22 Employment Taxes & Taxable Pay Practice Questions & Answers

1. 1. Under the Federal Insurance Contributions Act (FICA), how do the social security and Medicare portions differ in the way they apply to an employee's wages?

   • A.Medicare stops at an annual wage base, while social security applies to all wages.
   • B.Both stop at the same annual wage base, which the law sets anew each year.
   • C.Neither stops at a wage base; the two simply use different tax rates.
   • D.Social security stops at an annual wage base, while Medicare applies to all wages.✓ Answer

   FICA is two separate taxes. The old-age, survivors and disability insurance (social security) tax applies only to wages up to an annual wage base, so it stops once an employee reaches that figure for the year with that employer. The hospital insurance (Medicare) tax has no wage limit and continues on every dollar of covered wages.

   Source: IRC §3101 and §3121(a)(1); IRS Publication 15 (Circular E)Report a problem with this question

2. 2. Which statement correctly describes how the social security and Medicare tax rates apply to the employer and to the employee?

   • A.The employee pays both shares, and the employer only remits the money to the IRS.
   • B.The employer pays the same rate as the employee on social security and on Medicare.✓ Answer
   • C.The employer pays the social security rate only; Medicare comes from the employee.
   • D.The employer pays half of the employee's rate on both social security and Medicare.

   The employee tax is imposed by one Code section and the employer tax by another, but both are set at the same percentages: 6.2% for social security on wages up to the wage base and 1.45% for Medicare on all wages. The employer therefore matches the employee dollar for dollar on these two taxes.

   Source: IRC §3101 and §3111; IRS Publication 15 (Circular E)Report a problem with this question

3. 3. An employee's wages have passed the statutory threshold for the Additional Medicare Tax. What must the employer do about that 0.9% tax?

   • A.Withhold 0.9% from the employee and deposit a matching 0.9% employer share.
   • B.Withhold 0.45% from the employee and pay the other 0.45% as the employer share.
   • C.Pay the 0.9% as an employer tax and withhold nothing from the employee's wages.
   • D.Withhold 0.9% from the employee's wages, with no matching employer share due.✓ Answer

   The Additional Medicare Tax is imposed on the employee only. The employer's duty is limited to withholding and depositing it once the employee's wages from that employer exceed the statutory threshold; unlike regular social security and Medicare tax, there is no employer match.

   Source: IRC §3101(b)(2); IRS Publication 15 (Circular E)Report a problem with this question

4. 4. A married employee tells payroll that she and her spouse will file a joint return and expect their combined income to stay under the joint threshold for the Additional Medicare Tax. How should the employer withhold that tax?

   • A.Begin withholding only when her wages pass the $250,000 joint-return threshold.
   • B.Add the two spouses' wages together if both work here and withhold on the total.
   • C.Withhold nothing this year, since the couple's combined income is under the threshold.
   • D.Begin withholding when her wages from this employer pass $200,000, whatever her filing status.✓ Answer

   Payroll withholding of the Additional Medicare Tax is applied without regard to filing status: the employer starts withholding in the pay period in which that employee's year-to-date wages from that employer exceed $200,000. The higher joint and separate thresholds are settled on the individual income tax return, not in the payroll system.

   Source: IRC §3102(f)(1); IRS Publication 15 (Circular E)Report a problem with this question

5. 5. Assume the social security wage base for the year is $176,100. An employee's year-to-date social security wages are $170,100, and this pay period he is paid $12,000 of taxable wages. How much social security tax must the employer withhold from this payment?

   • A.$546.00
   • B.$372.00✓ Answer
   • C.$87.00
   • D.$744.00

   Only the wages remaining below the wage base are taxed for social security. $176,100 minus $170,100 leaves $6,000 of taxable room, and $6,000 times 6.2% is $372. Medicare is still due on the full $12,000, but that is a separate tax and is not part of this answer.

   Source: IRC §3121(a)(1); IRS Publication 15 (Circular E)Report a problem with this question

6. 6. An employee reaches the social security wage base at one company in June, resigns, and starts work at an unrelated company in July. How do the social security and FUTA wage bases apply at the new company?

   • A.The social security base carries over, but the FUTA base starts over at the new company.
   • B.Both bases start over, but the new company must refund the employee's excess withholding.
   • C.Both bases carry over, so the new company owes no further social security or FUTA tax.
   • D.Both bases start over, so the new company taxes his wages from the first dollar.✓ Answer

   Each wage base is applied per employer, per employee, per calendar year. An unrelated new employer has paid the employee nothing yet, so both the social security and the FUTA wage bases restart at zero. Any resulting over-withholding of employee social security tax is recovered by the employee as a credit on the individual income tax return, not by a refund from either employer.

