Lansing Corporation, a publicly held company with a 21% tax rate, paid its PEO an annual salary of $1 million plus a year-end bonus of $500,000 million. The bonus was based on a targeted amount of annual gross revenue. Ignoring payroll taxes, calculate the after-tax cost of this payment.

Question

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The total payment made to the PEO is $1,500,000 ($1,000,000 + $500,000). Since Lansing Corporation has a tax rate of 21%, the tax expense on this payment will be $315,000 ($1,500,000 x 0.21). Therefore, the after-tax cost of this payment will be $1,185,000 ($1,500,000 - $315,000) which is Option C.

Lansing Corporation, a Publicly Held Company with a 21% Tax