Susan works as an advertising executive for a small business making $40,000 per year and is in a tax bracket with a 30 percent marginal rate. She currently purchases a $5,000 health insurance plan outside of her employer from her net pay. Her employer offers her the option to purchase the same health insurance plan on a pretax basis through the company (in other words, the cost of the health insurance is subtracted out of her gross pay before her taxes are computed). If she decides to do so, the purchase of the $5,000 health insurance plan through her employer would now only cost her how much in terms of a reduction in her net pay?
A) $1,000
B) $1,500
C) $3,500
D) $5,000

Question

Quizplus · Accepted Answer

By purchasing the health insurance plan on a pretax basis, Susan reduces her taxable income by $5,000. With a 30% tax rate, she saves $1,500 in taxes ($5,000 x 30%). Therefore, the net cost to her is $5,000 - $1,500 = $3,500.

Susan Works as an Advertising Executive for a Small Business