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Exam 12: Compensation

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Question 1

Multiple Choice

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Which of the following regarding the Form W-4 is incorrect?

A) Determines an employee's income tax withholding.
B) Employees can claim more allowances than personal exemptions that will be claimed.
C) Employees can specify additional amounts to be withheld each month.
D) The form can only be adjusted at the beginning of year or start of employment.

E) All of the above
F) A) and D)

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D

Question 2

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Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 25 percent?

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$1,000 and $150.
Explanation: ...

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Question 3

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Employers computing taxable income under the accrual method to unrelated taxpayers may deduct wages accrued as compensation expense in one year and paid in the subsequent year, as long as the company makes the payment within 2½ months after the employer's year-end.

Raja received 20 NQOs (each option gives him the right to purchase 15 shares of stock for $10 per share) from his employer at the time he started working when the stock price was $11 per share. Now that the share price is $20 per share, he intends to exercise all of the options using a same-day sale. What are Raja's after-tax proceeds from the sale if his marginal tax rate is 30 percent?

Maren received 10 NQOs (each option gives her the right to purchase 10 shares of stock for $8 per share) at the time she started working when the stock price was $6 per share. When the share price was $15 per share, she exercised all of her options. Eighteen months later she sold all of the shares for $20 per share. How much gain will Maren recognize on the sale of the shares and how much tax will she pay assuming her marginal tax rate is 39.6 percent?

Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. How much cash will Hazel need on the exercise date?

For 2016, up to $300 of qualified transportation fringe benefits can be excluded from income.

Which of the following forms is filled out by an employee, who is a citizen, at the beginning of an employment relationship?

Lara, a single taxpayer with a 30 percent marginal tax rate, desires health insurance. The health insurance would cost Lara $5,000 to purchase if she pays for it herself (Lara's AGI is too high to receive any tax deduction for the insurance as a medical expense) . Lara's employer has a 40 percent marginal tax rate. Ignoring payroll taxes, what is the maximum amount of before-tax salary Lara would give up to receive health insurance?

Lina, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lina $8,000 to purchase if she pays for it herself (Lina's AGI is too high to receive any tax deduction for the insurance as a medical expense). Because of group discounts, her employer can purchase the insurance for $6,000. Lina's employer has a 30 percent marginal tax rate. What would be the after-tax cost to Lina's employer to provide her with health insurance?

Employers sometimes pay a "gross-up" to employees to cover taxes associated with taxable fringe benefits they provide.

The employee's income for restricted stock is typically measured on the grant date.

Which of the following statements regarding restricted stock is false?

Employees will always prefer to receive incentive stock options over nonqualified stock options.

On Form W-4, an employee can only claim one allowance for each personal or dependency exemption that will be claimed on the employee's income tax return.

Francis works for a local fly fishing shop. The shop allows employees to purchase two fly rods per year at a discount. This year, Francis purchased one rod. The rod normally retails for $300, was purchased for $225, was sold to Francis for $250, and the employer's average gross profit percentage is 30 percent. What amount of the discount must be included in Francis' income?

One primary purpose of equity compensation is to motivate employees.

Employer's expense for stock options is typically recognized earlier for book than tax purposes.

Fringe benefits are generally a form of non-cash compensation.

Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share. Rick's restricted shares vested three years later when the market price was $12. Rick held the shares for a little more than a year after vesting and sold them when the market price was $15. Assuming that Rick made an election under section 83(b) when the stock was granted and that his marginal tax rate is 30 percent, what is the amount of Rick's income inclusion and tax liability upon the sale of the stock?