Sessions9and10-.pdfVIP

Objectives – Sessions 9 and 10 ? Tax Planning Executive Compensation ? Taxation of various forms of compensation ? Multilateral planning perspective (both employee and employer costs are important) ? Incentive stock options (ISOs) ? Non-qualified stock options (NQSOs) ? Other issues 15.518 Fall 2002 Sessions 9 and 10 What is an employee? ? Classification of a worker as an employee: ? Employer subject to payroll taxes (i.e., Social Security, Unemployment) ? Employee subject to regular Social Security tax rather than higher self employment tax ? Employee unreimbursed business expenses are deductible only as itemized deductions and subject to a limitation ? Classification of a worker as an independentcontractor: ? Employer pays no payroll taxes ? Worker subject to self employment tax ? Workers business expenses are always deductible ? IRS does not allow taxpayers to choose whether they are employees, classification is based on strict rules about the relationship between the employer and the employee (e.g., can the employer tell the employee how to do his or her job?) 15.518 Fall 2002 Sessions 9 and 10 Taxation of Various Forms of Compensation ? Current Salary ? Employee - taxable as currently paid ? Employer - deductions as currently paid ? Qualified deferred compensation (e.g., pensions) ? Employee - taxable when received in the future ? Employer - deductions received now 15.518 Fall 2002 Sessions 9 and 10 Taxation of Various Forms of Compensation ? Nonqualified deferred compensation ? Employee - taxable when received in the future ? Employer - deductions received in the future ? Fringe benefits ? Employee - never taxable ? Employer - deductions received now ? Stock options (discussed later) 15.518 Fall 2002 Sessions 9 and 10 Which Form of Compensation is Optimal? ? The optimal form of compensation can’t be determined without knowing the following: ? The current and expected future marginal tax rates of the employee ? The current and expected future marginal tax rat