Question

2. Trent Inc. needs an additional worker on a multiyear project. It could hire an employee for a $65,000 annual salary. Alternatively, it could engage an independent contractor for a $72,000 annual fee. If Trent's income tax rate is 21 percent, which option minimizes the after-tax cost of obtaining the worker?

Answer 1

payroll tax rate = 7.65 % ( both social security and medicare )
cost of hire employee :
particular	amount ($)
Annual salary	$ 65,000
Add: payroll tax paid by Trent inc.	$ 4,973
( $ 65,000 * 7.65 % )
	$ 69,973
less: marginal income tax	($ 14,694)
( $ 69,973 * 21 % )
Employee annual cost after tax	$ 55,279
cost of independent contractor :
Annual fee	$ 72,000
less: marginal income tax	( $ 15,120 )
( $ 72,000 * 21 % )
independent contractor cost after tax	$ 56,800
Trent inc. should hire the employee because employee
annual cost after tax ($ 55,279 ) is less than independent
contractor cost after tax ($ 56,800 )