Question

Tony's marginal income tax rate is 24%, and he pays FICA tax on his entire salary (7.65%). Tony's employer offered him a choice between $5,000 additional salary or a nontaxable fringe benefit. Tony would have to pay $3,600 to purchase the benefit directly. Which of the following statements is true? (answers rounded to the nearest whole dollar)A. The fringe benefit and the additional salary have the same after-tax value.B. The fringe benefit is worth $83 more than the additional salary.C. The additional salary is worth $300 more than the fringe benefit.D. None of the above is true.

Answer 1

To determine whether the fringe benefit or the additional salary has a higher after-tax value, we need to calculate the after-tax amount for each option. Based on the calculations, the fringe benefit and the additional salary have the same after-tax value.

Step-by-step explanation:

To determine whether the fringe benefit or the additional salary has a higher after-tax value, we need to calculate the after-tax amount for each option. Let's start with the additional salary:

Additional salary: $5,000

Income tax on additional salary: $5,000 * 24% = $1,200

FICA tax on additional salary: $5,000 * 7.65% = $382.50

After-tax value of additional salary: $5,000 - $1,200 - $382.50 = $3,417.50

Now, let's calculate the after-tax value of the fringe benefit:

Cost of fringe benefit: $3,600

Income tax on cost of fringe benefit: $3,600 * 24% = $864

After-tax value of fringe benefit: $3,600 - $864 = $2,736

Based on these calculations, it can be concluded that option A is true - the fringe benefit and the additional salary have the same after-tax value.

Answer 2

Answer: The fringe benefit is worth $182 more than the additional salary.

Step-by-step explanation:

The Fringe benefit is valued at $3,600.

The additional salary after taxes is:

= 5,000 - (5,000 * 24%) - (5,000 * 7.65%)

= 5,000 - 1,200 - 382.5

= $3,418

The Fringe benefit is worth more than the salary by:

= 3,600 - 3,418

= $182

Options are more probably for a variant of this question.