SEE - Special Enrollment Exam Quiz: Wages And Other Earned Income

15 questions · exam conditions

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Wages And Other Earned IncomeQuestion 1 of 15

A single banquet server with a valid Social Security number worked at a convention center during 2025. She received $38,000 in hourly wages. The convention center added an 18% service charge to each banquet bill; her share was $27,000, paid through payroll and reported in Box 1 of Form W-2 as non-tip wages. She also received $5,000 in discretionary cash tips from guests, which she reported to her employer as required. Her MAGI is below the applicable phase-out threshold.

What amount may she treat as qualified tips for the qualified tips deduction on her 2025 return?

$0, because all gratuity-type amounts were paid through payroll

$25,000, because the mandatory service charge is treated as a tip up to the cap

$5,000, the amount of discretionary cash tips that qualifies

$32,000, the sum of the mandatory service charge and the discretionary cash tips

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SEE - Special Enrollment Exam Quiz

SEE - Special Enrollment Exam Quiz: Wages And Other Earned Income

Practice Wages And Other Earned Income in SEE - Special Enrollment Exam with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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Question 1

What amount may she treat as qualified tips for the qualified tips deduction on her 2025 return?

$0, because all gratuity-type amounts were paid through payroll
$25,000, because the mandatory service charge is treated as a tip up to the cap
$5,000, the amount of discretionary cash tips that qualifies (correct answer)
$32,000, the sum of the mandatory service charge and the discretionary cash tips

Explanation: IRC § 224 and IRS Pub. 531. Mandatory service charges are wages, not tips, so the only qualified tips are the $5,000 of discretionary cash tips. Choice B incorrectly treats the mandatory service charge as a qualifying tip and caps the combined amounts at $25,000. Choice D treats the service charge as a tip and ignores the cap. Choice A is wrong because not everything went through payroll: the $5,000 was discretionary cash tips that she reported to her employer, and those are qualified tips.

Question 2

A single taxpayer worked as a server in 2025. Her Form W-2 shows $64,000 in wages and $26,000 in reported tips. She has no above-the-line deductions, so her adjusted gross income is $90,000. She paid $11,000 in unreimbursed medical expenses and is eligible for the full qualified tips deduction.

Which statement is correct regarding the qualified tips deduction and the medical expense deduction on her 2025 return?

The qualified tips deduction is claimed after AGI; it does not lower her AGI or the medical-expense floor, and it is allowed whether or not she itemizes. (correct answer)
The qualified tips deduction is an adjustment to gross income; it lowers her AGI to $65,000 and reduces the 7.5% medical-expense floor.
The qualified tips deduction is claimed after AGI; it does not lower the medical-expense floor, but it may be claimed only if she itemizes her deductions.
The qualified tips deduction reduces her reported tips for Social Security tax purposes but does not change her income tax AGI or the medical-expense floor.

Explanation: IRC §§ 224 and 213. The qualified tips deduction is claimed on Schedule 1-A after AGI; it is not an IRC § 62 adjustment. It therefore does not reduce AGI or the 7.5% medical-expense floor, and it is available to both itemizers and standard deduction users. Choice B treats it as above the line. Choice C adds an itemization condition that does not apply. Choice D confuses the income tax deduction with Social Security wage reporting.

Question 3

A self-employed electrician, age 50 and single, performed 50 hours of work for a customer in one week during 2025. He billed the customer separately for a $14,000 'overtime premium' for the 10 hours over 40, and the customer paid the full invoice. The electrician received a Form 1099-NEC and has a valid Social Security number and a modified adjusted gross income below all applicable phase-out thresholds.

Which statement is correct regarding the $14,000 overtime premium on his 2025 federal income tax return?

The premium is not qualified overtime because the amount exceeds the $12,500 single taxpayer cap.
The premium is qualified overtime up to $12,500 because it is separately stated earned income.
The premium is not qualified overtime because the deduction is limited to overtime premium paid for services as an employee. (correct answer)
The premium is qualified overtime up to $14,000 because self-employment income is earned income.

Explanation: IRC § 225. Qualified overtime is overtime premium paid by an employer for services performed as an employee. A self-employed person invoicing a customer for extra hours has self-employment income, not qualified overtime. Choice A treats the dollar cap as an eligibility requirement, but a qualifying employee with overtime above the cap may deduct up to the cap. Choices B and D treat self-employment earnings as qualified overtime.

Question 4

A single taxpayer, age 40, has a valid Social Security number. In 2025 she was a nonexempt hourly employee and received $160,000 of wages shown on Form W-2. Her employer reported that $14,500 of those wages is qualified overtime compensation: the half-time premium portion of the time-and-one-half pay required by section 7 of the Fair Labor Standards Act for hours over 40. She has no other income and no adjustments to income. Her MAGI for the qualified overtime deduction is $160,000.

