Tony's marginal income tax rate is 28%,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 $3,400 to purchase the benefit directly.Which of the following statements is true?

Question

Quizplus · Accepted Answer

To determine which choice is the best, we need to compare the after-tax value of the additional salary and the fringe benefit.

If Tony chooses the $5,000 additional salary, he will have to pay income tax and FICA taxes on it.

Income tax = $5,000 x 28% = $1,400

FICA tax = $5,000 x 7.65% = $383.25

Total taxes paid = $1,400 + $383.25 = $1,783.25

After-tax value of additional salary = $5,000 - $1,783.25 = $3,216.75

If Tony chooses the nontaxable fringe benefit, he will not have to pay income tax or FICA taxes on it. However, he will have to pay $3,400 to purchase it.

After-tax value of fringe benefit = value of benefit - cost of benefit

= $3,400

Therefore, the after-tax value of the fringe benefit is $3,400.

Comparing the after-tax value of the additional salary and the fringe benefit, we can see that the fringe benefit is worth $3,400, while the additional salary is worth $3,216.75.

Therefore, the best choice for Tony is to choose the fringe benefit, as it is worth $183.25 more than the additional salary.

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