Tony's marginal income tax rate is 28%, and he pays FICA tax on his entire salary (7.65% rate in 2015). Tony's employer offered him a choice between $5,000 additional salary or a nontaxable fringe benefit. Tony would have to pay $3,400 to purchase the benefit directly. Which of the following statements is true?

Question

Quizplus · Accepted Answer

For additional salary, Tony will have to pay income tax and FICA tax. His total tax liability for the additional salary will be (0.28 + 0.0765) * $5,000 = $1,642.
Therefore, Tony's after-tax income from the additional salary would be $5,000 - $1,642 = $3,358.

For the fringe benefit, Tony will not have to pay income tax or FICA tax. However, he will have to pay $3,400 out of pocket to purchase the benefit.
Therefore, the after-tax value of the fringe benefit would be $5,000 - $3,400 = $1,600.

Comparing the after-tax values of the two options, we get:
After-tax value of additional salary = $3,358
After-tax value of fringe benefit = $1,600

Therefore, the fringe benefit is worth $1,758 less than the additional salary.
Option B is correct as it is asking Tony should choose the fringe benefit over additional salary because the fringe benefit is worth $183 more than the additional salary ($1,758 - $1,575).

Tony's Marginal Income Tax Rate Is 28%, and He Pays