Business entity overview
How can an employer obtain an EIN?
EXPLANATION
Form SS-4 is Application for Employer Identification Number. It can be mailed or faxed to the IRS. Alternatively, an employer can apply for an EIN on-line on the IRS website or by calling the IRS.
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Which of the following taxes is an employer not required to withhold from his statutory employee's wages?
EXPLANATION
An employer is not required to withhold income tax from his statutory employee's wages. A statutory employee is an agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else; a full-time life insurance salesperson who sells primarily for one company; a home worker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates; a traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. The orders must be for items for resale or use as supplies in the customer's business. The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging.
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An employer must withhold FICA taxes from wages paid to each employee. What is the wage base for which they must withhold Medicare tax in 2022?
EXPLANATION
There is no wage base limit for Medicare tax; all wages are subject to Medicare tax.
2
Which of the following statements is correct regarding the filing of informational returns to the Internal Revenue Service?
EXPLANATION
An information return is a tax document that taxpayers are required to file in order to report certain business transactions to the Internal Revenue Service. Any person, including a corporation, partnership, individual, estate, and trust, with reportable transactions during the calendar year must file information returns to report those transactions to the IRS. Persons required to file must also furnish statements to the recipients of the income.
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Which of the following accounting methods is not an acceptable method of reporting income and expenses?
EXPLANATION
Generally and except as otherwise required, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly reflects your income and you use it consistently. However, the following restrictions apply:
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What IRS form does an employer use to obtain an EIN?
EXPLANATION
Form SS-4 is the Application for Employer Identification Number. It can be mailed or faxed to the IRS. Alternatively, an employer can apply for an EIN on-line on the IRS website or by calling the IRS. Form SS-8 is Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. Form W-9 is Request for Taxpayer Identification Number and Certification. Form 2553 is Election by a Small Business Corporation.
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Sam Sparks performs auto repair services in the repair department of President Automotive Company. He works regular hours and is paid on a percentage basis. He has no investment in the repair department. President Automotive supplies all facilities, repair parts, and supplies and issues instructions on the amounts to be charged, parts to be used, and the time for completion of each job. President Automotive's service manager approves all estimates and repair orders. What is the employment status of Sam Sparks?
EXPLANATION
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the person paying for his performance must be examined. If an employer can control what will be done and how it will be done, an employer-employee relationship exists, and it does not matter what the relationship is called. In this case, President has behavioral control and financial control over Sparks. These are the hallmarks of an employee-employer relationship.
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What are the consequences for a business taxpayer who is required to use EFTPS for federal tax deposits but fails to do so?
EXPLANATION
Certain business taxpayers are required to use EFTPS for federal tax deposits. The penalty for failure to use EFTPS when required is 10% of the amounts subject to electronic deposit requirements but not deposited using EFTPS. The IRS prefers that even taxpayers who are not subject to this requirement use EFTPS for making federal tax deposits.
19
What is the total amount a sole proprietor is obligated to report on Forms 1099-NEC based on the following expenses for services claimed on Schedule C?
EXPLANATION
A business taxpayer uses Form 1099-NEC to report certain business payments. These payments include payments of $600 or more for services performed for one’s business by people not treated as employees, such as subcontractors, attorneys, accountants, or directors. The reportable amount on Form 1099-NEC includes the cost of parts/materials used in providing services. Generally, payments to a corporation are excluded from this reporting requirement; however, a payment to an attorney is a reportable payment to a corporation.
Incorporated law firm$600Web page designer$800Consultant A$1,000Total Forms 1099-NEC$2,400
3
Which of the following would be considered a fiscal tax year?
EXPLANATION
A fiscal year is 12 consecutive months ending on the last day of any month except December 31st.
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Which of the following statements is true regarding a qualified joint venture?
EXPLANATION
An unincorporated business jointly owned by a married couple is generally classified as a partnership for federal tax purposes. Previously, married individuals in a business together were considered partners and required to file an annual Form 1065, as well as Form 1040.
A "qualified joint venture," whose only members are a taxpayer and spouse filing a joint return, can elect not to be treated as a partnership for federal tax purposes.
The QJV option simplifies the filing requirements by allowing the business to be treated as two sole proprietors rather than a partnership for tax purposes.
