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Exam 12: Compensation

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Question 1

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Lina, a single taxpayer with a 35 percent marginal tax rate, desires health insurance. The health insurance would cost Lina $8,000 to purchase if she pays for it herself (Lina's AGI is too high to receive any tax deduction for the insurance as a medical expense). Because of group discounts, her employer can purchase the insurance for $6,000. Lina's employer has a 21 percent marginal tax rate. What would be the after-tax cost to Lina's employer to provide her with health insurance?

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$4,740.
$6...

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Question 2

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The use of restricted stock is increasing relative to the use of stock options.

A) True
B) False

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Question 3

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Which of the following regarding the Form W-4 is incorrect?

On Form W-4, an employee can change their withholding through claiming dependents, other adjustments for non-wage income or deductions, and choosing extra withholding.

Flexible spending accounts allow employees to set aside before-tax dollars for medical and dependent care expenses.

Which of the following is not an example of a taxable fringe benefit?

Fringe benefits are generally a form of noncash compensation.

Up to $5,250 of educational benefits can be excluded from an employee's compensation.

Employers computing taxable income receive a deduction for reasonable salary and wages paid to employees.

An employer always receives a deduction for total compensation paid to a CEO.

Which of the following is true regarding stock options?

Tanya's employer offers a cafeteria plan that allows employees to choose among a number of benefits. Each employee is allowed $6,000 in benefits. For 2020, Tanya selected $3,480 ($290 per month) of parking, $1,720 in 401(k) contributions, and $800 of cash. How much must Tanya include in taxable income?

Bonnie's employer provides her with an annual dinner club membership costing $5,000. Her marginal tax rate is 24 percent. Her employer has a marginal tax rate of 21 percent. What is Bonnie's after-tax benefit?

Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share. Rick's restricted shares vested three years later, when the market price was $12. Rick held the shares for a little more than a year and sold them when the market price was $15. What is the amount of Rick's gain on the sale of the stock? Assuming a marginal tax rate of 37 percent, what is Rick's tax on the sale of the stock?

Leesburg paid its employee $218,000 of compensation for the year. What is the after-tax cost of paying the salary assuming a 21 percent marginal tax rate (ignore payroll taxes)?

Brandy graduated from Vanderbilt with her bachelor's degree recently. She works for Walton & Company CPAs. The firm pays her tuition ($8,000 per year)for her so that she can receive her MBA. How much of the $8,000 tuition benefit does Brandy need to include in her income?

Kevin is the financial manager of Levingston BMW. The shop allows employees to purchase up to two vehiclesper year at a discount. Levingston's average gross profit percentage is 15 percent. This year Kevin purchased a 530 model and a new M3. What amount must Kevin include in income?

Health insurance is an example of a nontaxable fringe benefit.

A section 83(i)election freezes the value of restricted stock for compensation purposes on the vesting date.

Rachel receives employer-provided health insurance. The employer's cost of the health insurance is $5,700 annually. What is her employer's after-tax cost of providing the health insurance, assuming that the employer's marginal tax rate is 21 percent andthe employer is profitable?