What amount may she deduct as a qualified overtime deduction on her 2025 federal income tax return?

$14,500
$13,500
$12,500
$11,500 (correct answer)

Explanation: IRC § 225. The deduction is limited to the smaller of the qualified overtime compensation or $12,500 for a single taxpayer, and that amount is reduced by $100 for each $1,000 of MAGI over $150,000 (Schedule 1-A). The smaller of $14,500 or $12,500 is $12,500. The taxpayer is $10,000 over the threshold, so the reduction is 10 × $100 = $1,000, and the deduction is $12,500 − $1,000 = $11,500. Choice D is correct. Choice A ignores both the cap and the phase-out. Choice B subtracts the phase-out from the actual $14,500 premium and never applies the cap. Choice C applies the cap but ignores the phase-out.

Question 5

A single taxpayer, age 29, has a valid Social Security number. In 2025, he worked as a server and received $132,000 in wages reported on Form W-2 and $33,000 in cash tips that he reported to his employer and that appear on Form W-2. His modified adjusted gross income for the qualified tips deduction is $165,000, and he has no other income.

What amount of the qualified tips deduction may the taxpayer claim on his 2025 federal income tax return?

$25,000
$23,500 (correct answer)
$31,500
$24,100

Explanation: IRC § 224. The qualified tips deduction is capped at $25,000 and is reduced by $100 for each $1,000 (or part) by which modified adjusted gross income exceeds $150,000. The taxpayer's MAGI is $15,000 over the threshold, so the reduction is 15 × $100 = $1,500; $25,000 − $1,500 =

23,500. Choice A ignores the phase-out. Choice C starts with the taxpayer's actual tips (

33,000) rather than the $25,000 cap and subtracts only the phase-out. Choice D instead uses a 6% rate on the

15,000 excess (

900) and subtracts that from $25,000; the statutory phase-out is $100 per $1,000 (or part) of the excess, not a 6% rate.

Question 6

Married taxpayers file a joint 2025 return. Both have valid Social Security numbers, and their modified adjusted gross income is $200,000, below all applicable phase-out thresholds. One spouse received $30,000 in qualified tips as a casino dealer. The other spouse received $20,000 in qualified overtime premium as a nonexempt hourly employee. No other income or deductions affect these computations.

What total amount may they deduct for qualified tips and qualified overtime on their 2025 joint return?

$50,000
$45,000 (correct answer)
$55,000
$37,500

Explanation: IRC §§ 224 and 225. The qualified tips cap is $25,000 per return and is not doubled for a joint return. The qualified overtime cap for a joint return is $25,000. Therefore the deduction is $25,000 of tips plus $20,000 of overtime, or $45,000. Choice A ignores both caps. Choice C applies the joint overtime cap but not the tips cap. Choice D applies the tips cap but uses the single-return overtime cap on a joint return.

Question 7

A married casino dealer and his spouse are U.S. citizens, and both have valid Social Security numbers. In 2025, he received $80,000 in wages and $18,000 in tips. His spouse had no income. He and his spouse plan to file married filing separately for 2025, and his modified adjusted gross income is below the applicable phase-out threshold.

Can the taxpayer claim the qualified tips deduction on his 2025 separate return?

Yes, up to $18,000, because his tips are below the $25,000 per-return cap and his MAGI is below the phase-out threshold.
Yes, up to $25,000, because each spouse may claim the full per-return cap on a separate return.
No, because married taxpayers must file a joint return to claim the qualified tips deduction; the deduction is not available on a separate return. (correct answer)
No, because the qualified tips deduction is available only if the taxpayer's spouse also has qualified tips to report.

Explanation: IRC § 224. Married taxpayers must file a joint return to claim the qualified tips deduction; a married taxpayer filing separately cannot claim it. Choice A ignores the joint-return requirement. Choice B incorrectly treats the per-return cap as available separately to each spouse. Choice D adds a spousal-tips condition that the statute does not contain.

Question 8

During 2025, Priya's employer provided her with a transit pass worth $350 per month and qualified parking worth $300 per month. She did not have the option to receive cash in lieu of either benefit.

What amount of these transportation benefits must Priya include in gross income as wages for 2025?

