NEW YORK -- A strong economy and low unemployment are giving more employees extra negotiating power when it comes to compensation.
While the idea of higher pay, a company car or relocation to another state may be exciting, workers also should understand the possible tax implications of changing jobs or improving their present positions.
"There are potentially positive and negative tax ramifications," noted Mark Luscombe, principal federal tax analyst at CCH Inc., a tax information firm based in Riverwoods, Ill. "When negotiating new compensation, you may not be taking home as much as you think."
The effect on your tax bracket should be considered, for starters.
If a higher salary pushes you into a higher bracket, you might opt for some tradeoffs. Certain untaxed perks could be substituted for money, such as shorter hours, a flexible schedule, even use of the executive gym.
"If vacation time is important to you, you might consider trading several thousand dollars a year for time off," suggested Luscombe.
Some other tax-free benefits, according to the accounting firm Ernst & Young in its latest "Tax Saver's Guide", include services on which the employer incurs no significant cost by offering them free. Examples include the use of standby tickets for airline employees; qualified employee discounts, provided the discount is less than 20 percent of the price regularly charged customers; working conditions fringe benefits, which include items you're entitled to deduct on a tax return, like business periodicals; and "de minimis fringe benefits," or perks too small in value for an employer to account for, like personal use of a copying machine.
Many perks, though, are considered taxable income and can further add to your tax bill. Among them: employer-provided vehicles for personal use, low-interest loans, club memberships, stock options and bargain purchases of employer's assets.
Of course, the tax obligation can be offset by taking job search deductions on items like unreimbursed travel expenses, relocation costs and search firms fees, provided the position being sought is in the same trade or business.
"It is very important for anyone managing her own career to understand what is the total compensation, what is the value of a medical package ... or the flexible working hours," said Larry Elkin, a certified financial planner and accountant from Hastings-on-Hudson, N.Y.
"Employers more and more ... try to tell employees the value of all the extra perks and benefits we're getting."
Besides taking tradeoffs, employees can choose to defer compensation to lower their tax bills. For instance, a new employee can delay payment of a signing bonus, either to the next year or by dividing it up over several years.
"It's inevitable that at some point, the employee will have to pay taxes on them, but to the extent that he can control when the tax liability will arise and when it must be paid, the better his chance of reducing the overall impact," said Luscombe.
This strategy, however, should be approached cautiously.
"You have no rights to the money in the meantime," Elkin said. "When you defer compensation ... you're making a nonsecured loan of that compensation to your employer. The question is: Are you comfortable with that?"
Timing, too, can be crucial when it comes to income deferment, especially for those relocating to a state with high income taxes.
Elkin gives as an example someone moving from Texas, which has no state income tax, to New York City, where there's a combined state and city tax: If that person collected a lump-sum deferred compensation from the old employer after starting the new job and becoming a resident of New York, the income would be subject to New York tax. But if the money was collected before residency was established -- let's say the individual decided to take a brief vacation in New York before starting work -- the state would have no claim.
Another question regarding deferment is one of the most common issues facing employees when they move to a new job -- what to do with their former tax-deferred, employer-sponsored 401(k) plans.
Three options basically exist: You can keep it where it is, provided you have more than $5,000 in the plan; roll it over into an Individual Retirement Account; or roll it over into the new employer's plan, if permitted.
"Of course, it goes without saying that you should try to make the maximum contribution to your new employer's 401(k) plan. These dollars are pretax contributions and an easy way to lower your adjusted gross income," CCH noted.