22 Compliance & Recordkeeping Practice Questions & Answers

1. 1. A restaurant keeps a payroll register showing each nonexempt employee's hours worked, wage rate, and total wages paid each pay period. Under the FLSA recordkeeping regulations, how long must that payroll record be kept?

   • A.Six years from the last entry date
   • B.Three years from the last date of entry✓ Answer
   • C.Two years from the last date of entry
   • D.Four years from the last entry date

   29 CFR 516.5 requires payroll records, certificates, collective bargaining agreements and sales and purchase records to be preserved for three years, because these are the primary evidence of what the employer actually paid. The shorter two-year rule in 29 CFR 516.6 applies only to the supporting documents used to compute the payroll, such as time cards and wage-rate tables.

   Source: 29 CFR 516.5 (FLSA recordkeeping, three-year records)Report a problem with this question

2. 2. A Wage and Hour investigator asks to see the time cards that show employees' daily starting and stopping times. Under the FLSA recordkeeping regulations, what is the minimum retention period for those cards?

   • A.Four years from the date the record was made
   • B.Three years from the date the record was made
   • C.One year from the date the record was made
   • D.Two years from the date the record was made✓ Answer

   Time and earnings cards showing daily starting and stopping times are supplementary records under 29 CFR 516.6 and must be kept for two years, not three. The rule of thumb is that the payroll record itself is a three-year record while the backup used to compute it, including wage-rate tables, work schedules and records substantiating additions to or deductions from wages, is a two-year record.

   Source: 29 CFR 516.6 (FLSA recordkeeping, two-year records)Report a problem with this question

3. 3. The Wage and Hour Division notifies an employer that it wants to review FLSA records that are kept at a central recordkeeping office. Within what time must the employer make those records available?

   • A.Within 30 calendar days after the notice
   • B.Within 72 hours after the notice is given✓ Answer
   • C.Within 10 business days after the notice
   • D.Within 24 hours after the notice is given

   29 CFR 516.7 lets an employer keep FLSA records at the place of employment or at a central recordkeeping office, but records held centrally must be produced within 72 hours after the Department of Labor gives notice. No particular form or order of records is prescribed and no time clock is required, so the enforceable obligation is the ability to produce the required data quickly.

   Source: 29 CFR 516.7 (availability of FLSA records)Report a problem with this question

4. 4. An employer is setting a destruction schedule for records of wages paid and federal employment taxes withheld. Under the Internal Revenue Code recordkeeping rules, how long must those records be kept?

   • A.Four years after the later of the tax due date or the payment date✓ Answer
   • B.Four years after the earlier of the due date or the payment date
   • C.Six years after the close of the year in which wages were paid
   • D.Three years after the later of the tax due date or the date of payment

   Treasury Regulation 31.6001-1, issued under Internal Revenue Code section 6001, requires employment tax records to be kept for at least four years after the due date of the tax for the return period or the date the tax is paid, whichever is later. The IRS states this operationally as four years after filing the fourth quarter return for the year, and the four-year period is deliberately longer than the FLSA three-year period.

   Source: IRC section 6001; Treasury Regulation 31.6001-1; IRS Publication 15 (Circular E)Report a problem with this question

5. 5. An employer is sorting documents by which retention rule applies. Which record is covered by the four-year employment tax retention requirement rather than by the FLSA wage and hour rules?

   • A.Work and time schedules that set employees' daily hours
   • B.Undeliverable employee copies of Forms W-2 returned to the employer✓ Answer
   • C.Order, shipping and billing records that support sales volume
   • D.Wage rate tables used to compute straight-time earnings each week

   Undeliverable employee copies of Forms W-2 are part of the employment tax record set under Treasury Regulation 31.6001-1 and are held for the four-year period, along with the EIN, wage and tip amounts, employee identifying data, Forms W-4, deposit records and filed returns. The other three items are supplementary wage and hour documents that 29 CFR 516.6 assigns a two-year period.

   Source: Treasury Regulation 31.6001-1; 29 CFR 516.6Report a problem with this question

6. 6. How long must an employer retain a completed Form I-9 for an employee?

   • A.Three years after the hire date or one year after employment ends, whichever is later✓ Answer
   • B.Three years after employment ends, without regard to the hire date
   • C.Three years after the hire date or one year after employment ends, whichever is earlier
   • D.One year after the hire date or three years after employment ends, whichever is later

   Under 8 CFR 274a.2(b) and the USCIS Handbook for Employers M-274, the Form I-9 must be kept for three years after the date of hire or one year after the date employment ends, whichever date is later. Because the standard is the later of the two dates, the one-year prong only becomes relevant once employment has actually ended.