   Source: IRC §3121(a)(1) and §3306(b)(1); IRS Publication 15 (Circular E)Report a problem with this question

7. 7. A company acquires substantially all the property of another business and keeps the acquired employees on without a break in employment. What may the acquiring company do with the wages the predecessor already paid those employees this year?

   • A.Ignore them and restart both wage bases as it would for any newly hired worker.
   • B.Count them toward the FUTA wage base only; the social security base must restart.
   • C.Count them toward the social security and FUTA wage bases for the rest of the year.✓ Answer
   • D.Count them only if each acquired employee agrees to the treatment in writing.

   The successor employer rule is a deliberate exception to the per-employer wage base. When a business is acquired and the workforce continues without interruption, the successor may treat the predecessor's payments as wages it paid itself, so the employee does not start a second social security or FUTA wage base in the same year.

   Source: Treas. Reg. §31.3121(a)(1)-1(b), successor employer rule; IRS Publication 15 (Circular E)Report a problem with this question

8. 8. Who bears the cost of the federal unemployment (FUTA) tax on a covered employee's wages?

   • A.The employer and the employee share it equally, much as they share social security.
   • B.The employee alone, through a deduction taken from each paycheck during the year.
   • C.The employer alone; no part of FUTA is withheld from the employee's pay.✓ Answer
   • D.The employer, though it may recover the tax from the employee's final paycheck.

   FUTA is imposed on the employer with respect to wages it pays; the statute creates no employee tax. Because there is no employee share, deducting any amount of FUTA from an employee's pay is improper.

   Source: IRC §3301; IRS Publication 15 (Circular E)Report a problem with this question

9. 9. An employer pays its state unemployment contributions in full and on time in a state with no credit reduction. Applying the 6.0% gross FUTA rate, the maximum 5.4% credit and the $7,000 FUTA wage base, what is the most federal unemployment tax the employer can owe for one employee for the year?

   • A.$42.00✓ Answer
   • B.$420.00
   • C.$54.00
   • D.$378.00

   The gross rate of 6.0% less the full 5.4% credit for timely state unemployment contributions leaves a net rate of 0.6%. Applied to the $7,000 FUTA wage base, 0.6% times $7,000 equals $42 per employee for the year.

   Source: IRC §3301, §3302 and §3306(b)(1); Instructions for Form 940Report a problem with this question

10. 10. An employer has employees in a state that has not repaid its federal unemployment account loans for several consecutive years. What effect does that have on the employer's federal unemployment tax?

    • A.The employer must withhold the additional tax from those employees' wages.
    • B.The 6.0% gross FUTA rate rises for every state in which the employer has payroll.
    • C.The $7,000 FUTA wage base is raised for the employees who work in that state.
    • D.The 5.4% credit is cut, so the effective FUTA rate on those wages goes up.✓ Answer

    A credit reduction does not change the gross rate, the wage base or who pays. It reduces the credit the employer may take against the 6.0% gross rate for wages paid in that state, so the employer's net FUTA cost per employee there is higher, and the extra amount is figured on the schedule filed with the annual FUTA return.

    Source: IRC §3302(c)(2), FUTA credit reduction; Instructions for Form 940Report a problem with this question

11. 11. An employee elects to pay her share of the health insurance premium through the employer's Section 125 cafeteria plan. How does that salary reduction affect her taxable wages?

    • A.It reduces wages for FICA and FUTA, but not for federal income tax withholding.
    • B.It reduces wages for federal income tax withholding, for FICA and for FUTA.✓ Answer
    • C.It reduces wages for income tax withholding only; FICA and FUTA wages are unchanged.
    • D.It reduces none of those wages, because the premium is an after-tax deduction.

    A salary reduction under a cafeteria plan is not treated as compensation received by the employee at all, so the amount never enters the wage base of any of the three federal employment taxes. This is what separates it from a retirement deferral, which is excluded only for income tax withholding.

    Source: IRC §125; IRS Publication 15-BReport a problem with this question

12. 12. An employee defers part of her salary into her employer's traditional 401(k) plan. How is the deferred amount treated for employment taxes in the year of deferral?

