Hunter is a single 45-year-old who is employed by an engineering firm that includes a diverse array of taxable and nontaxable fringe benefits within the overall compensation package it offers its employees. Employees receive a base salary in addition to occasional incentive awards (i.e. bonuses); the incentive awards are often in the form of noncash perks. The company also offers different forms of equity-based compensation to reward its highest performing employees.
Hunter does not itemize deductions, and he does not have any available tax credits or estimated tax payments. His employer withheld $23,668 from his paychecks for income tax withholding.
Hunter’s base salary for calendar-year 2018 was $101,350. He embarked on an all-expenses-paid 5-day Caribbean cruise in April 2018, which he received from his employer in lieu of a cash bonus. The cruise and related travel expenses would have cost Hunter $4,025 if had paid for the trip out-of-pocket. His employer agreed to give Hunter an extra $1,375 in cash to cover his tax liability on the value of the cruise (referred to as a “tax gross-up”). Tax gross-up payments are included on an employee’s paycheck as ordinary wages subject to income and payroll taxes.
Hunter also took advantage of the following pre-tax payroll deductions:
- Annual employee contribution to employer’s 401(k) qualified plan = 6% * $101,350 base salary = $6,081/year (his employer provides a 75% match as well, i.e. $4,560.75/year)
- Annual employee contribution to a flexible spending account (“FSA”) = $2,400/year
- Annual employee contribution to health insurance plan = $1,440/year
A summary of the above-mentioned compensation details is provided in the following table:
|
Description |
2018 Amount |
|
Base salary |
$101,350 |
|
Non-cash incentive award – all-expenses-paid cruise vacation |
$4,025 |
|
Tax gross-up for the non-cash incentive award |
$1,375 |
|
Payroll deduction – Employee 401(k) contributions |
$6,081 |
|
Payroll deduction – Employee FSA contributions |
$2,400 |
|
Payroll deduction – Employee portion of insurance premiums |
$1,440 |
|
Income taxes withheld from paychecks |
$23,668 |
Hunter is a highly-valued engineer at the company and thus has been rewarded quite handsomely the past few years with several equity-based compensation awards. In 2018 Hunter decided to sell 4,360 shares of stock that he received pursuant to the terms of these awards.
|
Type of Equity Award |
Section 83(b) Election? |
Number of Options/Shares Granted |
Grant Date |
FMV/share @ Grant (Exercise Price) |
Vest Date |
FMV/Share @ Vest |
Exercise Date |
FMV/Share @ Exercise |
Number of Shares Sold |
Sale Date |
Sales Proceeds per Share |
|
Restricted Stock |
Yes |
610 shares |
1/1/2016 |
$9.50 |
1/1/2018 |
$11.75 |
610 |
5/1/2018 |
$17.50 |
||
|
Restricted Stock |
No |
950 shares |
1/1/2017 |
$11.30 |
1/1/2018 |
$11.75 |
950 |
5/1/2018 |
$17.50 |
||
|
Restricted Stock |
Yes |
1,225 shares |
1/1/2018 |
$11.75 |
1/1/2019 |
$10.90 |
|||||
|
Nonqualified Stock Options |
100 options – 7 shares per option |
1/1/2016 |
$9.50 |
1/1/2017 |
$11.30 |
1/1/2017 |
$11.30 |
700 |
5/1/2018 |
$17.50 |
|
|
Nonqualified Stock Options |
200 options – 7 shares per option |
1/1/2017 |
$11.30 |
1/1/2018 |
$11.75 |
1/1/2018 |
$11.75 |
1,400 |
5/1/2018 |
$17.50 |
|
|
Incentive Stock Options |
100 options – 7 shares per option |
1/1/2016 |
$9.50 |
1/1/2017 |
$11.30 |
1/1/2017 |
$11.30 |
700 |
5/1/2018 |
$17.50 |
|
|
Incentive Stock Options |
200 options – 7 shares per option |
1/1/2017 |
$11.30 |
1/1/2018 |
$11.75 |
1/1/2018 |
$11.75 |
(See excel spreadsheet for chart above)
In addition to his base salary, incentive award and equity-based compensation, Hunter also received the following taxable AND non-taxable fringe benefits from his employer during 2018:
|
Fringe Benefit |
Description |
Company’s Annual Cost |
Hunter’s Annual Cost |
|
Health insurance |
The company offers health insurance* to all employees. The monthly premium for each employee is $300, of which the company pays 60% and the employee pays 40% via a pre-tax payroll deduction. *Hunter elected to receive health insurance coverage for 2018. |
$2,160/year |
$1,440/year |
|
Accidental death and dismemberment (“AD&D”) insurance |
The company provides AD&D insurance to all employees, free-of-charge. |
$180/year |
$0 |
|
Fitness facility membership |
The company offers a fitness facility membership* to all employees, free-of-charge. The fitness facility is not located on the company’s business premises and is open to the general public. *Hunter elected to receive a membership in the fitness facility for 2018. |
$816/year |
$0 |
|
Employer-provided cell phone |
The company provides all engineers with a company phone, due to frequent after-hours client calls as well as the significant number of clients residing outside of the United States. Employees are not allowed to use their company phone to make personal calls. |
$444/year |
$0 |
|
Basic group-term life insurance policy |
The company provides group-term life insurance ($50,000 policy) to all employees, free-of-charge. |
$90/year |
$0 |
|
Supplemental group-term life insurance policy |
The company offers supplemental group-term life insurance* to all employees. The supplemental life insurance coverage employees can elect is capped at 8 times their base salary or $500,000, whichever is lower. *Hunter elected to receive the maximum allowable $500,000 in supplemental life insurance for 2018. |
$900/year |
$240/year |
|
Employer-provided meals |
The company provides catered lunches to all employees on Mondays and Wednesdays, free-of-charge. The meals are furnished for the convenience of the company and are provided on the company’s business premises. |
$1,352/year |
$0 |
|
Qualified parking |
The company provides qualified parking access at a parking garage located on the company’s business premises to all employees, free-of-charge. |
$3,900/year ($325/month) |
$0 |
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