   Source: 8 CFR 274a.2(b)(2)(i)(A); USCIS Handbook for Employers M-274Report a problem with this question

7. 7. An employee is hired on March 1 of Year 1 and resigns on November 30 of Year 1. Under the Form I-9 retention rule, when may the employer first destroy that Form I-9?

   • A.November 30 of Year 2, one year after employment ended
   • B.March 1 of Year 4, three years after the date of hire✓ Answer
   • C.November 30 of Year 4, three years after employment ended
   • D.March 1 of Year 3, two years after the date of hire

   Three years after the hire date falls on March 1 of Year 4, while one year after employment ended falls on November 30 of Year 2, and the rule takes whichever date is later. When an employee works less than two years, the three-year-from-hire prong always controls, which is why the M-274 restates the rule as three years from the first day of employment for short-tenure workers.

   Source: 8 CFR 274a.2(b)(2)(i)(A); USCIS Handbook for Employers M-274Report a problem with this question

8. 8. An ICE officer serves a Notice of Inspection asking an employer to produce its Forms I-9. How much time does the employer have?

   • A.Seventy-two hours, the same rule as FLSA records
   • B.Ten business days from the date the notice is served
   • C.The forms must be produced on the day of service
   • D.Three business days from the date the notice is served✓ Answer

   Employers are entitled to at least three business days' notice before producing Forms I-9 for inspection by the Department of Homeland Security, the Department of Justice Immigrant and Employee Rights Section, or the Department of Labor. This is a different deadline from the FLSA 72-hour rule, and keeping the I-9s separate from personnel files makes it easier to produce them without exposing unrelated records.

   Source: 8 CFR 274a.2(b)(2)(ii); USCIS Handbook for Employers M-274Report a problem with this question

9. 9. The same payroll document is subject to a two-year retention period under one federal law and a three-year period under another, and the employer's state imposes a longer period still. What should the employer do?

   • A.Keep the document for the longest applicable period✓ Answer
   • B.Apply only the federal period, because federal law controls
   • C.Keep the document for the shortest applicable period
   • D.Apply the period set by the law that was enacted most recently

   When several laws reach the same document, each one is independently enforceable, so destroying the record at the end of the shortest period would still violate the others. Payroll compliance follows the same principle used throughout wage and hour law: where federal and state requirements differ, the employer applies the standard that is more protective of the employee, which for retention means the longest period.

   Source: 29 CFR 516.5; Treasury Regulation 31.6001-1; FLSA section 18 (29 U.S.C. 218)Report a problem with this question

10. 10. A payroll check issued to a former employee has never been cashed. Which statement correctly describes the law governing that unclaimed wage?

    • A.A federal unclaimed property act sets a uniform dormancy period
    • B.Unclaimed wages are governed by state law and dormancy varies✓ Answer
    • C.The Department of Labor sets a national dormancy period
    • D.The IRS sets the dormancy period for uncashed payroll checks

    There is no federal escheat statute; unclaimed property is entirely a matter of state law, so the dormancy period, the due diligence steps and the reporting cycle all come from the jurisdiction that has the right to the property. Payroll is typically treated as one of the shortest dormancy classes, but the practitioner must look to the applicable state's own unclaimed property act rather than assume a single national period.

    Source: State unclaimed property acts; Texas v. New Jersey, 379 U.S. 674 (1965)Report a problem with this question

11. 11. An uncashed final paycheck has reached the end of its dormancy period. The employee's last known address in the employer's records is in one state, the employer is incorporated in a second, and the work was performed in a third. Where must the holder report the property?

    • A.The state of the employee's last known address✓ Answer
    • B.The state in which the employer is incorporated
    • C.The state in which the work was actually performed
    • D.The state where the bank that issued the check sits

    Under the first priority rule of Texas v. New Jersey, unclaimed property is reported to the state of the owner's last known address as shown on the holder's books and records. The place of incorporation, the place the work was performed and the location of the paying bank are the classic distractors, and none of them displaces a known address on the employer's records.

    Source: Texas v. New Jersey, 379 U.S. 674 (1965), first priority ruleReport a problem with this question

12. 12. An employer must report unclaimed wages for a worker whose address does not appear anywhere in the employer's books and records. Under the priority rules, where is the property reported?

