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CERTIFIED PAYROLL PROFESSIONAL (CPP) 20 24/ 2025
FINAL EXAM AND PRACTICE QUESTIONS COMPLETE
QUESTIONS WITH 100% CORRECT VERIFIED ANSWERS
GRADED A (STUDY GUIDE)
List the factors used under the Common Law Test in determining whether a business has the right to control the financial aspects of a workers activities.
- Behavioral Control- Right to direct and control the details and means by which the worker will perform the tasks. A. Level of Instruction B. Level of Training
- Financial Control- Dictates the payment A. Hourly rate- Most likely employee B. Paid by the project- could be an independent contractor. C. Who abosorbs most of the costs/takes most risks?
- Type of Relationship- Written agreements/contracts stating the worker is an independent contractor does not make it so... What are the two categories for Statutory Nonemployees?
- Real Estate Agents
- Direct Sellers What are the 4 categories of Statutory Employees?
- Agent/commission drivers
- Full Time Life Insurance Agents *exempt from FUTA ONLY if all earnings are from commissions
- Homemakers *Works away from ERs location
- Assembles items at home
- Stuffs evelopes at home
- Type transcripts at home
- Traveling/City Salespersons What is Common Law Test? Employer Control: The more control, the more likely an employee.
- Who does it?
- What is done?
- How does it get done?
- When does it get done?
- Who furnishes tools, supplies, work location?
- Who sets salary rate? What is Reasonable Basis Test? Even though a worker meets the definition of an employee under the common law test, an employer may treat a worker as an independent contractor exempt from federal payroll tax laws if it has a reasonble basis. List the factors for the Reasonable Basis Test.
- Court decisions, published IRS rulings, IRS technical advice or a private letter ruling from the IRS or,
- A past IRS audit of the employer or,
- A longstanding, recognized practice in the employers industry that treats workers in similar situations as independent contractors. What is a temporary help agency employee? Temp workers are hired, screened and trained by the temp help agency to provide services for clients. They are employees of the temp agency which sets their wages and has sole right to hire and fire. The agency is alsor responsible for all payroll taxes. What is a leased employee?
Leased employees are hired, trained, and qualified by a leasing company which provides workers for a client company. The client pays a fee to the leasing company to cover the cost of payroll, benefits, etc... Responsibility for payroll taxes depends on the degree of control exercised by the client over the employees work and which entity has control over the payment of their wages. When leasing an employee or using a temp agency, what should you know about the overall company that you are dealing with to avoid having to pay any withholding or employment taxes? Employers should make sure they are dealing with a financially secure and reputable company before entering into a contract, since the temp agency or leasing company's financial failure could lead to the client company becoming liable for any withholding or employement taxes that remain unpaid. What are the three parts of the ABC test?
- (Absence Control): Free from control via agreement and in reality.
- (Business- unusual and/or away): performed outside the usual course of company business or away from employers facility
- (Customarily independent contractor): independent trade, occupation or business What is the ABC test used to determine? While many states use the Common Law Test to determine an employee relationship, more than half use the ABC Test. ABC test is used by many states to determine a worker's employement status under state unemployment insurance laws to see if the employee is indeed an independent contractor. What is Form I-9 used for? It is used to verify that an individual has the legal right to work in the US. The Immigration Reform and Control Act of 1986 makes it illegal for an employer to hire an unauthorized worker. When a client company hires leased employees, who is responsible for withholding and/or paying the FIT, SS, Med and FUTA taxes? Although the client company may have the right to hire and fire the workers, set wage levels and supervise their work, the workers are generally employees of the leasing company, which is responsible for withholding FIT, FICA, as well as paying the employers share of FICA and FUTA taxes because of the leasing companys control over the payment of wages.
What factors do the courts and the DOL consider when making an employment status determination under the FLSA?
