With the holiday season approaching employers may desire to reward their employees with a little something extra in their stockings also referred to as a fringe benefit. Consideration for the reward should be taken as in most cases it will result in taxable compensation to the employee unless an exception applies.
By default, any fringe benefit provided to employees is taxable and must be included in the employee’s pay unless the law specifically excludes it. One exclusion is referred to as De Minimis (Minimal) Benefit. A de minimis benefit is any property or service provided to an employee that has little value (considering how frequently the employer provides similar benefits to the employees) and that accounting for it would be unreasonable or administratively impracticable. Cash and cash equivalent fringe benefits (for example, gift certificates, gift cards, and the use of a charge card or credit card), no matter how little, are never excludable as a de minimis benefit.
Some examples of de minimis benefits include:
- Personal use of an employer-provided cell phone provided primarily for noncompensatory business purposes.
- Holiday or birthday gifts, other than cash, with a low fair market value (aka the holiday ham).
- Occasional parties or picnics for employees and their guests.
- Occasional tickets for theater or sporting events.
Employee John received a bottle of wine. Employee Jane received an Amazon gift card. Both are of equal value, but John’s wine will not be taxable compensation because the wine is de minimis in value and does not occur frequently (only around the holidays). Jane on the other hand will have the value of the Amazon gift card included on her W-2 because gift cards are a cash equivalent and are redeemable for general merchandise. However, if Jane received a gift certificate for a free coffee at Starbucks, then it would not be taxable compensation because the gift certificate is for a specific item of general merchandise.
As they say, no good deed goes unpunished. It is important for employers to understand the income impact on their employees when providing fringe benefits.