$0
$25
$300 (correct answer)
$3,900

Explanation: IRC § 132(f) excludes qualified transportation fringe benefits from gross income, subject to separate monthly limits: $325 for transit passes and $325 for qualified parking in 2025. The parking is within its $325 monthly limit, so it is fully excludable. The transit pass exceeds its limit by $25 per month, so the taxable amount is $25 × 12 =

300 for the year. Choice C (

300) is correct. Choice A ($0) treats the entire transit pass as excludable and ignores the

25 monthly excess. Choice B (

25) reports only one month's excess and fails to annualize it. Choice D ($3,900) incorrectly applies a single

325 combined monthly cap to the two benefits: (

650 − $325) × 12.

Question 9

Marcus, a single taxpayer with a valid SSN, worked as a bartender during 2025. His Form W-2 wages were $176,000, of which $31,000 were qualified tips. For purposes of the qualified tips deduction, Marcus's modified adjusted gross income is $164,000.

What amount may Marcus deduct for qualified tips on his 2025 return?

$23,600 (correct answer)
$25,000
$29,600
$31,000

Explanation: IRC § 224, as added by the OBBBA, and the Schedule 1-A (Form 1040) instructions. Section 224 allows a deduction for qualified tips of up to $25,000 per return for every filing status in 2025, reduced by $100 for each $1,000 of modified AGI over $150,000. Marcus's MAGI of $164,000 is $14,000 over the threshold, so the phase-out is $1,400. Because his qualified tips exceed the cap, the deduction starts with the $25,000 cap, not the full tips: $25,000 − $1,400 =

23,600. The deduction is taken after AGI and does not reduce his W-2 wages or AGI. Choice A (

23,600) is correct. Choice B (

25,000) ignores the phase-out. Choice C (

29,600) applies the phase-out to the full

31,000 of tips and then ignores the cap. Choice D (

31,000) ignores both the cap and the phase-out.

Question 10

Lena, a single taxpayer, had 2025 wages of $95,000. Her employer paid $20,000 of qualified adoption expenses in 2025 under a written adoption assistance program. Lena's modified adjusted gross income is $125,000, below the phase-out range for the employer adoption assistance exclusion.

What amount of the employer's adoption assistance payment must Lena include in gross income as wages for 2025?

$0
$2,720 (correct answer)
$17,280
$20,000

Explanation: IRC § 137 generally excludes employer-provided adoption assistance from gross income, but the exclusion for 2025 is limited to $17,280 per eligible child. The exclusion is phased out for high-income taxpayers, but Lena's $125,000 MAGI is below the $259,190 beginning of the phase-out range. Of the $20,000 paid by the employer, $17,280 is excludable and the remaining

2,720 is included in wages. Choice B (

2,720) is correct. Choice A (

0) applies no dollar limit to the exclusion. Choice C (

17,280) is the excluded amount, not the amount included. Choice D ($20,000) treats the entire payment as taxable and ignores the statutory exclusion.

Question 11

Mina, a single taxpayer, earned $64,000 in wages at a restaurant and received $30,000 in cash tips, all reported to her employer and included on her 2025 Form W-2. Her modified adjusted gross income is $157,000.

What amount may Mina deduct on Schedule 1-A for qualified tips on her 2025 return?

$25,000, because the deduction is limited to the $25,000 statutory maximum and no phase-out applies at this income level.
$18,000, because the deduction is reduced dollar-for-dollar by the amount of MAGI above $150,000.
$24,300, because the deduction is limited to the smaller of qualified tips or $25,000, and that amount is reduced by $100 for each $1,000 of MAGI over $150,000. (correct answer)
$30,000, because qualified tips are deductible in full up to the amount of tips reported on Form W-2.

Explanation: IRC § 224, added by the OBBBA and reflected in the 2025 Form 1040 instructions, limits the qualified-tips deduction claimed on Schedule 1-A to the smaller of qualified tips or $25,000, and reduces that amount by $100 for each $1,000 of MAGI over $150,000. The smaller of $30,000 or $25,000 is $25,000. Mina's MAGI is $157,000, so the reduction is 7 × $100 = $700, and the deduction is $25,000 − $700 = $24,300. Choice C is correct. Choice A ignores the phase-out. Choice B computes the phase-out dollar-for-dollar as if the deduction were reduced by the entire $7,000 excess. Choice D ignores the $25,000 cap.

Question 12

Which of the following is correct for 2025 regarding the deduction for qualified overtime premium pay?

