It’s the time of year when employers are thinking of creative ways to thank employees and provide a bit of holiday cheer. The gift you choose, however, could have tax consequences for employees, which may not be a welcome prize from their perspective.
For tax purposes, the key question is whether the gift will be considered a “de minimis fringe benefit.” If so, the gift will not be included in employees’ income, meaning they won’t pay taxes for it.
What Is a De Minimis Fringe Benefit?
A de minimis fringe benefit is so small that accounting for it is unreasonable or impractical. A key element is that it’s “occasional” or “unusual” in frequency. The IRS regulations set forth several examples:
- Occasional cocktail parties, group meals, or picnics for employees and their guests;
- Traditional birthday or holiday gifts of property (not cash) with a low fair-market value;
- Occasional theater or sporting event tickets;
- Coffee, doughnuts, and soft drinks;
- Local telephone calls; and
- Flowers, fruit, books, or similar property provided to employees under special circumstances (e.g., after an illness, outstanding performance, or family crisis).
Gifts that are considered “cash equivalent fringe benefits,” such as gift certificates or gift cards, aren’t excludable from income even if the same property or service provided in kind would be excluded as a de minimis fringe benefit. That is because it isn’t difficult to account for gifts in which the exact cash value is ascertainable. Below are two examples.
Gifting a Turkey
As an HR manager, you’re trying to determine whether to give each employee a turkey or a $20 gift card to a local grocery store specifically earmarked for the purchase of a turkey. A $20 gift card to a grocery store, even if it is earmarked as being for a “turkey,” will not qualify as a de minimis fringe benefit. The card must be included in the employee’s income and will be taxed.
If you distributed an actual turkey to each employee at the holidays, however, it would be considered a fringe benefit and wouldn’t be taxable to the employee.
Similarly, a gift card or gift certificate for use at a restaurant, a megastore, a movie theater, or any other retailer for a specific cash amount will not qualify as a de minimis fringe benefit and will be taxable to the employee.
For example, if you give a gift card of $20 and the employee pays $4 in tax, the net gift is actually $16. If you opt to provide a gift card, remember that the actual value will not be the face value because you must take into consideration the tax paid by the employee.
To thank employees for their impressive performance throughout the year, you decide to throw a year-end celebration consisting of an employee appreciation lunch catered by a local pizza place. The lunch consists of salad, pizza, cookies, and soda.
The celebration is held once a year if employees meet the performance goals set at the beginning of the year. Because the pizza lunch is held on only an occasional basis (in this example, once a year) and it would be unreasonable or impractical to account for each attendee’s meal, the benefit is considered a de minimis fringe benefit.
As you experience this season of giving, remember that gifts to your employees can generate taxable income for them if the gifts don’t qualify as de minimis fringe benefits. Also recognize that if you provide a gift consisting of a cash-equivalent fringe benefit, you will need to report it as income. The spirit of giving is a wonderful thing so long as you properly account for it.