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Lecture Taxation of individuals and business entities 2015 (6/e) - Chapter 12: Compensation

In this chapter students will be able to: Discuss and explain the tax implications of compensation in the form of salary and wages from the employee’s and employer’s perspectives, describe and distinguish the tax implications of various forms of equity-based compensation from the employer’s and employee’s perspectives, compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits. | Chapter 12 Compensation Learning Objectives Discuss and explain the tax implications of compensation in the form of salary and wages from the employee’s and employer’s perspectives Describe and distinguish the tax implications of various forms of equity-based compensation from the employer’s and employee’s perspectives Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Salary and Wages Employee Considerations for Salary and Wages Fixed amount of compensation for the current year no matter how many hours worked Salaried employees eligible for bonuses Employees receiving wages generally get paid by the hour Salary, bonus, and wages taxed as ordinary income They report their wages on page 1, line 7 of the 1040 federal tax return Salary and Wages Withholding Taxes Employees complete a Form W-4 to supply the information the firm needs to withhold the correct amount of tax and also to indicate . | Chapter 12 Compensation Learning Objectives Discuss and explain the tax implications of compensation in the form of salary and wages from the employee’s and employer’s perspectives Describe and distinguish the tax implications of various forms of equity-based compensation from the employer’s and employee’s perspectives Compare and contrast taxable and nontaxable fringe benefits and explain the employee and employer tax consequences associated with fringe benefits Salary and Wages Employee Considerations for Salary and Wages Fixed amount of compensation for the current year no matter how many hours worked Salaried employees eligible for bonuses Employees receiving wages generally get paid by the hour Salary, bonus, and wages taxed as ordinary income They report their wages on page 1, line 7 of the 1040 federal tax return Salary and Wages Withholding Taxes Employees complete a Form W-4 to supply the information the firm needs to withhold the correct amount of tax and also to indicate Whether to withhold at the single rate or at the lower married rate The number of withholding or “personal” allowances the employee chooses to claim Whether the employee wants an additional amount of tax withheld each period above the amount based on the number of allowances claimed Salary and Wages Form W-2 Summarizes an employee’s taxable salary and wages Provides annual federal and state withholding information Generated by employer on an annual basis Form W-4 Supplies an employee’s withholding information to employer Generated by employee Remains constant unless employee makes changes Employer Considerations for Salary and Wages Deductibility of Salary Payments – General Rule Employers computing taxable income under Cash method of accounting generally deduct salary and wages when they pay the employee Accrual method generally deduct wages payable to employees as the employees earn the wages Compensation expense accrued at end of year is deductible in year accrued if paid to an .