Fundamental Payroll Certification (FPC) Practice Exam

What does constructive receipt refer to in taxation?

1. Wages that are automatically taxed

2. Wages considered earned even if not physically received

3. Wages that must be received by check

4. Wages exempt from taxation

The correct answer is: Wages considered earned even if not physically received

Constructive receipt is a tax principle that indicates that income is considered to be received by an individual if it is made available to them, even if they have not taken possession of it in cash or check form. This means that wages are deemed earned and subject to taxation in the period they are made available to the employee, not necessarily when the employee physically receives the payment. For example, if an employer issues a paycheck on December 31, but the employee does not cash it until January 5 of the following year, the employee is still responsible for reporting that income in the tax year in which the paycheck was made available. Thus, under the concept of constructive receipt, it is essential to recognize the income as earned regardless of the actual cash flow. The other options do not accurately capture the essence of constructive receipt, which centers on the availability of income rather than its physical reception or any exemptions from taxation.