Discussion: Tax-exempt Fringe Benefits

45. LO.2, 5 Bluebird, Inc., does not provide its employees with any tax-exempt fringe benefits. The company is considering adopting a hospital and medical ben-

efits insurance plan that will cost approximately $9,000 per employee. To adopt this plan, the company may have to reduce salaries and/or lower future salary increases. Bluebird is in the 35% (combined Federal and state rates) bracket. Bluebird is also responsible for matching the Social Security and Medicare taxes withheld on employees’ salaries (at the full 7.65% rate). The hospital and medical benefits insur- ance plan will not be subject to the Social Security and Medicare taxes, and the com- pany is not eligible for the small business credit for health insurance. The employees generally fall into two marginal tax rate groups:

Income Tax

Social Security and Medicare Tax

Total

.15

.0765

.2265

.35

.0145

.3645

 

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