You are currently trying to decide between two job offers. In both cases you would be considered
Question:
You are currently trying to decide between two job offers. In both cases you would be considered an employee of the company. The first offer, from Glen Corporation, includes a starting salary of $55,000 and health insurance (premiums paid 100% by Glen). The second offer is from Coco Corporation. They are willing to negotiate salary with you, but they do not provide health insurance. You definitely want health insurance so you researched purchasing a policy on your own and found that insurance similar to the policy provided by Glen would cost you $8,700 per year. Assume you are not married, have no dependents, and use the standard deduction. Base your calculations on 2021 tax rules/rates.
1a. How much would Coco need to pay you in salary in order for you to be indifferent between the two job offers (i.e., the two job offers would provide you with the same net cash flow after accounting for all relevant expenses)?
1b. What is the difference in salaries at this indifference point?
2a. Now assume that Glen is offering you a starting salary of $170,000 (plus the same health insurance mentioned in Part 1). How much would Coco need to pay you in salary in order for you to be indifferent between the two job offers?
2b. What is the difference in salaries at this indifference point?
2c. Why is the salary difference in 2b different than the amount in 1b?
In determining your answers for Part 3:
Assume all expenses related to employee compensation paid for by the corporation are deductible in calculating corporate taxable income (i.e., the corporation will lower its taxable income by the amount of its financial burden/its cash expended for these expenses). • Note that the corporate income tax is calculated by multiplying corporate taxable income times a flat rate of 21% (no progressive tax rate schedule).
3a. What is Glen’s total after-tax cost of the health insurance? (Assume Glen would also pay $8,700 in health insurance premiums.)
3b. What is Coco’s total after-tax cost of the additional salary calculated in part 1b?
3c. Assume a given firm was offering you two compensation options: either (1) $55,000 salary plus health insurance premiums, or (2) the salary amount you calculated in 1a. Based on your answers to 3a and 3b, which option would the firm prefer you choose?