    • A.To the state where the payroll office is located
    • B.To the state of the employer's headquarters
    • C.To the employer's state of incorporation✓ Answer
    • D.To a federal unclaimed property registry

    The second priority rule of Texas v. New Jersey applies only when the holder's records show no address for the owner, and it sends the property to the holder's state of incorporation. The state of incorporation is a fixed legal fact that any court can verify, which is why it was chosen over operational locations such as headquarters or the payroll office.

    Source: Texas v. New Jersey, 379 U.S. 674 (1965), second priority ruleReport a problem with this question

13. 13. Before turning unclaimed wages over to the appropriate jurisdiction, what step is a holder generally required to take?

    • A.File a refund claim with the IRS for withheld taxes
    • B.Mail written notice to the owner's last known address✓ Answer
    • C.Obtain a court order authorizing release of the funds
    • D.Publish a notice in a newspaper of general circulation

    Holder due diligence requires written notice to the owner at the last known address within the window the jurisdiction prescribes, and the holder must retain records of the attempt and of the amount ultimately remitted. The purpose is to reunite the owner with the property before the state takes custody, and failure to perform due diligence exposes the holder to interest and penalties on audit.

    Source: State unclaimed property acts; Uniform Unclaimed Property Act holder due diligence provisionsReport a problem with this question

14. 14. A paycheck issued two years ago is still uncashed and will now be escheated. How should the employer treat the wages and the taxes already withheld?

    • A.Leave the wages on the original Form W-2 and remit the net amount✓ Answer
    • B.Void the check and reverse the wages and taxes on a Form W-2c
    • C.Record the stale check as miscellaneous income of the employer
    • D.Claim a refund of the withheld income tax and FICA from the IRS

    The wages were constructively paid in the year the check was issued, so the income tax and FICA withholding are not reversed and the Form W-2 for that year stands as filed. The uncashed check remains a liability of the employer rather than income, and the amount escheated is the net check amount; if the employee later surfaces, the claim is made against the jurisdiction holding the funds, not against the employer.

    Source: IRS Publication 15 (Circular E) wage reporting rules; state unclaimed property actsReport a problem with this question

15. 15. A monthly depositor makes a required federal employment tax deposit eight calendar days after the due date. What failure-to-deposit penalty rate applies?

    • A.15 percent of the deposit
    • B.10 percent of the deposit
    • C.5 percent of the deposit✓ Answer
    • D.2 percent of the deposit

    Internal Revenue Code section 6656 sets a ladder of 2 percent for deposits 1 to 5 calendar days late, 5 percent for 6 to 15 days late, 10 percent for more than 15 days late, and 15 percent for amounts still unpaid more than 10 days after the first IRS notice. Eight days falls in the second band, and the tiers do not stack, so only the single applicable rate is assessed.

    Source: IRC section 6656(b)(1)Report a problem with this question

16. 16. An employer's required deposit of $20,000 is made 22 calendar days after the due date, and the IRS has issued no notice or demand. What is the failure-to-deposit penalty?

    • A.$2,000✓ Answer
    • B.$400
    • C.$1,000
    • D.$3,000

    A deposit more than 15 calendar days late carries the 10 percent rate under Internal Revenue Code section 6656, and 10 percent of $20,000 is $2,000. The 15 percent rate would apply only to amounts still unpaid more than 10 days after the IRS issues a notice and demand, and because the tiers do not stack the 2 and 5 percent bands are not added on.

    Source: IRC section 6656(b)(1)Report a problem with this question

17. 17. An employer files a federal employment tax return three months after its due date and the tax is still unpaid. What is the failure-to-file penalty structure?

    • A.0.5 percent of the unpaid tax per month, capped at 25 percent
    • B.10 percent of the unpaid tax per month, capped at 50 percent
    • C.5 percent of the total tax per month, with no overall cap
    • D.5 percent of the unpaid tax per month, capped at 25 percent✓ Answer

    Internal Revenue Code section 6651 imposes 5 percent of the unpaid tax for each month or fraction of a month the return is late, to a maximum of 25 percent. The separate failure-to-pay penalty is 0.5 percent per month with its own 25 percent cap, and in any month when both apply the failure-to-file portion is reduced by the failure-to-pay amount.

    Source: IRC section 6651(a)(1) and 6651(a)(2)Report a problem with this question

18. 18. A company fails to remit taxes it withheld from employees, and the IRS proposes the Trust Fund Recovery Penalty against the payroll manager who decided which creditors to pay. What amount forms the penalty base?