The deduction is claimed on Schedule 1 as an adjustment to income and therefore reduces modified adjusted gross income for credits and other AGI-based limits.
The deduction is available only to taxpayers who itemize deductions, and it is claimed as a miscellaneous deduction on Schedule A.
The deduction is limited to $12,500 for each taxpayer, so a married couple filing jointly with qualified overtime pay for both spouses may claim $50,000.
The deduction is claimed on Schedule 1-A after AGI and reduces taxable income, so it does not lower AGI or AGI-based limits such as the medical expense floor. (correct answer)

Explanation: Under the OBBBA and the 2025 Form 1040 Schedule 1-A instructions, the qualified overtime premium deduction is claimed after AGI and reduces taxable income. It is not an IRC § 62 adjustment, so it does not affect AGI or AGI-based limits such as the 7.5%-of-AGI medical expense floor. Choice A misstates both the form and the effect: it is not a Schedule 1 adjustment and does not reduce MAGI. Choice B misstates availability; the deduction may be claimed whether or not the taxpayer itemizes. Choice C misstates the cap; a married couple filing jointly has a $25,000 combined maximum, not $50,000.

Question 13

Which of the following is correct regarding payments made by an employer to a former employee in 2025?

Back pay awarded in a discrimination lawsuit is not wages because it is damages for the alleged injury and is excludable from gross income.
Payments for accrued but unused vacation leave made after termination are taxable wages subject to income tax withholding and to Social Security and Medicare taxes. (correct answer)
Severance pay is taxable to the former employee but is exempt from Social Security and Medicare taxes because the employment relationship has ended.
Employer reimbursements under an accountable plan are included in wages and reported in Form W-2, box 1, regardless of whether the employee substantiates the expenses.

Explanation: Under IRC § 3121(a) and § 3401(a), accrued vacation pay paid to a former employee after termination is wages subject to income tax withholding and to Social Security and Medicare taxes. Choice A misstates back pay: back pay awarded in a discrimination lawsuit is wages for income tax and FICA purposes, not excludable damages for personal injury. Choice C misstates severance pay: severance paid by an employer is generally wages subject to Social Security and Medicare taxes even though employment has ended. Choice D misstates accountable plan reimbursements: such reimbursements are excluded from wages when the employee adequately substantiates the expenses and returns any excess reimbursement.

Question 14

Which of the following is correct regarding the reporting and taxation of tips received by an employee in 2025?

A cash tip total of $20 or more in a month must be reported to the employer by the 10th day of the following month; the report is made in a written statement signed by the employee. (correct answer)
A cash tip total of $20 or more in a month must be reported to the employer by the 15th day of the following month; the employer then includes the reported tips in Form W-2, box 1.
Cash tips are not subject to income tax withholding because they are not paid by the employer, and the employee reports them directly on Form 4137 with the annual return.
Cash tips of less than $20 in a month are not reportable to the employer and are also not included in gross income because of the small-amount exception in the tax law.

Explanation: IRC § 6053(a) requires an employee who receives $20 or more in cash tips in a calendar month to report the tips to the employer by the 10th day of the following month in a signed written statement. Choice B misstates the deadline; the report is due by the 10th, not the 15th. Choice C misstates the withholding rules: reported tips are subject to income tax withholding, and Form 4137 reports Social Security and Medicare taxes on tips that were not reported to the employer. Choice D misstates the income rule: tips below the $20 monthly reporting threshold are still gross income under IRC § 61(a)(1).

Question 15

For 2025, a single employee has $210,000 of wages from one employer and no other income.

What total amount is withheld from the employee's wages for the employee share of Social Security and Medicare taxes, including Additional Medicare Tax?

$13,963.20, because Social Security uses the wage base, Medicare applies to all wages, and no Additional Medicare Tax is withheld.
$16,155.00, because the 6.2% Social Security rate is applied to all wages, with Medicare on all wages and Additional Medicare Tax on wages over $200,000.
$10,918.20, because this is the Social Security tax on the wage base, and Medicare tax is not withheld from a single employee's wages.
$14,053.20, because Social Security applies to the wage base, Medicare applies to all wages, and Additional Medicare Tax applies to wages over $200,000. (correct answer)

Explanation: Under IRC § 3101(a), § 3101(b), § 3101(b)(2), and § 3102(a), the employee share of FICA required to be withheld is 6.2% Social Security tax on wages up to the 2025 wage base of $176,100, 1.45% Medicare tax on all wages, and 0.9% Additional Medicare Tax on wages over $200,000. The Social Security tax is $176,100 × 0.062 = $10,918.20; the Medicare tax is $210,000 × 0.0145 = $3,045; the Additional Medicare Tax is $10,000 × 0.009 = $90. The total withheld is $14,053.20. Choice A omits the Additional Medicare Tax. Choice B applies the Social Security rate to all wages instead of stopping at the wage base. Choice C includes only the Social Security portion and incorrectly states that Medicare tax is not withheld; the 1.45% Medicare tax applies to all wages regardless of filing status.