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)?

Question

Quizplus · Accepted Answer

To calculate the after-tax value of the additional salary, we first need to subtract FICA taxes from the salary:
$5,000 - ($5,000 * 0.0765) = $4,617
Then we subtract federal income taxes:
$4,617 - ($4,617 * 0.24) = $3,506
To calculate the after-tax value of the fringe benefit, we need to subtract the cost Tony would incur to purchase the benefit:
$5,000 - $3,600 = $1,400
Therefore, the after-tax value of the fringe benefit is simply $1,400. Since this is higher than the after-tax value of the additional salary ($3,506), the fringe benefit is worth $1,364 ($1,400 - $3,506) more than the additional salary, which rounds to $183. Therefore, choice B is true.

Tony's Marginal Income Tax Rate Is 24%, and He Pays