Welcome to Federal Laws & Business Regulations!
Hi there, future CPA! Welcome to one of the most practical parts of the REG exam. While much of REG focuses on numbers and tax forms, this section is all about the rules of the game. We are going to look at how the government regulates the relationship between employers and employees, how it handles businesses that run out of money, and how it keeps competition fair and honest.
Don't worry if legal jargon usually makes your head spin. We’re going to break these down into simple, real-world concepts. Think of this chapter as the "HR and Legal Department" of your CPA studies. Let’s dive in!
1. Worker Classifications: Employee vs. Independent Contractor
Before a business can pay taxes or provide benefits, it has to answer one big question: "Is this person an employee or an independent contractor?" This distinction is huge because it determines who is responsible for taxes.
The "Control" Test
Federal tax worker classification considers the whole relationship: behavioral control, financial control and the type of relationship. No single fact, contract label, work location or ownership of tools decides the result. Apply any statutory-employee or other special rule separately. An illustrative flexible schedule or employer-provided laptop is evidence, not a conclusive classification.
Federal tax worker classification considers the whole relationship: behavioral control, financial control and the type of relationship. No single fact, contract label, work location or ownership of tools decides the result. Apply any statutory-employee or other special rule separately. An illustrative flexible schedule or employer-provided laptop is evidence, not a conclusive classification.
Common Mistake to Avoid: Just because a worker has a "contract" saying they are an independent contractor doesn't mean the IRS agrees! The IRS looks at the actual behavior, not just the label on the paper.
Key Takeaway:
Federal tax worker classification considers the whole relationship: behavioral control, financial control and the type of relationship. No single fact, contract label, work location or ownership of tools decides the result. Apply any statutory-employee or other special rule separately. An illustrative flexible schedule or employer-provided laptop is evidence, not a conclusive classification.
2. Employment Taxes (FICA and FUTA)
Once we know someone is an employee, the government wants its share. There are two main types of federal employment taxes you need to know for the REG exam.
FICA (Federal Insurance Contributions Act)
FICA funds Social Security and Medicare. Both the employer and the employee must contribute.
Employer and employee each generally pay 6.2% Social Security up to the annual wage base ($184,500 for 2026), plus 1.45% Medicare on covered wages without that cap. Additional Medicare tax of 0.9% is employee-only; there is no employer match. Employers begin its withholding when their wages paid to an employee exceed $200,000, whereas the employee’s final liability uses filing-status thresholds and combined applicable earnings. FUTA is generally paid by the employer, not withheld from employees.
Under the regular method, self-employment net earnings are generally 92.35% of eligible net profit. Apply 12.4% Social Security only to the remaining combined wage/SE earnings base ($184,500 for 2026), and 2.9% Medicare without that cap. Additional Medicare tax of 0.9% may apply above the filing-status threshold ($250,000 joint/$125,000 separate/$200,000 others). The deductible employer-equivalent portion does not include Additional Medicare tax.
FUTA (Federal Unemployment Tax Act)
FUTA provides funds for workers who lose their jobs. Here is the most important rule for the exam: Only the Employer pays FUTA. It is never deducted from the employee's paycheck.
• Rate: The standard rate is \( 6.0\% \) on the first \( \$7,000 \) of each employee's wages.
• Credit: Employers can get a credit of up to \( 5.4\% \) if they pay their state unemployment taxes on time, effectively making the federal rate only \( 0.6\% \).
Key Takeaway:
Employer and employee each generally pay 6.2% Social Security up to the annual wage base ($184,500 for 2026), plus 1.45% Medicare on covered wages without that cap. Additional Medicare tax of 0.9% is employee-only; there is no employer match. Employers begin its withholding when their wages paid to an employee exceed $200,000, whereas the employee’s final liability uses filing-status thresholds and combined applicable earnings. FUTA is generally paid by the employer, not withheld from employees.
3. Qualified Health Plans (Affordable Care Act - ACA)
An applicable large employer generally averaged at least 50 full-time employees including full-time equivalents in the preceding calendar year, applying aggregation and seasonal-worker rules. Section 4980H(a) concerns failure to offer minimum essential coverage to at least 95% of full-time employees and their dependents; section 4980H(b) separately addresses unaffordable or non-minimum-value coverage. Applicable premium-tax-credit conditions and monthly rules determine liability.
An applicable large employer generally averaged at least 50 full-time employees including full-time equivalents in the preceding calendar year, applying aggregation and seasonal-worker rules. Section 4980H(a) concerns failure to offer minimum essential coverage to at least 95% of full-time employees and their dependents; section 4980H(b) separately addresses unaffordable or non-minimum-value coverage. Applicable premium-tax-credit conditions and monthly rules determine liability.
Analogies from Life: Think of the ACA mandate like a "potluck dinner." If you have a huge family (50+ people), the "head of the house" (the employer) is legally required to bring a main dish (health insurance) so nobody goes hungry.
