Question: If we create an employee recognition program that awards points to employees that can be used to purchase company-branded items from an online store, does the value of the items “purchased” by the employees have to be added to their gross income for tax purposes?
Answer from the experts at HR.BLR.com: Noncash employee recognition awards are considered fringe benefits that generally should be treated as taxable income to the employee unless they meet the de minimis standard for exclusion because the award is of such a small value that accounting for it is administratively impracticable. See 26 U.S.C. sec. 132(e).
De minimis benefits are those that are “so small as to make accounting for [them] unreasonable or impractical.” For example, “occasional tickets for entertainment events; [certain] holiday gifts; flowers, fruit, books, etc., provided under special circumstances, etc.”
The IRS has ruled that items with a value exceeding $100 cannot be considered de minimis. Additionally, cash and cash equivalent gifts/prizes (such as gift certificates) cannot be considered de minimis or excluded from income because there is no difficulty in accounting for such prizes.
So the tax treatment of the company-branded items would depend on the items offered, their value, and the ease with which that value could be included in income.
For example, if points can be redeemed for an item that serves as a cash equivalent – a $25 Amazon.com gift card or a Visa cash card – this would always be taxable regardless of the amount because there is no difficulty in accounting for the monetary value of the gift.
However, if points can only be redeemed for gifts with a less obvious cash value – such as a company-branded travel mug – this would not be taxable as long as the value did not exceed $100.
For more information, the IRS provides a very detailed and helpful guide to these fringe benefits at this link.
Because of the fact specific nature of tax issues such as these, for additional guidance we recommend consultation with a tax expert on this matter.