Respond to the following in a minimum of 175 words:
Explain the tax implications of compensation in the form of salary and wages from the perspectives of the employee and employer.
Answer-
Discuss and explain the tax implications of compensation in the form of salary and wages from the employee’s and employer’s perspectives.
? Employees are taxed on salary at ordinary income rates.
? Employees use Form W-4 to supply their employer with withholding information. Employees can use the W-4 to manage withholding throughout the year because withholding is treated as though it is withheld evenly throughout the year for estimated tax purposes.
? Cash-method employers deduct wages when paid. Accrual-method employers deduct wages when accrued as long as the wages are paid within 2.5 months of year-end. If paid after 2.5 months of year-end, wages are deductible when the employee recognizes the income (when paid). When an employer accrues wages to a related-party employee (more than 50 percent ownership), the wages are not deductible until the employee recognizes the income (when paid).
? Employer's’ after-tax cost of wages is the cost of the wages minus the tax benefit of the deduction for the wages.
? For publicly traded corporations, the tax deduction for nonperformance-based compensation paid to the CEO and the three other most highly compensated officers, not including the CFO, is limited to $1,000,000 per year per individual.
2. Describe and distinguish the tax implications of various forms of equity-based compensation from the employee’s and employer’s perspectives.
? Stock options and restricted stock are common forms of equity-based compensation. Although both reward employees for increases in the stock price of their employers, there are fundamental economic differences between them.
?Stock options are treated as either non-qualified or incentive stock options for tax purposes.
? Employees recognize ordinary income equal to the bargain element on NQOs when they are exercised. Employers are able to deduct the bargain element when NQOs are exercised. Any appreciation in the value of shares subsequent to the exercise of NQO’s is treated as capital gain by employees when the shares are sold.
? If certain holding period requirements are met, employees exercising ISOs don’t recognize any income until the shares received from the exercised options are sold. When the shares are sold, the difference between the exercise price and the share price is long-term capital gain (assuming appreciation). Employers are not permitted a deduction for ISOs.
? Generally, employees prefer ISOs and employers prefer NQOs because of differences in the way the two types of options are taxed.
? Employers treat stock options differently for book and tax purposes.
? Employees recognize ordinary income from restricted stock equal to the fair market value of the stock on the vesting date. Employers receive a corresponding tax deduction.
? Employees may elect to recognize taxable income from restricted stock on the date it is received rather than on the vesting date if they make an §83(b) election. Although this election accelerates the recognition of income, it gives the employee the ability to convert ordinary income from further appreciation into a capital gain.
3. Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits.
? Fringe benefits are taxable to the employee unless the Code specifically excludes the benefit from gross income. Taxable fringe benefits are generally luxury perks, such as corporate air travel and security.
? Nontaxable fringe benefits include up to $50,000 of group-term life insurance, health benefits, meals and lodging for the convenience of the employer, educational assistance, dependent care benefits, qualified employee discounts, and qualified transportation benefits (among others).
Respond to the following in a minimum of 175 words: Explain the tax implications of compensation...
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