Let’s say you’re given a choice of two identical jobs. The first job pays $100,000 annually in bi-weekly installments. The second job pays $90,000 annually in bi-weekly installments, but will give you an additional $10,000 lump sum payment when you accept their offer. All else being equal (and assuming that, after one year, both jobs will pay the same annual amount), is either of these offers clearly better than the other?
How would I go about finding out, for example, whether it makes more sense tax-wise (or in any other respect) to accept the first rather than the second, or vice-versa? What questions should I be asking?
Find out how they are reported on the W-2 you’d receive at the end of the year. If they are both treated as income, you’d see the same amount - $100K - in the Income window on the W-2 - so they’d be treated exactly the same.
If the $10K up front is treated differently on the W-2, it may be subjected to a different tax rate.
It is entirely appropriate and in fact expected that you ask very specific, detailed questions about these types of issues with each company - ask to speak to someone in HR and make sure you are comfortable with what you hear - keep asking and get it spelled out on paper if you are slightly unsure. And even if you’re not.
Any potential employer who won’t invest the time necessary to ensure your comfort with these issues isn’t worth talking to. I am not saying that your potential employers are like that, I am merely trying to frame how comfortable you should feel inquiring.
In terms of the actual money received, both will ultimately pay exactly the same amount. Here are some factors that I think may impact the decision.
First of all, what are you going to do with the $10,000 signing bonus? Blow it all on booze and wild women? Invest it in an IRA or CD? Put it in your checking account and draw it out over the year to pay bills? By taking the $10,000 up front, you are significantly reducing the size of your paycheck for the rest of the year. If you can live on the smaller check, and invest the bonus wisely, this may be a good thing.
Another factor that comes into play with most computerized payroll systems is that a large one-time bonus will have income tax withheld at a much higher rate than if the same money were paid out over the course of the year. However, this will all come out in the wash when you file your tax return on April 15th (or sooner) and get the excess withholding back.
Every starting bonus I’ve gotten was just income on the W-2, so there’s no difference in taxes (other than the withholding that FatBaldGuy mentioned).
I strongly question your assumption that the salaries would be the same a year later though. If this is a real case, not a hypothetical, I’d get that in writing, with a penalty if they don’t comply.
May not be an issue if you have a good job and/or decent savings. But for a lot of people I know looking for that first “real” or professional job, that signing bonus would have a lot of appeal as a way to help pay for a professional wardrobe, the deposit on an apartment, maybe the deposit on a new car, or various other reasonable expenses which make having a chunk of your paycheck upfront desirable.
They are similar enough that I would take the job where I think I’d be happier. (you say “identical jobs” but of course in real life there is no such thing)
At the end of year one company one gives you a 3% raise and you make $103,000.
Company 2 needs to give you over a 14% raise to match that - not unheard of, but really unlikely.
Generally money in the hand today is worth more than money in your hand tomorrow, though. So if this is hypothetical, you want the $10k up front. In the real world, go for the higher paycheck.
Also find out if the 10,000 bonus is counted as part of your base salary when it comes time to calculate raises. If you get a 5% raise every year going forward, but one job is calculating it based on 90k and the other is calculating it on 100k, it doesn’t take long for that to become a big difference.
ETA I should have previewed. Other people got this thought out there faster than I did. Still a good point to consider though.
Thanks; I’ll check this out and see what they say.
This is much appreciated as well. I always feel a little dicey asking money questions like this.
FatBaldGuy:
Yours was excellent advice, too. As Eureka cogently suggested, I would probably use it to move to a better apartment (something I’ll do at some point anyway), as I’d be able to pay the higher rents now rather than when I started.
muldoonthief:
Dangerosa:
taxi78cab:
This skepticism is fair. I guess it’s not giving too much of the non-hypothetical situation away to say that, in this instance, Company 1 and Company 2 are the same company. The choice is between bringing me in with X responsibility and a somewhat steep learning curve at the straight annual salary of Y the first year, or slightly-less-than-X responsibility and a somewhat less steep learning curve at the annual salary+upfront bonus totalling Y the first year. The salary of Y is one paygrade above the salary of Y-minus-bonus. They say that if I demonstrate the first year that I can handle the job (which shouldn’t be a problem), they’ll bump me up to the higher paygrade the second year and beyond. If any of that makes sense. The likelihood of my being kept on the lesser paygrade after the first year isn’t zero, but I think it’s pretty low.
Rigamarole:
These are sage words. I suspect I’d be happier, if only slightly so, with a bit less pressure and responsibility at the outset. The skills I have are fairly well suited to this job, but not perfectly so, and it would be nice to have a bit of time to acclimate. (For that reason, if I was absolutely guaranteed the additional bump after the first year, I think this would be a much easier decision.)
I have another perspective on this. If you are looking to get a company match on your 401k contributions, and you can’t get it set up in time for your first pay check, you will probably lose that match on the 10k. It may not be a big deal, but worth considering.
Clearly, from just a value standpoint, this is an easy question. . .10K now, and 90K over the rest of the year is worth more than 100K over the rest of the year.
That’s the whole point of “present value” and “future value” of money.
Tax-wise, you’re going to wind up with the same amount taken out. It’s all income.
However, I have seen problems like that before. Image if instead of 10+90, they would give you the whole 100 right up front.
If that gets submitted to the IRS with a statement that says you’re a bi-weekly employee, they might think you’re going to make 2.6Million next year, and take 40% your paycheck, instead of 30%.
At the end of the year, it will be made up to you, but that will affect the present-value calculation. Either way, It’s only going to amount to a couple hundred bucks probably.
My experience with this is that the chances of that bump happening are significantly less than they would have you believe. I’ve seen this play out, and I’ve seen that bump actually occur once. Usually, there is some “good reason” why that bump can’t happen - “times are tougher than we expected” - “corporate capped salary increases this year” - “corporate capped promotions” - “we restructured” - there are a gazillion reasons that corporations back out of this deal - usually pissing the hell out of the hiring manager who really was well intentioned and thought this would work when he made the deal - and now discovers that promoting someone is as difficult as getting the headcount in the first place.
If you can demonstrate the ability to do the higher paying job, take it and do the steep learning curve. While $10,000 now is better than $10,000 over the course of a year, a $100,000 salary now is better than a $100,000 promised a year from now. Bird in the hand…
Take the higher job. Otherwise they’ll never, ever bump you up. Been there, taken it up the ass (and I’m not particularly into anal sex as far as I can tell). I was doing a level 9-12 job at level 7 pay, the immediate supervisor who’d inherited me from another thought I was level 11 based on level of responsibility. Since she wasn’t my boss officially, HR wouldn’t listen to her. My level 7 was due to having been promoted from a level 5 job (company policy forbids jumping people more than 2 levels); shortly after I’d been hired, someone had decided that people in that team could not go up in levels.
Take the higher job. The learning curve will actually be the same, it’s only different on paper.