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Section 2 of 7

CSLB Taxes Practice Questions

10 free practice questions on taxes, part of the Business Finances section (about 15% of the exam). Try each one, then open the answer: every choice is explained and the law is quoted.

Questions and answers

  1. Business Finances

    1. Who pays the federal unemployment (FUTA) tax on a contractor's employees?

    • A. The employee, through payroll withholding
    • B. The employer, from its own funds
    • C. The employer and employee, half each
    • D. The state, from its unemployment fund
    Show answer

    Correct answer: B

    • A. The employee, through payroll withholding

      Employees do not pay FUTA tax and do not have it withheld from their pay.

    • B. The employer, from its own funds

      Correct answer

      Pub. 583 says the employer pays FUTA tax only from its own funds.

    • C. The employer and employee, half each

      FUTA is not shared. Social security and Medicare taxes are shared by employer and employee, but FUTA is paid only by the employer.

    • D. The state, from its unemployment fund

      The state does not pay it. Pub. 583 says the employer pays FUTA tax only from its own funds.

    Explanation

    IRS Publication 583 says you pay FUTA tax only from your own funds as the employer. Employees do not pay this tax and do not have it withheld from their pay. That is different from social security and Medicare taxes, which are shared by the employer and the employee.

    Source

  2. Business Finances

    2. A California contractor pays $3,000 of state payroll taxes to the EDD late, after the "Delinquent if Not Paid By" date. According to the EDD DE 44, what penalty is charged, not counting interest?

    • A. $60
    • B. $150
    • C. $300
    • D. $450
    Show answer

    Correct answer: D

    • A. $60

      This uses a 2% rate (0.02 x $3,000). The DE 44 penalty for late payroll tax payments is 15 percent.

    • B. $150

      This uses a 5% rate (0.05 x $3,000). The DE 44 penalty for late payroll tax payments is 15 percent.

    • C. $300

      This uses a 10% rate (0.10 x $3,000). The DE 44 penalty for late payroll tax payments is 15 percent.

    • D. $450

      Correct answer

      Correct. The DE 44 charges a penalty of 15 percent plus interest on late payroll tax payments, and 15% x $3,000 = $450.

    Explanation

    Step 1: The DE 44 says a penalty of 15 percent plus interest is charged on late payroll tax payments. Step 2: A payment is late when it is made after the delinquency date, not just after the due date. Step 3: 15% x $3,000 = 0.15 x $3,000 = $450. Choosing $60, $150, or $300 uses a rate of 2%, 5%, or 10%. Those rates look like some federal deposit penalty rates, but the California rate in the DE 44 is 15 percent.

    Source

  3. Business Finances

    3. A contractor works alone as a sole proprietor. According to IRS Publication 583, at what amount of net earnings from self-employment must the contractor pay self-employment tax?

    • A. $400 or more
    • B. $600 or more
    • C. $1,000 or more
    • D. $5,000 or more
    Show answer

    Correct answer: A

    • A. $400 or more

      Correct answer

      IRS Publication 583 says you must pay SE tax and file Schedule SE if your net earnings from self-employment were $400 or more.

    • B. $600 or more

      $600 is not the SE tax threshold. SE tax is owed when net earnings from self-employment are $400 or more.

    • C. $1,000 or more

      $1,000 is the estimated tax test, not the SE tax test. SE tax is owed when net earnings from self-employment are $400 or more.

    • D. $5,000 or more

      $5,000 is not the SE tax threshold. SE tax is owed when net earnings from self-employment are $400 or more.

    Explanation

    IRS Publication 583 says you must pay self-employment (SE) tax and file Schedule SE if your net earnings from self-employment were $400 or more. SE tax is the social security and Medicare tax for people who work for themselves. The $1,000 amount is the estimated tax test, not the SE tax test, and $600 and $5,000 are not the SE tax threshold.

    Sources

  4. Business Finances

    4. A contractor signs a lump sum contract. Its invoice to the owner lists separate amounts for materials, labor, and tax. According to CDTFA Publication 9, what type of contract is this for sales and use tax?

    • A. Still a lump sum contract, because invoice amounts do not change it
    • B. A time and material contract, because materials are listed as separate items
    • C. A cost-plus-a-fee contract, because its costs and its fee are shown
    • D. A time and material plus tax contract, because tax is listed
    Show answer

    Correct answer: A

    • A. Still a lump sum contract, because invoice amounts do not change it

      Correct answer

      Correct. CDTFA Publication 9 says a lump sum contract does not become a time and material contract when amounts for materials, labor, or tax are separately stated in the invoice, so it stays a lump sum contract.

    • B. A time and material contract, because materials are listed as separate items

      Listing materials as separate items on the invoice does not turn a lump sum contract into a time and material contract.

    • C. A cost-plus-a-fee contract, because its costs and its fee are shown

      Showing amounts on the invoice does not create a cost-plus-a-fee contract; the contract stays a lump sum contract.

