Resident Tax Information
The tax brackets play an important role for an employee so they understand how much of deductions can be expected from the employer thereby allowing them to understand the amount that finally they can expect in-hand.
401(k)
A 401(k) plan is a retirement savings fund offered by numerous American organizations which gives many tax benefits to the employee. Any professional working for a company, who signs up for a 401(k), agrees to the deduction of a fixed amount from their paycheck, which goes directly to an investment account. The employer can match the amount, or a part of it, while the employee can select from a number of investment options.
There are four types of 401(k)s:
Traditional
The amount is deducted from the gross income, before the income tax is levied. As a result, the taxable income is reduced but there are no remaining dues on the money contributed, until the employee withdraws the money. The employee must pass the Actual
Deferral Percentage (ADP) and Actual COntribution Percentage (ACP) tests to retain a traditional 401(k) plan.
Safe harbor
This plan automatically passes the ADP and ACP tests each year. These plans are popular amongst small businesses; however, they must contribute a certain amount to the plan regardless of the employee’s job title, duration of service or compensation.
Simple
The best plan for small businesses or self-employed professionals having 100 or fewer employees. In this plan too, the employee does not have to perform non-discrimination tests. However, they cannot receive the benefits of other employer-sponsored retirement plans and the contributions cannot be canceled once released.
Roth
The amount is deducted from the post-income tax paycheck, so the employee does not have to pay any additional tax while withdrawing the amount at a later stage. However, very few employers offer a Roth 401(k) account.
Contribution Limit
Fringe Benefits
Fringe benefits are additional benefits which companies offer their employees in the form of financial compensation or commodities. Such benefits are either awarded for covering the employee’s cost related to work and sometimes to generate job satisfaction. The motive of fringe benefits is to hire and motivate high performing employees.
Common fringe benefits include:
- Health insurance
- Life insurance
- Tuition assistance
- Cafeteria subsidies
- Below-market loans
- Childcare reimbursement
- Employee discounts
- Employee stock options
- Company-owned vehicle
- Vacations
- Discount on properties
- Commercial flight tickets
- Membership to social clubs
- Tickets to entertainment or sporting events
- Worker’s compensation
- Retirement plans
While the aforementioned fringe benefits are taxable, depending on their fair market value, there are few such benefits which are exempt from tax according to the IRS. Following are the fringe benefits for which employees do not have to pay any tax:
- Adoption assistance
- Athletic facilities
- De minimis benefits (small perks like free coffee)
- Educational assistance
- Employee discounts
- Achievement awards
- Dependent care assistance
- Accident and health benefits
- Employee stock options
- Employer-provided cell phones
- Group-term life insurance coverage
Exempt Benefits
Depending on their fair market value, there are few benefits which are exempt from tax according to the IRS:
- Accident and health benefits
- Adoption assistance
- Educational assistance
- De minimis benefits
(small perks like free coffee)
- Employee stock options
- Group-term life
insurance coverage
- Achievement awards
- Athletic facilities
- Employee discounts
- Dependent care assistance
- Employer-provided cell phones
Long-term Incentives
Long-term incentives are the largest component of a senior-level employee’s pay. Over the years, the scale increased by 4.1% while short-term incentives have decreased by 5.3%. Long-term benefits are offered to executives as at this position, their compensations may be too massive to be offered in cash. Thus they are offered in the form of stocks and equity.
The logic behind offering equity compensation is that a portion of the executive’s overall pay is aligned with the value of the company. If considering equity compensation, the existing owners must be willing to share ownership.
Common forms of equity-based incentives include:
- Company stock
- Stock bonus and employee stock purchase plans
- Profits interest and capital interests (in partnerships)
- Stock options (incentive and non-qualified)
- Phantom stock
- Restricted stock
- Stock appreciation rights
Long-term incentives (LTI) are of three types
Appreciation-based
Value is calculated as per the increase in a company’s underlying value, which is reflected
in share prices in case of a listed company. The employee will receive the difference between the company’s underlying value at some point in the future and the same value when the stock options are allocated.
Stock-based
Value is received by the employee in the form of company stocks. However, the final payout may depend on the employee performance. Some companies also grant “phantom shares”, which trace the movement of the underlying value but pay out in cash
Cash-based
Value is delivered in cash payments, without any relations whatsoever to performance of shares. The cash payment is received strictly on a performance basis.
Often long-term incentives are given after obtaining the approval of the board
.svg)