    • A.Withheld income tax plus the employee share of FICA✓ Answer
    • B.The full tax liability plus interest and penalties
    • C.Only the employer's matching share of FICA taxes
    • D.Withheld income tax plus both shares of FICA and FUTA

    Internal Revenue Code section 6672 assesses 100 percent of the trust fund portion only, meaning the money actually withheld from employees: federal income tax plus the employee share of Social Security and Medicare. The employer's matching FICA share and FUTA are the employer's own tax and are excluded, and the penalty is assessed personally against any responsible person who willfully failed to remit.

    Source: IRC section 6672 (Trust Fund Recovery Penalty)Report a problem with this question

19. 19. An employer files a Form W-2 with the SSA showing the wrong wage amount and gives the employee a copy with the same wrong amount. What is the penalty exposure?

    • A.No penalty applies, because the employer may later file a W-2c
    • B.Separate penalties for the incorrect filing and the incorrect statement✓ Answer
    • C.A penalty only for the copy furnished to the employee, not the filing
    • D.A single penalty applies, because only one Form W-2 is involved

    Internal Revenue Code section 6721 penalizes failure to file a correct information return with the IRS or SSA, while section 6722 separately penalizes failure to furnish a correct payee statement, so one bad Form W-2 can draw both. Each has a tiered structure that is lower if the error is corrected within 30 days, higher if corrected by August 1, higher still after that, and uncapped for intentional disregard.

    Source: IRC sections 6721 and 6722Report a problem with this question

20. 20. A payroll department is mapping each obligation to its federal administering agency. Which obligation is administered by U.S. Citizenship and Immigration Services?

    • A.Annual wage reporting on Forms W-2 and W-3
    • B.Minimum wage and overtime pay under the FLSA
    • C.Withholding and depositing federal income taxes
    • D.Employment eligibility verification on Form I-9✓ Answer

    USCIS publishes the Form I-9 and the Handbook for Employers M-274, while enforcement is shared with ICE and with the Department of Justice Immigrant and Employee Rights Section. The rest of the map is equally testable: the IRS administers federal employment tax, the SSA receives Forms W-2 and W-3, the DOL Wage and Hour Division administers the FLSA and FMLA, child support and new hire reporting run through the federal and state directories, and unemployment insurance is administered by the state workforce agency.

    Source: Immigration Reform and Control Act; 8 CFR 274a.2; USCIS Handbook for Employers M-274Report a problem with this question

21. 21. A practitioner researching an unsettled withholding question finds a private letter ruling issued to a different company on similar facts. How may that ruling be used?

    • A.It carries the same weight as a Treasury regulation
    • B.It supersedes a revenue ruling published on the same issue
    • C.It binds the IRS only for the taxpayer that requested it✓ Answer
    • D.It may be cited as binding precedent by any taxpayer

    A private letter ruling answers one taxpayer's request on one stated set of facts and by statute may not be used or cited as precedent by anyone else. The authority hierarchy runs from the statute itself, to Treasury and DOL regulations published in the Federal Register and codified in the Code of Federal Regulations, to revenue rulings and revenue procedures that all taxpayers may rely on.

    Source: IRC section 6110(k)(3)Report a problem with this question

22. 22. A U.S. employer sends an employee on a three-year assignment abroad and wants the employee's wages covered by only one country's social security system. What documents that result?

    • A.A Form W-8BEN filed with the host country's tax office
    • B.A tax equalization agreement signed by the employee
    • C.A certificate of coverage under a totalization agreement✓ Answer
    • D.A foreign earned income exclusion claimed on Form 673

    Totalization agreements exist to prevent the same wages from being taxed for social security in two countries, and the certificate of coverage is the document that shows which country's system applies. Tax equalization deals with income tax burden rather than social security coverage, Form W-8BEN is a nonresident alien withholding certificate, and Form 673 relates to the foreign earned income exclusion.

    Source: Social Security Act section 233 (totalization agreements); SSA certificate of coverageReport a problem with this question

Practice questions based on the PayrollOrg Fundamental Payroll Certification content outline and on federal payroll authorities including IRS Publication 15 (Circular E), Publication 15-A, Publication 15-B, the Fair Labor Standards Act, and the Consumer Credit Protection Act. FPC and CPP are marks of PayrollOrg; this site is not affiliated with or endorsed by PayrollOrg. Amounts that are adjusted each year — wage bases, contribution limits, the minimum wage, mileage and per-diem rates — are given inside the question rather than tested from memory, and state-specific rules are out of scope. Confirm the current content outline and the current-year figures from the official sources before testing. About the FPC exam →