    • D. A time and material plus tax contract, because tax is listed

      A time and material plus tax contract needs a time and material contract in the first place, and stating tax separately does not change a lump sum contract.

    Explanation

    CDTFA Publication 9 says a lump sum contract does not become a time and material contract when the amounts for materials, fixtures, labor, or tax are separately stated in the invoice. So the contract stays a lump sum contract, and the contractor is still the consumer of the materials. Listing amounts on the invoice does not create a time and material contract or a cost-plus-a-fee contract. A time and material plus tax contract needs a time and material contract in the first place.

    Source

  5. Business Finances

    5. A sole proprietor contractor has $40,000 of net earnings from self-employment for the year. This is well below the social security wage limit. According to IRS Publication 334, how much of the self-employment (SE) tax can the contractor deduct as an adjustment to income?

    • A. $2,480
    • B. $3,060
    • C. $4,960
    • D. $6,120
    Show answer

    Correct answer: B

    • A. $2,480

      $2,480 is half of only the 12.4% social security part; it leaves out the 2.9% Medicare part of the 15.3% SE tax rate.

    • B. $3,060

      Correct answer

      Correct. SE tax is $40,000 x 15.3% = $6,120, and one-half of it, $3,060, is deducted as an adjustment to income.

    • C. $4,960

      $4,960 uses only the 12.4% social security part ($40,000 x 0.124) and does not take half; the SE tax rate is 15.3%.

    • D. $6,120

      $6,120 is the full SE tax; only one-half of the SE tax can be deducted as an adjustment to income.

    Explanation

    Step 1: IRS Publication 334 says the SE tax rate on net earnings is 15.3% (12.4% social security plus 2.9% Medicare). Step 2: $40,000 x 0.153 = $6,120 of SE tax. Step 3: The contractor can deduct one-half of the SE tax as an adjustment to income: $6,120 / 2 = $3,060. $6,120 is the full SE tax, which forgets to take half. $4,960 uses only the 12.4% social security part ($40,000 x 0.124), and $2,480 is half of that amount.

    Sources

  6. Business Finances

    6. A contractor files Form 941 each quarter. It paid no wages from April through June because it had no jobs. It has not filed a final return and is not a seasonal employer. According to IRS Publication 15, what must it do for that quarter?

    • A. File Form 941 for the quarter, showing zero wages
    • B. File nothing, because no wages means no return is due
    • C. File nothing, but only if it calls the IRS first
    • D. Add the empty quarter to next quarter's Form 941
    Show answer

    Correct answer: A

    • A. File Form 941 for the quarter, showing zero wages

      Correct answer

      Correct. An employer that has not filed a final return and is not a seasonal employer must keep filing Form 941 even for periods when it paid no wages. This is a zero wage return.

    • B. File nothing, because no wages means no return is due

      Having no wages does not end the duty to file. Without a final return or seasonal status, Form 941 is still due for that quarter.

    • C. File nothing, but only if it calls the IRS first

      Calling the IRS does not replace the required return. Form 941 must still be filed for the quarter.

    • D. Add the empty quarter to next quarter's Form 941

      The quarter cannot be folded into the next return. A Form 941 must be filed for the quarter even though no wages were paid.

    Explanation

    IRS Publication 15 says an employer that has not filed a final return, and is not a seasonal employer, must keep filing Form 941 even for periods when it paid no wages. This is called a zero wage return. Having no wages does not end the duty to file. Calling the IRS or adding the quarter to the next return does not replace the required return.

    Source

  7. Business Finances

    7. A contractor is buying a business that has employees. The seller owes payroll taxes to the EDD. According to the EDD DE 44, what should the buyer do to avoid owing the seller's EDD debt?

    • A. Have the seller sign a written promise to pay the EDD
    • B. Hold escrow money until the EDD issues a buyer's release certificate
    • C. Register a new EDD account under a new business name
    • D. Pay the seller in full, then notify the EDD within 15 days
    Show answer

    Correct answer: B

    • A. Have the seller sign a written promise to pay the EDD

      A private written promise from the seller does not release the buyer. The buyer may be held liable for the seller's EDD debt unless a Certificate of Release of Buyer (DE 2220) is obtained.

    • B. Hold escrow money until the EDD issues a buyer's release certificate

      Correct answer

      Correct. Until the EDD issues a Certificate of Release of Buyer (DE 2220), the buyer must hold in escrow enough to cover what the seller owes the EDD, up to the purchase price.

    • C. Register a new EDD account under a new business name

      Opening a new account or using a new business name does not release the buyer. The buyer avoids the seller's debt only by obtaining a DE 2220.

    • D. Pay the seller in full, then notify the EDD within 15 days

      Paying the seller and notifying the EDD does not release the buyer. The buyer must hold the money in escrow until the DE 2220 is issued.

    Explanation

    The EDD DE 44 says a buyer of a business with employees may be held liable for the previous owner's EDD debt if a Certificate of Release of Buyer (DE 2220) is not obtained. Until the certificate is issued, the buyer must hold in escrow enough money to cover what the seller owes the EDD, up to the purchase price. The EDD issues the certificate after the seller pays. A private promise from the seller, a new account or name, or a notice to the EDD does not release the buyer.

