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Tax Laws
Tax laws are an obvious part of the legal environment of compensation administration. Anyone who has ever received a paycheck is aware of income-tax withholding. Less obvious, however, is the influence of tax laws on broad-based benefits and executive compensation.
Taxation of benefits
Under the present U.S. Internal Revenue Service code, certain employee benefits are not taxed, and the employer can take a deduction for qualified benefits, such as medical, dental, and 401K retirement plans. Tax treatment of non-executive broad-based benefit programs will generally have preferential treatment when administered on a pre-tax basis.
Taxation of executive compensation
For executives, companies may offer additional plans that have a different set of tax treatments depending on their design and administration. These plans may be introduced, expanded, or eliminated in response to changes in tax laws. Many elements of executive compensation are nonqualified plans that are subject to taxation. For example, stock option offerings have decreased significantly in response to tax law changes. It is important to understand how tax law impacts compensation and benefit programs.
For more information on executive compensation, see DLC Courses:
- 12: IRS Reasonable Executive Compensation
- 18: Intermediate Sanctions
- 20: The Basics of Equity Compensation
- 21: Compensation for Business Leaders and
- 42: Accumulated Earnings and Deferred Compensation
Keeping abreast of the tax treatment and corresponding definitions of different compensation elements is critical.
Memory Jogger
Which of the following benefits is taxed under the present U.S. internal revenue code?