- How much control the employer has over how the work is performed
- Wheter the worker has the chance to make a profit or risks a loss based on how skillfully the work is performed
- Whether the worker invests in tools or materials required to perform the work or hires helpers
- Whether the worker requires a special skill
- How permanent the working relationship is
- Whether the work performed is an integral part of the employers business operation Why would many employers rather use workers who are not employees to perform services for them? Employers would rather use workers who are not employees to perform services for them because employers must withhold income and employment taxes from employees wages and pay employement taxes with their own funds. Employers also must pay federal and state unemployment taxes based on ther employees wages. If a worker is an employee, most companies have their own list of benefits and other entitlements that are provided to employees but not to independent contractors. What does a SS card prove in terms of an employees work authorization status under IRCA? A SS card that does not contain language saying that the employment is not work-authorized is proof of an employees authorization to work in the US but not proof of identity. Which factors are considered not to be importatnt by the IRS in making a worker classification determination because of changes in the workplace over the years? Factors that the IRS does not consider important in making worker classification determinations include PT/FT work, the work location and hours of work. What are the elements that are required for New Hire Reporting? Employer must report:
- New hire's name
- Address
- SSN
- 1st day of work for which compensation is paid as well as the employers name
- ER address
- ER federal employer ID number. When must employers report newly hired employees under the federal new hire reporting requirements? Employers must report new hires within 20 calendar days of the date of hire. Employers that report magnetically/electronically must send 2 transmissions per calendar month which are 12-16 days apart. What is the name of the program employers can use to verify the employment authorization status of new hires with the US Citizenship and Immigration Services? E-Verify Program Section 530 (Safe Harbor) Relief Requirements
- Must have a reasonable basis for not treating the worker as an employee, based on a court case or ruling issued to you by the IRS.
- Your business was audited by the IRS at a time when you treated a similar worker as an independent contractor and did not re-class the employees at that time. (But NOT an audit after December 1996, unless such audit included an examination for employment tax purposes.)
- You treated worker as an independent contractor because you knew that was how a significant segment of your industry treated similar workers (how you would prove that would be impossible).
- Or you relied on some other reasonable basis such as advice of a business lawyer or accountant who knew the facts about your business. (I would imagine that person would then be in big trouble). What are Statutory employees?
- Agree all services performed personally by worker (NO subcontracting)
- No substantial investment in equipment or facilites other than transportation costs
- Continuing relationship, not single transaction
- Not EEs under common law but treated as EEs for tax purposes
- Subject to SS/MED for EE/ER
- NOT required to withhold FIT
- May be subject to FUTA Penalties for Misclassification (issuing a form 1099 MISC instead of W FIT- tax accessed 1.5% of wages paid. Doubled to 3% if ER failed to file at all FICA- tax accessed 20% Doubled to 40% if ER failed to file at all Pay 100% of shared SS/Med taxes Also, back taxes and penalties on the state/local levels. What are Statutory Non-Employees?
- Most of the compensation must be directly related to sales or other work output rather than the number of hours worked.
- Work must be performed under a written contract providing that the individual will not be treated as an employee for FIT, FICA or FUTA tax purposes.
- May qualify as EEs under the common law test but treated as IC for FIT, FICA and FUTA
- Not subject to FIT and FICA
- Uses 1099 MISC Independant Contractor Taxation
- Fees/payments of $600 or more must be reported by payer on 1099 MISC if indeed an IC
- Contractor does not provide a tax ID to the payer, the payer must withhold 28% backup withholding tax on the payment FLSA Regulates:
- Min Wage
- Overtime Pay
- Child Labor
- Equal Pay for employees covered by the law
- Also, contains special rules for specific industries and situations FLSA does not require Vacation, sick days, jury duty, leave,holidays, breaks, or hours for individuals over 16 years old. This could mandated by the actual state. DOL Enforcement The FLSA is administered and endorced by the wage and hour division of the US dept of Labor except for the equal pay provision. Enterprise Coverage Employees of Business are covered for FLSA if;
- At leaset 2 ee's jobs related and essential to interstate commerce.
