BGBC Partners, LLP Tax Update:
De Minimis Fringe Benefits
As a business owner, you know that small perks can go a long way toward building your employees’ morale. So when is a “perk” taxable compensation and when is it just a nontaxable incidental cost of keeping your store a great place to work? We will dive into this issue in this segment of our Tax Update.
The IRS has sought to bring an organized approach to evaluating whether an employee benefit is taxable or nontaxable by creating a special class of nontaxable employee benefits known as “de minimis” fringe benefits.
According to the IRS, a de minimis fringe benefit is one which, considering its value and the frequency with which it is provided, is so small as to make accounting for it unreasonable or impractical. The IRS has not specifically provided a ceiling amount that benefits should not exceed. However, the IRS did rule in a Chief Counsel Advice that items or services exceeding $100 are not considered de minimis fringe benefits.
The key factors that grocers should consider when determining whether or not some of these gifts or “perks” are de minimis would be the value and frequency of the benefits. The IRS states that an essential element of a de minimis benefit is that it is occasional or unusual in frequency. In addition, it cannot be paid compensation to the employees that is actually disguised in the form of a gift or other cash equivalent benefit.
The IRS has stated that the following employee benefits qualify as de minimis benefits:
1) Holiday gifts (not cash) – as noted, the IRS has not specified a dollar value threshold but many employers do not exceed $25-50;
2) Occasional meal money or transportation expense for working overtime;
3) Occasional tickets for entertainment events (again, no threshold provided by the IRS but $25-50 might be considered de minimis);
4) Occasional snacks, coffee, doughnuts, etc
Some of the more common benefits that grocers can provide to their employees are cash or gift certificates. These can be given during special occasions or as rewards for good performance. However, cash or cash equivalent items given by a grocer are never excludable from the employees’ income. An exception to this rule is cash for occasional meal money or transportation when a worker puts in more than the standard amount of hours.
Gift certificates that can be redeemed for general merchandise are usually not considered to be de minimis fringe benefits. However, according to the IRS, if the gift certificate is for a specific item of personal property and is given infrequently and under the right circumstances then it would not be considered taxable.
To elaborate on holiday gifts, grocers do not have to include the value of holding a holiday lunch or dinner for their employees as taxable compensation. In addition, grocers can also give out the traditional holiday turkey, ham, fruit basket, or flowers tax free as long as the goods are of minimal value and the grocer does not hand out holiday gifts regularly throughout the year. However, large value gifts such as TVs and other electronics will not be excludable as de minimis fringe benefits even if they are given out infrequently.
In general, benefits provided by grocers that qualify as de minimis fringe benefits are not required to be reported to the IRS. However, any benefits that are not unusual in nature and are excessive in value must be reported on the employees’ W-2 as part of wages subject to income tax withholding.
As you can see, this area of the tax law has general rules to which application to specific situations can be tricky. For that reason, we recommend that you consult a qualified CPA for clarification as situations arise. This will keep the IRS from ruining your morale as you try to build up the morale of your employees!
BGBC Partners, LLP is a full service certified public accounting and business consulting practice.
For more information, contact Brad Bell, CPA or Steve Reed, CPA/ABV/CFF at BGBC Partners, LLP (317-633-4700).
