Question

Show transcribed image text

Problem 11-23 (LO. 2) Bluebird, Inc., does not provide its employees with any tax-exempt fringe benefits. The company is considering adopting a hospital and medical benefits insurance plan that will cost approximately $9,000 per employee. To adopt this plan, the company may have to reduce salaries and/or lower future salary increases. Bluebird is in the 25% (combined Federal and state rates) bracket. Bluebird also is responsible for matching the Social Security and Medicare taxes withheld on employees' salaries (at the full 7.65% rate). The hospital and medical benefits insurance plan will not be subject to the Social Security and Medicare taxes, and the company is not eligible for the small business credit for health insurance. The employees generally fall into two marginal tax rate (MTR) groups, specifically: Social Security and Medicare Tax Income Tax Total Marginal Rate 12% 7.65% 19.65% 24% 1.45% 25.45% The company has asked you to assist in its financial planning for the hospital and medical benefits insurance plan by computing the following. a. How much taxable compensation is the equivalent of $9,000 of exempt compensation for each of the two classes of employees? When required, carry out the computations to four decimal places, but round your final answers to the nearest whole dollar. Low (0.12) High (0.24) Before-tax compensation $ b. What is the company's after-tax cost equivalent of $9,000 exempt compensation for each of the two classes of employees? In your computations, round to two decimal places. Round your final answers to the nearest whole dollar. Low (0.12) High (0.24) Employer's after-tax cost of taxable compensation $ c. The company's after-tax cost of the exempt compensation is $

Answer 1

Answert (a) Total compensation for each of the two classes of employees, particulary Low (0.12) High 66.24) Benefity (0) $9000 $9000 Income ton rate | 12% 24% Addi Social Security and Medicare 7.65% 1.45% - Taxes Total marginal tax rate 119.65% 25.45% EMTR (3) 80.35% 74.55%. Before tax compensation $11201 1$12,072 4. Before tax compensation = $ 11,201, $1272 (3) Company's abter tax cost of Tanable compensatiost particulars Low (0.12 high (0.24) Benefity () 9000 $9000 Employery Social Security tax vale (17) 765%. 11.45% Employery social security tax is ixi 688.5 130.5 Hotoy (it iii ) 9130.5 Less: employers tan Benefity (25%) (2422012) (2282.62 Employer's abler torx Colt of $7266 $6848 tosable compensation Low 9688.5 (c) the compeny's after tax cost of exemption": particulars Low High Benefity 9000 9000 Less'. Employers tan benefit (25) (2250) 19250) labter ton compensation $6750 $ 6750