- Business gross sales at least $500K
- Covered no matter what: Hospitals, nursing homes, schools, public (government) agencies. Individual Employee Coverage If the job engaged in interstate commerce or goods for interstate commerce even if business is not covererd by FLSA. What is interstate commerce? Any trade, transportation, or communication between one state and another or between a state and foreign country. Outside Sales EE's Primary duty making sales, obtaining orders/contracts, regularly work away from employers place of business. There is no salary requirement to qualify as an exempt outside sales employee. Retail and Service industry exemption
If their regular rate of pay is 1 1/2 times the fedreal minimum wages in effect and more than half their pay comes from commissions. Public Sector exempt ee's On a state and local gov't level, employees who are not subject to state or local civil service laws are exempt from FLSA if;
- Publicly elected officials
- Persons selected by elected officials for staff positions (directly supervised by the elected official)
- Persons appointed by an elected official to serve in policymaking position Tips Employers required to pay "tipped employees" only $2.13 per hour so long as the employees tips are enough to make up the remainder of the min hourly wage. Tip Credit Up to $5.12 per hour, if;
- Tips do not bring the ee's total wage up to the current min wage, the er must make up the difference
- Mujst be at least $30 per month in tips Tip Credit conditions
- Must receive as much tips as the credit taken by er
- The ee must be informed about the tip credit provision
- All tips received by ee must be kept by employee
- Credit card tips must be given to the ee by the next payday but credit card charges can be deducted from the tip FLSA complaint filing limit 2 years Equal Pay for Equal Work Requires equal pay for Men and women doing equal work under similar working conditions. Enforced by the Equal Employment Opportunity Commission. Included in Reg Rate of Pay (but not limited to)
Shift Differential Nondiscretionary bonuses- Contractual/Agreed upon Payments in form other than cash Retro pay On call pay Supplemental Pay Sick Leave buyback Per Diem Pay Not included in Reg Rate of Pay Gifts- As long as it doesnt depend on hours worked Paid Time Off Expense Reimb Discretionary bonuses Benefit Plan Contributions Stock Options OT premium pay Premium Pay for extra days worked Premium Pay under union contract for extra hours Belo-Type Plan Similar to fluctuating workweeks. Plan must be agreed upon by EE and ER through an individual contract or collective bargaining agreement. EE must work irregular hours (with workwees fluctuating above AND below 40 hours) Contract mus guarantee a straight time rate of at least the statutory min (.5) and an OT rate of 1 1/2. Weekly guarantee must be for not more than 60 hours of work. Fluctuating Workweeks ER paying a fixed salary even though hours may vary from week to week. So long as the employees received 1 1/2 reg hourly rate for the week for each hour of OT worked. Compensatory Time Off
Unit of time used in determining whether OT pay is due to an ee Compesable Time Issues All hours during which the employhee is under the Er's control, even if the time is unproductive, so long as the time spent is for the ER's benefit Federal Child Labor Restrictions **State might be more protective
- Minor under 18 cannot work hazardous jobs
- Minor 14-15 can work a limited number hours for nonhazardous jobs in retail, food services and gasoline service establishments.
- Cannot work during school hours
- Limitted to 3 hours a day and 18 hours a week when school is in session
- Can work between 7am and 7pm (or 9pm during summer break)
- Minor under 14 generally prohibited unless working for a parent. Child Labor Fines and Penalties Can bring fines up to $11,000 (2014) for each violation up to $50,000 for each violation that causes the death or serious injury of a minor. The amount of fines depends on the size of the employer and seriousness of the violation. Willfully violating child labor laws could include imprisonment for officers, up to six months. Preliminary and postliminary activities time spent to get ready for work or to get ready to leave work is NOT work time unless essential to the employee's principal work activity.
- Changing clothes - donning/doffing - work time if changing clothes is integral and indispensable to the employee's principal activity. Engaged to be waiting compensable work time because it is usually short, spent on the employer's premises, and insufficient for the employee to use for his or her own purposes. Waiting to be engaged
is NOT work time because the employee is freed from all duties and responsibilities for a definite period of time and has enough time to pursue personal business before returning to work even if the employee remains on the employer's premises, the waiting time in not work time. On-Call Time Employees who must be on call on the employer's premises or close enough to seriously curtail their use of time for their own purposes must be paid for the time spent on call. Travel time rules governing travel time are contained in the Portal to Portal Act of 1947.
- Time spend traveling as part of an employee's daily work activity is compensable work time including travel from one job site to another or travel from a designated meeting place to a job site.
- Travel away from home is work time only during those periods that coincide with the employee's regular working hours. Such time is counted as hours worked even if it occurs on a non-working day. Travel outside regular working hours is not hours worked. White Collar FLSA Exemption categories
- Admin
- Exec
- Professional
- Computer Related Professional
- outside sales Name the 3 main non-discrimination tests that cafeteria plans must satisfy to qualify for preferencial tax treatment.
