Vernon Inc. needs an additional worker on a multi-year project. Vernon could either hire an employee for a $72,000 annual salary or engage an independent contractor for a $75,000 annual fee. If Vernon's marginal income tax rate is 21%, which option minimizes the after-tax cost of obtaining the worker?
What will be an ideal response?
The independent contractor option is the most cost effective. Payroll tax for the employee would be $5,508 = $72,000 × 7.65%. After-tax cost of employee = $61,231 = [($72,000 + $5,508) × (1 ? 21%)]. After-tax cost of independent contractor = $59,250 = $75,000 × (1 ? 21%).
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Fill in the blank(s) with the appropriate word(s).
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