    Sources

  8. Business Finances

    8. A contractor runs his business as a sole proprietorship (a business owned by one person). He hires his 16-year-old daughter to clean up jobsites and pays her wages. According to IRS Publication 15, which federal taxes apply to her wages?

    • A. Income tax withholding only; no social security, Medicare, or FUTA
    • B. Social security and Medicare only; no income tax or FUTA
    • C. FUTA tax only; no income tax, social security, or Medicare
    • D. Income tax, social security, Medicare, and FUTA tax all apply
    Show answer

    Correct answer: A

    • A. Income tax withholding only; no social security, Medicare, or FUTA

      Correct answer

      Correct. Wages of a child under 18 working for a parent's sole proprietorship are not subject to social security and Medicare, and wages of a child under 21 working for a parent are not subject to FUTA. Income tax withholding generally still applies.

    • B. Social security and Medicare only; no income tax or FUTA

      Social security and Medicare do not apply to a child under 18 working for a parent's sole proprietorship. Income tax withholding generally does apply.

    • C. FUTA tax only; no income tax, social security, or Medicare

      FUTA does not apply to a child under 21 working for a parent. Income tax withholding generally does apply.

    • D. Income tax, social security, Medicare, and FUTA tax all apply

      All four taxes would apply if she worked for a corporation, even one her parent controls. Here she is 16 and works for her parent's sole proprietorship, so social security, Medicare, and FUTA do not apply.

    Explanation

    IRS Publication 15 says wages of a child under age 18 who works for a parent's sole proprietorship are not subject to social security and Medicare taxes. It also says wages of a child under age 21 who works for a parent are not subject to FUTA (federal unemployment) tax. Wages of a child of any age who works for a parent are generally subject to income tax withholding. So only income tax withholding applies to the 16-year-old daughter. All four taxes would apply if she worked for a corporation, even one her parent controls.

    Sources

  9. Business Finances

    9. A California contractor is planning the cost of hiring employees. According to the EDD DE 44, which two state payroll taxes are paid by the employer and NOT withheld from workers' wages?

    • A. State Disability Insurance and Personal Income Tax
    • B. Unemployment Insurance and State Disability Insurance
    • C. Employment Training Tax and Personal Income Tax
    • D. Unemployment Insurance and Employment Training Tax
    Show answer

    Correct answer: D

    • A. State Disability Insurance and Personal Income Tax

      Both of these are withheld from workers' wages. SDI is funded through a payroll deduction from employees' wages, and PIT is also withheld from employee wages.

    • B. Unemployment Insurance and State Disability Insurance

      UI is employer-paid, but SDI is funded through a payroll deduction from employees' wages, so it is not an employer cost.

    • C. Employment Training Tax and Personal Income Tax

      ETT is employer-paid, but PIT is withheld from employee wages, so it is not an employer cost.

    • D. Unemployment Insurance and Employment Training Tax

      Correct answer

      The DE 44 says UI is funded through payroll taxes paid by the employer and ETT is an employer-paid tax. These are the only two that are employer costs.

    Explanation

    The DE 44 says the Unemployment Insurance (UI) program is funded by payroll taxes paid by the employer, and that the Employment Training Tax (ETT) is an employer-paid tax. State Disability Insurance (SDI) is a payroll deduction from employees' wages. California Personal Income Tax (PIT) is also withheld from employee wages. So only UI and ETT are employer costs.

    Sources

  10. Business Finances

    10. For 2026, an employee of a contractor earns $45,000 during the year. Before any credit for state unemployment tax, what is the FUTA tax on this employee?

    • A. $42
    • B. $420
    • C. $2,430
    • D. $2,700
    Show answer

    Correct answer: B

    • A. $42

      $42 uses the 0.6% rate after the full credit, but the question asks for the tax before any credit.

    • B. $420

      Correct answer

      For 2026, FUTA is 6.0% on only the first $7,000 paid to each employee: 6.0% x $7,000 = $420.

    • C. $2,430

      $2,430 applies the 5.4% credit rate to all $45,000 of wages instead of 6.0% to the first $7,000.

    • D. $2,700

      $2,700 taxes all $45,000 (6.0% x $45,000), but the tax applies only to the first $7,000 of wages.

    Explanation

    Step 1: IRS Publication 15 says that for 2026 the FUTA tax rate is 6.0% on the first $7,000 paid to each employee. Step 2: Only $7,000 of the $45,000 is taxed. Step 3: 6.0% x $7,000 = $420. Choosing $2,700 taxes all $45,000 (6.0% x $45,000). Choosing $2,430 uses the 5.4% credit rate on all wages. Choosing $42 uses the 0.6% rate after the full credit, but the question asks for the tax before any credit.

    Source

Keep studying

Read the Section 2 study notes: Business Finances