Tony's marginal income tax rate is 28%, and he pays FICA tax on his entire salary (5.65% rate in 2012). 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

Calculating the after-tax value of the additional salary:
Additional Salary = $5,000
FICA tax on additional salary = 5.65% * $5,000 = $282.50
Taxable income = $5,000 - $282.50 = $4,717.50
Federal income tax = 28% * $4,717.50 = $1,320.30
After-tax value of additional salary = $5,000 - $282.50 - $1,320.30 = $3,397.20

Calculating the after-tax value of the fringe benefit:
Cost of fringe benefit = $3,400
After-tax cost of fringe benefit = $3,400 / (1 - 28%) = $4,722.22
After-tax value of fringe benefit = $4,722.22

Comparing the after-tax values of the additional salary and the fringe benefit, we can see that the fringe benefit is worth $4,722.22 - $3,397.20 = $1,325.02 more than the additional salary. Therefore, the best choice for Tony would be to choose the fringe benefit.

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