In this chapter, we look at compensation from both the employee's and employer's perspective. It includes the basic information necessary to design a compensation package that offers tax savings to both.
Employees can significantly increase the after-tax value of compensation by taking some of their compensation as tax-exempt fringe benefits. The cost of tax-exempt fringe benefits is deductible by the employer, even though the value of such benefits is not taxable income to the employee, providing a win-win situation for both employer and employee. To prevent abuse, however, most of the tax-free benefits have significant limitations. An awareness of these limitations is important to maximize the tax savings that can be achieved through the best use of these tax-free fringe benefits.
Stock and stock options are popular compensation tools and are used as incentives to both recruit and retain employees, while requiring no cash outlay by the employer. Stock options offer employees an opportunity to acquire stock at a bargain price and can provide the dual tax advantages of deferring income to a future year ...