    • A.Included in wages for income tax withholding, but excluded from FICA and FUTA.
    • B.Excluded from wages for income tax withholding, but included for FICA and FUTA.✓ Answer
    • C.Included in wages for all three taxes and taxed a second time when distributed.
    • D.Excluded from wages for income tax withholding, for FICA and for FUTA alike.

    An elective deferral is treated as wages for social security, Medicare and FUTA purposes when the services are performed, even though it is not yet income for withholding purposes. That single difference is why an employee's social security and Medicare wages usually exceed her income tax wages on the annual wage statement.

    Source: IRC §3121(v)(1)(A) and §402(g); IRS Publication 15 (Circular E)Report a problem with this question

13. 13. An employee elects to contribute to the designated Roth account in his employer's 401(k) plan. How does the contribution affect his taxable wages for the pay period?

    • A.It reduces none of them; the contribution comes from after-tax pay.✓ Answer
    • B.It reduces wages for income tax withholding, but not for FICA or FUTA.
    • C.It reduces wages for FICA only, since income tax is paid when the money is drawn.
    • D.It reduces wages for federal income tax withholding, for FICA and for FUTA.

    A designated Roth contribution is made from pay that has already been included in income and in all employment tax wage bases. Because nothing is excluded up front, the contribution leaves income tax, FICA and FUTA wages exactly where they were; the tax benefit comes later, when qualified distributions are received.

    Source: IRC §402A, designated Roth contributions; IRS Publication 15 (Circular E)Report a problem with this question

14. 14. An employer wants to use the optional flat rate to withhold federal income tax on an employee's bonus. Which condition must be satisfied before that method may be used?

    • A.The employee must consent in writing to flat-rate withholding on the payment.
    • B.The bonus must be paid in the same check as the employee's regular wages.
    • C.The bonus must be at least as large as the employee's regular pay for the period.
    • D.The employer withheld income tax from the employee's regular wages this year or last.✓ Answer

    The optional flat rate is available only if the supplemental payment is identified separately from regular wages and income tax was withheld from the employee's regular wages in the current or the preceding calendar year. If either test fails, the employer must use the aggregate method, combining the bonus with regular wages and applying the withholding tables.

    Source: Treas. Reg. §31.3402(g)-1(a); IRS Publication 15 (Circular E)Report a problem with this question

15. 15. During the year an executive's cumulative supplemental wages reach $1,200,000. How does mandatory flat-rate federal income tax withholding apply to those payments?

    • A.It applies to the whole $1,200,000 at the highest income tax rate for the year.
    • B.It applies to the whole $1,200,000 at the optional flat supplemental wage rate.
    • C.It applies only to the $200,000 above $1,000,000, at the top tax rate.✓ Answer
    • D.It does not apply, because the employer may still choose the aggregate method.

    Once an employee's cumulative supplemental wages from an employer pass $1,000,000 in a calendar year, withholding on the excess is mandatory at the highest income tax rate and the employer has no choice of method. The first $1,000,000 is still withheld under whichever ordinary method the employer properly applied.

    Source: IRC §3402 and Treas. Reg. §31.3402(g)-1(a)(2); IRS Publication 15 (Circular E)Report a problem with this question

16. 16. An employer reimburses an employee's qualified adoption expenses under a written adoption assistance program, within the annual exclusion limit. How is the reimbursement taxed?

    • A.Exempt from income tax withholding and from social security, Medicare and FUTA.
    • B.Subject to income tax withholding, but exempt from social security, Medicare and FUTA.
    • C.Subject in full to income tax withholding, social security, Medicare and FUTA.
    • D.Exempt from income tax withholding, but subject to social security, Medicare and FUTA.✓ Answer

    Adoption assistance is one of the benefits that Congress excluded from gross income for income tax purposes without extending the exclusion to the employment tax definitions of wages. The employer therefore does not withhold income tax on it but must still treat it as social security, Medicare and FUTA wages.

    Source: IRC §137, §3121(a) and §3306(b); IRS Publication 15-BReport a problem with this question

17. 17. An employer provides $150,000 of group-term life insurance coverage on an employee, and the employee pays nothing toward it. How is the imputed cost of the coverage above $50,000 treated?

    • A.Subject to social security and Medicare and taxable for income tax, but exempt from FUTA.✓ Answer
    • B.Exempt from every federal employment tax as long as the employer pays the premium.
    • C.Exempt from social security and Medicare, though it is taxable for income tax.
    • D.Subject to social security, Medicare and FUTA, exactly as if it were paid in cash.

