-to-date wages are well below the annual wage base, that federal income tax withheld is $210 and state income tax withheld is $60. What is Priya's net pay?

    • A.$1,410.77
    • B.$1,397.00
    • C.$1,484.65
    • D.$1,404.65✓ Answer

    Social Security and Medicare wages are $2,000 - $100 = $1,900, because only the cafeteria plan premium is exempt from those taxes; the 401(k) deferral is not. Social Security is $1,900 x 6.2% = $117.80 and Medicare is $1,900 x 1.45% = $27.55, so total deductions are $100 + $80 + $210 + $60 + $117.80 + $27.55 = $595.35, leaving net pay of $2,000 - $595.35 = $1,404.65.

    Source: IRS Publication 15 (Circular E), computing employee withholding on taxable wagesReport a problem with this question

18. 18. A weekly payroll shows gross wages of $10,000, federal income tax withheld of $1,200, state income tax withheld of $400, employee Social Security and Medicare withheld of $765, a 401(k) deferral withheld of $500, and net pay of $7,135 paid in cash. Which entry correctly records the payroll itself?

    • A.Debit Wages Expense $10,000; credit Federal Income Tax Payable $1,200, State Income Tax Payable $400, FICA Payable $765, 401(k) Payable $500 and Cash $7,135.✓ Answer
    • B.Debit Wages Expense $10,000; credit Payroll Tax Expense $2,865 and Cash $7,135.
    • C.Debit Wages Expense $10,000 and Payroll Tax Expense $765; credit Federal Income Tax Payable $1,200, State Income Tax Payable $400, FICA Payable $1,530, 401(k) Payable $500 and Cash $7,135.
    • D.Debit Wages Expense $7,135; credit Cash $7,135.

    Wages Expense is debited for gross pay because gross pay is the cost of the labor, and each amount withheld is credited to its own liability account because those amounts belong to the employee and are held in trust until remitted. The employer's own matching Social Security and Medicare is not part of this entry; it is recorded separately as payroll tax expense.

    Source: US GAAP payroll accounting; IRS Publication 15 (Circular E), employee withholding held in trustReport a problem with this question

19. 19. For the same $10,000 payroll, the employer must match the $765 of Social Security and Medicare withheld from employees, owes $60 of federal unemployment tax on the payroll, and owes $270 of state unemployment tax. Which entry correctly records the employer's payroll taxes?

    • A.Debit Wages Expense $1,095; credit Cash $1,095.
    • B.Debit Payroll Tax Expense $1,095; credit FICA Payable $765, Federal Unemployment Tax Payable $60 and State Unemployment Tax Payable $270.✓ Answer
    • C.Debit Payroll Tax Expense $1,860; credit FICA Payable $1,530, Federal Unemployment Tax Payable $60 and State Unemployment Tax Payable $270.
    • D.Debit Payroll Tax Expense $765; credit FICA Payable $765, because unemployment taxes are withheld from employees rather than expensed.

    The employer's payroll tax expense is only its own share: $765 matching Social Security and Medicare plus $60 federal unemployment plus $270 state unemployment, or $1,095, credited to the corresponding liability accounts. Including the $765 withheld from employees would double count, because that amount was already credited to a liability in the entry recording the payroll and was never an employer expense.

    Source: US GAAP payroll accounting; IRS Publication 15 (Circular E), employer FICA matching and unemployment taxesReport a problem with this question

20. 20. On the deposit due date, an employer transfers to the government the federal income tax it withheld from employees together with both the employee and employer shares of Social Security and Medicare for that payroll. How is that remittance recorded?

    • A.Debit Federal Income Tax Payable and FICA Payable for the amounts owed and credit Cash; no expense is recorded because both the wage cost and the employer's tax expense were already recognized.✓ Answer
    • B.Debit Cash and credit the payable accounts, because the liability is being satisfied.
    • C.Debit Payroll Tax Expense for the full amount remitted and credit Cash, because the expense arises when the tax is paid.
    • D.Debit Wages Expense for the full amount remitted and credit Cash.

    Under accrual accounting the expense is recognized when the payroll and the employer's taxes are recorded, so the deposit merely settles previously recorded liabilities. The entry therefore debits the payable accounts and credits Cash, reducing both a liability and an asset with no effect on income.

    Source: US GAAP accrual accounting for payroll liabilities; IRS Publication 15 (Circular E), depositing withheld taxesReport a problem with this question

21. 21. A company's fiscal year ends on a Wednesday. Employees earned $6,000 of wages from Monday through Wednesday that will not be paid until the following Friday, and the employer's payroll taxes on those wages total $500. What entry should the company make at year end?

    • A.Debit Wages Expense $6,000 and Payroll Tax Expense $500; credit Wages Payable $6,000 and the related payroll tax liabilities $500.✓ Answer
    • B.Debit Wages Payable $6,500 and credit Wages Expense $6,000 and Cash $500.
    • C.Debit Wages Expense $6,000 and credit Wages Payable $6,000, recording the employer's payroll taxes only in the following period when the wages are paid.
    • D.No entry is required until the payroll is actually paid on Friday, because wages are taxable when paid.

    The matching principle puts the cost of labor in the period the work was performed, so both the unpaid wages and the employer's payroll taxes on those wages are accrued as expense with offsetting liabilities. When the payroll is paid in the next period the liabilities are cleared, often through a reversing entry, and the year-of-payment rule for tax withholding does not change the accounting accrual.

    Source: US GAAP matching principle; accrual of unpaid wages and related employer payroll taxesReport a problem with this question

22. 22. A bookkeeper is explaining the role of the payroll register. Which statement correctly describes its relationship to the general ledger?

    • A.The payroll register is a general ledger control account that is posted to directly from each individual paycheck.
    • B.The payroll register takes the place of the individual employee earnings record used to prepare annual wage statements.
    • C.The payroll register is a supporting record that lists each employee's gross pay, every deduction and net pay for one pay period, and its column totals are the source of the journal entry posted to the general ledger; the register itself is not a ledger account.✓ Answer
    • D.The payroll register is submitted with the quarterly federal employment tax return instead of making a journal entry.

    The payroll register summarizes one pay period across all employees, and its totals for gross pay, each withholding and net pay become the debits and credits of the payroll journal entry that is posted to the general ledger. It works alongside, not in place of, the individual employee earnings record, which accumulates each worker's figures year to date for wage reporting and wage base tracking.

    Source: US GAAP payroll accounting; payroll register and employee earnings record as subsidiary payroll recordsReport a problem with this question

Practice questions based on the subject areas of the AIPB Certified Bookkeeper designation, US GAAP, and federal payroll practice. Tax rates, wage bases, contribution limits and withholding tables are reset annually and unemployment and wage-and-hour rules differ by state, so no such figure is used as an answer here — where a calculation needs one, the question supplies it. Confirm the rates in effect for your payroll period and your state's requirements before applying anything here to real books. AIPB and Certified Bookkeeper are marks of the American Institute of Professional Bookkeepers; this site is not affiliated with or endorsed by the AIPB. About the Certified Bookkeeper exam →