salary_v_bonus - (1- tax rate) 65% 65% 65% 673,154...

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Source of income (a) (b) (c) Salary vs. Bonus (assume a 35% marginal corporate tax rate) Salary 2,000,000 1,000,000 1,000,000 Performance-based bonus 1,000,000 1,530,765 Compensation subject to FICA 2,000,000 2,000,000 2,530,765 Social security tax base - 2010 106,800 106,800 106,800 Compensation subject to SS tax 106,800 106,800 106,800 x Social security tax rate 6.2% 6.2% 6.2% Social security tax 6,622 6,622 6,622 Compensation subject to Medicare tax 2,000,000 2,000,000 2,530,765 x Medicare tax rate 1.45% 1.45% 1.45% Medicare tax 29,000 29,000 36,696 After-tax cost to corporation: Total FICA taxes 35,622 35,622 43,318 Deductible wages 1,000,000 1,000,000 1,000,000 Deductible bonus 1,000,000 1,530,765 Before-tax cost of salary 1,035,622 2,035,622 2,574,083
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Unformatted text preview: (1- tax rate) 65% 65% 65% 673,154 1,323,154 1,673,154 Nondeductible wages 1,000,000 After-tax cost of wages 1,673,154 1,323,154 1,673,154 Note: The corporation could offer a fully deductible $1M salary and a performance-based bonus of approximately $1.5M & have the same cash outflow as a $2M salary, some of which is nondeductible. The employee would be better off with the salary & larger bonus. Obviously, the employee would bear the risk of the contingent bonus payment & would have to consider the probability of meeting the performance goals....
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This note was uploaded on 09/09/2011 for the course TAX 6845 taught by Professor Kelliher,c during the Fall '08 term at University of Central Florida.

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