When less salary becomes more money in your pocket

ITworld.com –

When considering job offers, it's natural to go for more money. This is usually a good idea, but more money doesn't necessarily mean more buying power. More money does, however, almost always mean more taxes. Is it possible for you to actually be better off earning less money?

Erisa Ojimba, salary consultant with Salary.com, said that under some circumstances, more benefits and less salary may be preferable. "Let's say you want your company to pay for your vacation and fly you somewhere. Make sure that your company is not translating that into actual cash value. If they are, you may be penalized. If your company says the trip to Paris is a cash bonus, then you're going to pay more taxes."

Bonuses, trips, company cars, and other perks may be taxable as compensation, but "a lot depends on your individual situation in life," said CPA Richard Rammer of Santa Cruz, Calif. In particular, "Flex-Care" plans deal with two major issues: medical and childcare. Your employer can easily set up a Flex-Care plan, and can often benefit from doing so. An employer could, for example, offer you either a $5,000 raise or a $5,000 Flex-Care program. The Flex-Care program actually works out better for your bottom-line spending power, since it's tax-free. "If you use that $5,000 on child care, you don't pay taxes," says Rammer. "For young families or individuals who have children to deal with in terms of day care issues, those fringe benefits are worth their weight in gold. They come right off the top at the highest marginal tax bracket, and the employer doesn't have to pay social security or unemployment taxes on the money."

Stock options not always worthwhile

However, taking stock options instead of a higher salary isn't always a good idea. But accepting less money in exchange for equity may be an acceptable risk, if you think the company has great potential. In the early days of Microsoft, Bill Gates handed out stock instead of raises because the company was cash-poor. In so doing, he created thousands of "Microsoft millionaires" who stuck with the company because of its potential.

But even if the stock options have real value, there are serious tax considerations. "Typically, a lot of people have found, to their chagrin, that while these things seem like they're a pot of gold, in many cases they're not," said Rammer. "They have been very severely hit by the alternative minimum tax." (When stock options are exercised, it results in more income tax.)

An informal survey of IT firms revealed a number of trends in employee compensation. First of all, companies are still offering plenty of intangible benefits, such as flextime and concierge services, but nobody expects these to replace hard cash and bankable benefits.

"Employers who do matching grants for 401Ks or match to a certain dollar amount will have a much greater impact on the wealth creation for families than do those incentive stock options and other pie-in-the-sky things that may or may not work," said Rammer. In sum, Rammer advises: "Stick to the benefits that have a substantial current savings for you, and stick to things that will put your earnings outside of present taxation -- such as 401Ks and Roth IRAs."

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