- Eligibility Test
- Contributions and benefit Test
- Concentration Test Concentration Test A cafeteria plan is not discriminatory if the qualified (nontaxable) benefits provided to key employees do not exceed 25% of such benefits provided to all employees under the plan. Contributions and Benefit Test
The cafeteria plan is not discriminatory where either qualified (nontaxable) benefits and total benefits, or ER contributions sor such benefits, do no discriminate in favor of highly compensated participants. 3 Major types of health care plans offered by ER to their EEs
- Traditional Health Insurance (Fee for service)
- HMO (Health Maintenance Org)
- PPO (Preferred Provider Organizations) How does the Internal Revenue Code define "medical care" in terms of an employees reimbursement for such medical care? Amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of diseasse, or for the purpose of affecting any structure or function of the body. Conditions must satisfied for an ER provided group health insurance plan to be Non-Discriminatory in terms of eligibility and benefits
- at least 70% of all employees
- at least 80% of participation
- employee classification that the Secretary of the Treasury finds not to be discriminatory 3rd Party needed from ER
- Total wages paid to EE during the calendar year prior to 3rd party payments
- Last month in which the EE worked for the ER
- EE contributions made to the cost of the insurance after taxes have been withheld What info must the payroll department maintain for the proper administration of defined benefit plans?
- Hours Worked
- Compensation Earned
- Date of birth
- Date of hire Defined Contribution plan EE/ER contributions such as 401K, Roth, etc...
Defined benefit plan Retirement plans outside of EE/ER contributions that are made periodically. T/F: Pre-tax contributions by the EE are considered to be ER contributions when determining the taxable valude of a benefit TRUE T/F: Cafeteria plans that are the result of collective bargaining between an ER and a Union are NOT exempt from nondiscrimination tests applicable to cafeteria plans FALSE- In this case, cafeteria plans are exempt from the nondiscrimination tests. T/F: FMLA of 1993 is administered and enforced by the Department of Labors Wage and Hour Division TRUE T/F: All pay received for OT hours is excluded from an ER's total payroll when calculating WC premiums FALSE- Only the premium portion of OT is excluded. The straight time portion is included. T/F: When an EE requests FMLA to care for a newborn or newly adopted child, he/she must give the ER 30 days notice or as much as can be given under the circumstances. TRUE T/F: Any reimbursement for medical care expenses in excess of the amount actually sepnt or incurred by the EE is taxable income to the EE TRUE Age an EE no longer subject to 10% excise tax when the EE receives a distribution from his/her qualified retirement plan 59 1/ If an employer wants to offer a SIMPLE plan to its EEs, how many EE must work for the company? No more than 100 EEs
For payments made to a disabled EE by the 3rd party who is NOT an agent, the 3rd party is NOT required to withhold FIT unless the EE requests that a certain amount be withheld by furnishing the 3rd party with...? W-4S W-4S Request for FIT Withholding from Sick Payh Which department in a company generally administers defined benefit plans? Benefits Dept ADP Actual deferred percentage Which taxes are elective deferrels to a 457b plan for public sector ees subject to if the ER is subject to FICA? FICA Taxes Simplified Employee Pensions 408 K Employee Funded Plans 501C 18D Deferred Comp plans for Public Sector and Tax Exempt Groups 457B Tax Sheltered Annuities 403B Cash/Deferred Arrangments 401K Qualified Pension and Profit Sharing Plans
401A
Simple Individual Retirement accounts 408P ER Sponsored IRA empoyee contribution limit $5, $1,000 additional if over 50 years old W2 Letters o A - Uncollected SS tax on tips o B - Uncollected MED tax on tips o C - Think "Coffin" for Group Term Life over $50, o D - "Deferred Comp" 401(k) watch the pattern below o D, E, F, G, H.....401 (k), 403B, 408, 457, 501. Notice the numbers go up as the letters go up. So in a column write D, E, F, G, H, then in the next column write 401, 403, 408, 457, and 501. Check yourself, but relating G the code for the 457 as G for Government. A 457 plan is a government plan. o J - Sick Pay. Think "Juice and Jammies" Picture yourself on the couch drinking juice in your jammies because your are home sick. Remember to think in color. o K - Golden Parachute (think 14 Karat Gold) o L - Substantiated EE business expense reimbursements o M - Uncollected SS tax on GTL over $50, o N - Uncollected MED tax on GTL over $50, o P - non-taxable relocation. Moving expenses. (Think P for Packing) o Q - Military Quarters (Q in Quarters) o R - Medical Savings (think Rx as in prescriptions) o S - Simple plan (S in simple) o T - Adoption assistance (think T for Toddler) o V - Stock Options (think Value) o W - ER contributions to a HSA account (think health and Welfare) o Y - Deferrals under Section 409A Non-Qualified Deferred Comp Plan o Z - Income under Section 409A Non-Qualified Deferred Comp Plan o AA- Designated Roth Contributions to a section 401(k) plan