Key Takeaway:
An applicable large employer generally averaged at least 50 full-time employees including full-time equivalents in the preceding calendar year, applying aggregation and seasonal-worker rules. Section 4980H(a) concerns failure to offer minimum essential coverage to at least 95% of full-time employees and their dependents; section 4980H(b) separately addresses unaffordable or non-minimum-value coverage. Applicable premium-tax-credit conditions and monthly rules determine liability.
4. Bankruptcy (The "Fresh Start")
Bankruptcy is a federal court process that helps people and businesses who cannot pay their debts. For the REG exam, focus on Chapter 7 and Chapter 11.
Chapter 7: Liquidation
The automatic stay generally pauses specified collection and enforcement actions, subject to section 362 exceptions, repeat-filing limits and court relief. Criminal proceedings and specified domestic-support or tax actions are among exceptions. Chapter 7 liquidates nonexempt assets; individual discharge has conditions and exceptions, and corporations do not receive a Chapter 7 discharge. Educational debts covered by section 523(a)(8) may be discharged for undue hardship. Do not describe all debts or all student loans as permanently nondischargeable. Chapter 11 generally permits reorganization under a court-confirmed plan. Common individual discharge exceptions include specified support, tax, fraud and willful-injury debts, subject to their statutory conditions.
The automatic stay generally pauses specified collection and enforcement actions, subject to section 362 exceptions, repeat-filing limits and court relief. Criminal proceedings and specified domestic-support or tax actions are among exceptions. Chapter 7 liquidates nonexempt assets; individual discharge has conditions and exceptions, and corporations do not receive a Chapter 7 discharge. Educational debts covered by section 523(a)(8) may be discharged for undue hardship. Do not describe all debts or all student loans as permanently nondischargeable. Chapter 11 generally permits reorganization under a court-confirmed plan. Common individual discharge exceptions include specified support, tax, fraud and willful-injury debts, subject to their statutory conditions.
Chapter 11: Reorganization
This is mostly for businesses. Instead of closing down, the business stays alive and creates a "Plan of Reorganization" to pay back creditors over time. Think of it as a "timeout" to fix the business model.
Important Bankruptcy Terms:
The automatic stay generally pauses specified collection and enforcement actions, subject to section 362 exceptions, repeat-filing limits and court relief. Criminal proceedings and specified domestic-support or tax actions are among exceptions. Chapter 7 liquidates nonexempt assets; individual discharge has conditions and exceptions, and corporations do not receive a Chapter 7 discharge. Educational debts covered by section 523(a)(8) may be discharged for undue hardship. Do not describe all debts or all student loans as permanently nondischargeable. Chapter 11 generally permits reorganization under a court-confirmed plan. Common individual discharge exceptions include specified support, tax, fraud and willful-injury debts, subject to their statutory conditions.
Key Takeaway:
The automatic stay generally pauses specified collection and enforcement actions, subject to section 362 exceptions, repeat-filing limits and court relief. Criminal proceedings and specified domestic-support or tax actions are among exceptions. Chapter 7 liquidates nonexempt assets; individual discharge has conditions and exceptions, and corporations do not receive a Chapter 7 discharge. Educational debts covered by section 523(a)(8) may be discharged for undue hardship. Do not describe all debts or all student loans as permanently nondischargeable. Chapter 11 generally permits reorganization under a court-confirmed plan. Common individual discharge exceptions include specified support, tax, fraud and willful-injury debts, subject to their statutory conditions.
5. Anti-Bribery: The Foreign Corrupt Practices Act (FCPA)
The FCPA was designed to stop U.S. companies from winning business through bribery in other countries. It has two main parts:
1. Anti-Bribery Provisions: It is illegal to offer or pay anything of value to a foreign official to get or keep business.
2. Accounting/Internal Control Provisions: Public companies must keep accurate books and records so that "bribe" money can't be hidden as "consulting fees" or "travel expenses."
The FCPA’s facilitating-payment exception is narrow: it concerns routine, nondiscretionary governmental action, not decisions to award new business or continue business on favorable terms. A small payment or low-ranking recipient alone does not establish the exception. Accurate books and internal-control requirements still apply, and a payment can violate other applicable laws even if it meets the FCPA exception.
Key Takeaway:
The FCPA’s facilitating-payment exception is narrow: it concerns routine, nondiscretionary governmental action, not decisions to award new business or continue business on favorable terms. A small payment or low-ranking recipient alone does not establish the exception. Accurate books and internal-control requirements still apply, and a payment can violate other applicable laws even if it meets the FCPA exception.
Final Quick Review Box
Employer and employee each generally pay 6.2% Social Security up to the annual wage base ($184,500 for 2026), plus 1.45% Medicare on covered wages without that cap. Additional Medicare tax of 0.9% is employee-only; there is no employer match. Employers begin its withholding when their wages paid to an employee exceed $200,000, whereas the employee’s final liability uses filing-status thresholds and combined applicable earnings. FUTA is generally paid by the employer, not withheld from employees.
Great job! You've just cleared a major hurdle in Business Law. Keep moving forward—you're getting closer to those three letters after your name!