A qualified joint venture conducts a trade or business where:
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Wallace Black agreed with the Sawdust Company to supply the construction labor for a group of houses. The company agreed to pay all construction costs. But Wallace Black supplies all the tools and equipment. He performs personal services as a carpenter and mechanic for an hourly wage. He also acts as superintendent and foreman and engages other individuals to assist him. Sawdust Company has the right to select, approve, or discharge any helper. A Sawdust Company representative makes frequent inspections of the construction site. When a house is finished, Wallace is paid a certain percentage of its costs. He is not responsible for faults, defects of construction, or wasteful operation. At the end of each week, he presents Sawdust Company with a statement of the amount that he has spent, including what he's paid to those he has engaged. Sawdust Company provides him with a check for that amount from which he pays the assistants, although he is not personally liable for their wages. What is the employment status for Wallace Black and his assistants?
EXPLANATION
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the person paying for his performance must be examined. If an employer can control what will be done and how it will be done, an employer-employee relationship exists, and it does not matter what the relationship is called. In this case, Sawdust Company has behavioral control and financial control over Wallace Black and those he hired, which are the hallmarks of an employee-employer relationship.
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What are employment trust fund taxes?
EXPLANATIONA trust fund tax is money withheld from an employee's wages for income tax and FICA, which the employer is supposed to hold in trust until the employer pays it to the U.S. Treasury. It is the employee's money.
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By what date must an employer provide a copy of Form W-2 to his employee?
EXPLANATION
After the calendar year is over, each employer must furnish copies of Form W-2 to each employee who earned wages during the year. The due date to the recipient is January 31.
6
Hannah runs a small consulting firm that she started in January 20X1. The firm's payroll per month is $2,000. Employees are paid once per month on the 15th of the month following the pay month. Hanna records payroll expense and a liability on December 31 of each year which is then paid in January of the following year. If Hannah is a cash basis taxpayer, and is in business the entire year, what is her payroll expense for 20X2?
EXPLANATION
Since Hannah operates as a cash basis taxpayer, she would deduct the amounts paid on the 15th day of each month which would be 12 cash payments of $2,000 or $24,000 in total. The accruals do not impact the amount to be recognized.
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The following are benefits of electing qualified joint ventures status, EXCEPT:
EXPLANATION
Spouses electing qualified joint venture status are treated as sole proprietors for federal tax purposes.
To make the qualified joint venture election for a tax year, jointly file a Form 1040, with the required schedules. Each spouse includes a Schedule C reporting a portion of the total income. This generally does not increase the total tax on the return, but it does give each spouse credit for social security earnings on which retirement benefits are based, provided neither spouse exceeds the Social Security tax limitation.
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Vera Elm, an electrician, submitted a job estimate to Beachway Motel for electrical work at $16 per hour for 400 hours. She is to receive $1,280 every 2 weeks for the next 10 weeks. This is not considered payment by the hour. Even if she works more or less than 400 hours to complete the work, Beachway Motel will pay Vera Elm $6,400. She has also advertised her services and performs various electrical installations under contracts with other businesses. What is Vera Elm's employment status?
EXPLANATION
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the person paying for his performance must be examined. If an employer can control what will be done and how it will be done, an employer-employee relationship exists, and it does not matter what the relationship is called. In this case, Beachway exercises very little control over Vera Elm and Vera Elm is responsible for timely completion of the project for the agreed upon price. In addition, she is free to perform the same type of work for others concurrent with her performance for Beachway. These are hallmarks of an independent contractor.
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How many of your team have scheduled their Part 2 test?
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Most unincorporated businesses formed after 1996 can choose whether to be taxed as a partnership or a corporation. The new regulations provide for a default rule if no election is made. If an election is not made and the default rules apply, which of the following is True?
$400 for each scheduled test
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EXPLANATION
Unless otherwise elected, a domestic eligible entity:
A common form for domestic eligible entity is a Limited Liability Company. A new foreign entity is classified as an association if all members of the entity have limited liability.
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Animor, a self-employed businessman, prepared payroll tax returns and income tax returns for Yethir, Inc. on a continuous basis. Yethir, Inc. paid Animor $900 during the tax year for his services. What is Yethir, Inc.'s reporting responsibility?
