With the holiday season officially upon us, the Dollars and Sense team wants to make sure you maximize your giving and gifting! For so many businesses, and business owners, this time of year also means employer festivities, and gifting, are about to be in full swing.
For business relationships, there is a tax upside: customer, client, and employee holiday gifts can be a win-win, bringing the holiday spirit to the recipient and a potential tax deduction to the business. A de minimis fringe benefit is so small that accounting for it is unreasonable or impractical. Per the IRS, a key element is that it’s “occasional” or “unusual” in frequency. Treasury Regulations and Internal Revenue Code section 132(a)(4) set forth these definitions and examples to include items which are not specifically excluded under other sections of the Code, such as:
- Occasional snacks, coffee, doughnuts, etc.
- Occasional tickets for entertainment events
- Holiday gifts
- Occasional meal money or transportation expense for working overtime
- Flowers, fruit, books, etc., provided under special circumstances
Whether an item or service is de minimis depends on all the facts and circumstances. In addition, if a benefit is too large to be considered de minimis, the entire value of the benefit is taxable to the employee, not just the excess over a designated de minimis amount. While there is no firm threshold on the level that constitutes at or above “de minimis” per se, the IRS has previously ruled that items with a value exceeding $100 could not be considered de minimis, even under unusual circumstances. Therefore, most employers keep their holiday gift values under $100.
If a benefit qualifies for exclusion, no reporting is necessary, as they are truly considered to be de minimis. If a benefit is taxable, it should be included in wages on the employee’s Form W-2 and subject to income tax withholding. If the employees are covered for Social Security and Medicare, the value of those benefits are also subject to withholding for these taxes.
Cash, or cash-equivalent gifts, however, are almost always per se taxable and not excludable as a fringe benefit, regardless of their face value or amount. So, rather than a gift card towards a turkey or ham this holiday, which can be taxable to your employees, consider distributing an actual turkey or ham that would qualify instead as a fringe benefit. This allows the employer the deduction, and isn’t a gift coupled with a tax hit for the employee. Plus, isn’t it more fun to see a group of employees holding actual turkeys than gift cards.
Similarly, a holiday or year-end event for rewarding employees for their performance throughout the year can also qualify as a fringe benefit. If it coincides with the holidays, or the new year, or even a particular fiscal period, the celebration could be considered an occasional event, making it unreasonable or impractical to account for each person’s meal and beverage. Thus, this benefit is also typically considered a de minimis fringe benefit.
As you plan ahead for this season of giving, it’s important to keep in mind what gifts to your employees can generate taxable income and what gifts qualify as a de minimis fringe benefit. Be generous, but also be tax savvy.