    Only the first $50,000 of employer-provided group-term life coverage is excluded. The cost of the excess is imputed income that must be added to social security and Medicare wages and to income for the year, but the law specifically exempts it from FUTA, and the employer is not required to withhold income tax on it.

    Source: IRC §79; IRS Publication 15 (Circular E) and Publication 15-BReport a problem with this question

18. 18. How does an employer compute the imputed income for employer-provided group-term life insurance coverage above $50,000?

    • A.From the employer's actual group premium cost, spread evenly over all covered employees.
    • B.From the cash surrender value of the policy measured at the close of the plan year.
    • C.From the IRS uniform premium table by age bracket, less any after-tax employee payments.✓ Answer
    • D.From the amount of coverage above $50,000, multiplied by the employee's income tax rate.

    The taxable amount is not the employer's real premium. It is found by applying the uniform premium table rate for the employee's age bracket to each $1,000 of coverage above $50,000 for each month of coverage, and then subtracting anything the employee paid for the coverage with after-tax dollars.

    Source: IRC §79, Uniform Premium Table I; IRS Publication 15-BReport a problem with this question

19. 19. An employer includes the value of an employee's personal use of a company car in the employee's wages. Which statement describes the employer's withholding duty on that value?

    • A.The employer may elect not to withhold income tax on it, but must withhold FICA.✓ Answer
    • B.The employer must withhold income tax on it, but owes no FICA on a noncash benefit.
    • C.The employer must collect the value from the employee in cash before the year ends.
    • D.The employer may choose to withhold no tax of any kind on a noncash fringe benefit.

    An employer may elect not to withhold income tax on the value of a noncash fringe benefit if it notifies the employee, because the employee can cover the tax through other withholding or estimated payments. That election reaches income tax only; social security and Medicare tax on the imputed value must still be withheld and deposited.

    Source: IRC §3402(s); IRS Publication 15-BReport a problem with this question

20. 20. At the holidays an employer gives every employee a frozen turkey and a $25 gift card redeemable at a local store. How are the two items treated?

    • A.Both are taxable wages, because every employee receives them year after year.
    • B.Both are excludable as de minimis fringe benefits because their value is small.
    • C.The turkey is excludable as a de minimis fringe; the gift card is taxable wages.✓ Answer
    • D.The gift card is excludable as a de minimis fringe; the turkey is taxable wages.

    A de minimis fringe must be so small and so infrequent that accounting for it would be unreasonable, and a holiday turkey or ham is the classic example. Cash and cash equivalents, including gift cards and gift certificates, can never qualify no matter how small the amount, because their value is precisely known and easily accounted for.

    Source: IRC §132(e), de minimis fringe benefits; IRS Publication 15-BReport a problem with this question

21. 21. A third-party insurer pays sick pay to an employee who has now been unable to work for more than six full calendar months. How is that sick pay treated for social security and Medicare?

    • A.It is exempt, because more than six months have passed since the last month worked.✓ Answer
    • B.It is taxable, because sick pay stays subject to FICA for as long as it is paid.
    • C.It is exempt, because sick pay from a third party is never subject to FICA at all.
    • D.It is taxable, but only the third party, never the employer, may report the wages.

    Sick pay is FICA and FUTA wages only during the first six calendar months following the last calendar month in which the employee actually worked. Payments made after that period are excluded from social security, Medicare and FUTA, although the employer-funded portion generally remains taxable income to the employee.

    Source: IRC §3121(a)(4) and §3306(b)(4); IRS Publication 15-AReport a problem with this question

22. 22. An employee dies in March, and in June of the same year the employer pays the accrued wages to the employee's estate. How is that payment treated?

    • A.Subject to income tax withholding, social security, Medicare and FUTA alike.
    • B.Subject to income tax withholding only, since FICA ends on the date of death.
    • C.Subject to social security, Medicare and FUTA, but not to income tax withholding.✓ Answer
    • D.Exempt from every federal employment tax, because the employee has died.

    Wages earned before death but paid to the estate or beneficiary in the same calendar year remain social security, Medicare and FUTA wages, so those taxes are due. No federal income tax is withheld, because the payment is income of the recipient rather than of the employee, and it is reported to the estate or beneficiary on Form 1099-MISC.

    Source: IRC §3121(a); IRS Publication 15 (Circular E), wages paid after an employee's deathReport 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 →