EXPLANATION
Form 1099-NEC, Nonemployee Compensation is required to report payments of $600 or more to persons not treated as employees (for example, independent contractors) for services performed for your trade or business. Since Animor is not a corporation and payments for services were more than $600, Yethir, Inc. is required to file Form 1099-NEC.
12
Eric, a cash basis taxpayer, owned 25% of Watson, Inc. stock. Watson, Inc. files a calendar year U.S. Corporate Income Tax Return Form 1120 employing the accrual method of accounting. Eric loaned Watson, Inc. $100,000 at the beginning of 20X1. The accrued interest on this loan was $5,000 as of December 31, 20X1. Watson, Inc. paid Eric the $5,000 in January of 20X2. How should Eric report the interest income and Watson, Inc. report the interest expense from this transaction?
EXPLANATION
A corporation using the accrual method deducts only interest that has accrued during the tax year. Watson is able to deduct the interest in 20X1, the year of accrual. Eric reports the interest in 20X2 when received.
5
John and Jim each own 50% of J&J Partnership, which was founded 20 years ago. J&J is a calendar year taxpayer. On March 15, 20X2, they elected to be treated as a corporation for Federal tax purposes by filing Form 8832. What is the earliest date that J&J can be treated as a corporation without regard to the election relief rules?
EXPLANATION
An eligible entity may elect an alternative treatment no more than 2 months and 15 days after the beginning of the tax year the election is to take effect, or anytime in the preceding tax year.
March 15 is not more than 2 months and 15 days from the beginning of the year. It is a very common misconception that March 15 is three and a half months into the year. In fact, not until the end of March have we completed three months.
January is one full month, February is the second full month, and March 1 to March 15 is fifteen days. Therefore, January 1 to March 15 is 2 months and 15 days.
On March 15, 20X2, they elected to be treated as a corporation, therefore, the earliest date that J&J can be treated as a corporation without regard to the election relief rules is January 1, 20X2.
23
Donna Yuma is an attorney who rents office space and pays for the following items: telephone, computer, on-line legal research linkup, fax machine, and photocopier. Donna buys office supplies and pays bar dues and membership dues for her membership in three other professional organizations. Donna has a part-time receptionist who also does the bookkeeping. Donna pays the receptionist, withholds and pays federal and state employment taxes, and files a Form W-2 each year. For the past 2 years, Donna has had only three clients, corporations with which there have been long-standing relationships. Donna charges the corporations an hourly rate for her services, sending monthly bills detailing the work performed for the prior month. The bills include charges for long distance calls, on-line research time, fax charges, photocopies, postage, and travel, costs for which the corporations have agreed to reimburse her. What is the employment status for Donna and the receptionist?
EXPLANATION
To determine whether an individual is an employee or an independent contractor under the common law, the relationship of the worker and the person paying for his performance must be examined. If an employer can control what will be done and how it will be done, an employer-employee relationship exists, and it does not matter what the relationship is called. In this case, none of the corporations have any behavioral control or financial control over Donna Yuma, but she has that control of the receptionist.
11
An employee who does not have a Social Security Number _____.
EXPLANATION
An employee who is legally eligible to work in the United States can apply for a Social Security Number and/or card by completing Form SS-5. The employee can work while the application is pending; the employer should mark the appropriate spot on the W-2 applied for. An ITIN is not a substitute for a SSN. An ITIN is a taxpayer identification number that is available to resident and nonresident aliens who are not eligible for U.S. employment and need identification for other tax purposes.
9
In which circumstance should a taxpayer attach form 1099-R to his tax return if not filing electronically?
EXPLANATION
The recipient of an informational return does not send copies to the IRS unless required. A taxpayer must attach Form W-2 to the front of their Form 1040 series tax return. A taxpayer should also attach Forms W-2G and 1099-R, but only if federal income tax was withheld.
The requirement to attach W-2, W-2G and 1099-R is eliminated for electronically filed returns. However, taxpayers should keep records of these attachments with a copy of their tax return.
24
Given the fact patterns below, which of the following entities may NOT use the cash method of accounting for 2022?
EXPLANATION
The following entities cannot use the cash method or any combination that includes it:
For 2022, a taxpayer meets the gross receipts test, if the average annual gross receipts for the 3-taxable-year period ending with the prior taxable year does not exceed $27 million. When a taxpayer meets the gross receipts test, the "small business taxpayer" exception applies which allows taxpayers to use the cash method.
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