o BB - Designated Roth Contributions under a Section 403(b) salary reduction agreement o CC - Hire Act exempt wages/tips o DD - Cost of employer sponsored health insurance coverage (required for 2012 and not taxable) o EE - Designated Roth contributions under a Governmental 457 plan (not deferrals - use code G) Traditional Plan o The employer purchases an insurance plan from a third party carrier o Or self-insures and pays claims to employees or health care providers from its own insurance fund. o Fee for service agreement HMOs o A healthcare system that provides health care but does not directly pay for it. o Provided on a prepaid basis with employers contributing to the plan on behalf of the employee. o Within an HMO you can have a POS plan allows covered employees to use non HMO healthcare providers with the inclusion of deductibles and insurance co-pays. PPOs
- PPO (preferred provider organization) - Is a delivery system that gives participants a choice of a higher level of benefits and lower out of pocket costs ONLY if they use doctors in the network. Medical Loss Ratio (MLR) rebates may be taxable o The Affordable Care Act requires companies to spend a specified percentage of premiums paid on medical care and quality improvements. If the requirement is not met, the insurance companies are required to provide rebates to their consumers beginning in 2012. Does not apply to self insured plans o MLR rebate can be a form of premium reduction that employers pass on to employees in the form of a reduction in the premiums. The amount of the rebate is taxable income to the employees if they pay their portion of the premium with pre-tax dollars. This is also taxable if the employees receive a cash rebate rather than a reduction in premium.
- This is because the rebate is a return to the employee of a pretax deduction that is no longer being used to pay for health insurance.
W2 Box 12 DD Reporting ER's with more than 250 W2 employees are subjet to report medical Cost of employer sponsored health insurance coverage (required for 2012 and not taxable) MSA (Medical Savings Account/Archer MSAs)
- ONLY available for employers with no more than 50 employees.
- Contributions can ONLY be made by EITHER the employee or the employer, NOT both. o The deduction/contribution cannot exceed the employee's compensation. o If the employer contributes, it must be the same amount for each employee based on either a dollar amount or a percentage.
- MSAs cannot be part of a cafeteria plan.
- Must be reported in box 12 of the W2, code "R"
- Not subject to Cobra continuation coverage.
- If employee has a HSA in addition to the MSA the employer can only contribute to one, not both. Long Term Care Insurance - HIPAA 1996 Long Term Care Insurance Contracts are generally treated as accident and health insurance contracts and are excluded from income as amounts received for personal injury, sickness, and reimbursement for medical expenses.
- If the contract makes per diem payments the excludable amount will be capped at $330/day (2014). Cobra 1985/ The employer is subject to penalties for non-compliance of $100 per day of non compliance for each qualifying dependent (maximum $200 per day). Penalty is not assessed if due to reasonable cause and corrected within 30 days of discovery. Health Reimbursement Arrangements Generally is paid solely by the employer and not provided pursuant to a salary reduction election or under a café 125 plan.
- The employer reimburses the employee for medical care expenses incurred by the employee and dependents.
- Provides reimbursement up to a maximum dollar amount at the end of the coverage period carried
forward to increase the maximum amount in subsequent coverage periods.
- Reimbursements can ONLY be for medical expenses. HSA Annual Deductibles least $1,250 (2014) for self only coverage, or $2,500 (2014) for family coverage, and that has an out of pocket expense limit of no more than $6,350 (2014) for individuals, or $12,700 (2014) for family. These amounts are adjusted for inflation annually to the nearest $50. HSA Contribution Limits o Maximum contributions are $3,300 (2014) for individuals, or $6,550 (2014) for family coverage. o Catch-up contributions are available to individuals 55 and older and MUST be enrolled in Medicare. The additional catch up is $1,000 (2014). MSA Vs. HSA employer can only contribute to one, not both. Requires to pay FMLA CA and NJ as of 2013 Sick Payment Subject to to all taxes (FIT, SS, MED, FUTA). However, if over 6 months not subject to SS, MED, or FUTA but will be subject to FIT Workers Comp payments Worker's comp is a form of insurance employers are generally required to buy to insulate them against lawsuits brought on by employees who are hurt or become ill while working.
- Payments are not taxable income
- Each state has their own worker's comp rules.