Question

Trent Inc. needs an additional worker on a multiyear project. It could hire an employee for a $79,000 annual salary. Alternatively, it could engage an independent contractor for a $86,000 annual fee. Trent's income tax rate is 21 percent. Compute the annual after-tax cost of each option and indicate which minimizes the after-tax cost of obtaining the worker. (Round all your intermediate calculations to the nearest whole dollar amount.)

Answer 1

To determine the annual after-tax cost of each option, subtract the income tax from the annual salary/fee. The option with the lower after-tax cost is the one that minimizes the cost of obtaining the worker.

Step-by-step explanation:

In order to determine the annual after-tax cost of each option, we need to calculate the amount of income tax paid by Trent Inc. for both hiring an employee and engaging an independent contractor.

For an employee, the annual after-tax cost is the annual salary minus the income tax. So, for the employee option, the annual after-tax cost is $79,000 - (21% of $79,000). To calculate the tax, we multiply the annual salary by the income tax rate (0.21) and subtract that from the annual salary.

For an independent contractor, the annual after-tax cost is the annual fee minus the income tax. So, for the contractor option, the annual after-tax cost is $86,000 - (21% of $86,000). To calculate the tax, we multiply the annual fee by the income tax rate (0.21) and subtract that from the annual fee.

By comparing the annual after-tax costs of both options, we can determine which one minimizes the after-tax cost of obtaining the worker.