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Barb McGuan, CPA

A Small Token of Gratitude: How to account for de minimis fringe benefits

2013-02-13

How big is “small”?

If you provide your employee with property or services that have a small (nominal) value, and accounting for them is unreasonable or administratively impractical, this qualifies as a “de minimis” fringe benefit. The value of the benefit is determined by the frequency provided to each individual employee or, if this is not administratively practical, by the frequency provided to the whole workforce. For example, the meal at an annual employee holiday party would qualify as a de minimis fringe benefit. There are special rules that provide limited exceptions for employee length of service or safety achievement awards of tangible personal property (which do not include cash, gift cards or certificates, or other cash equivalents).

The gift that keeps giving: No taxes on de minimis benefits

De minimis fringe benefits are not subject to income and employment taxes. The IRS has not established a dollar threshold that can be applied when determining if goods and services qualify as de minimis fringe benefits. If a fringe benefit does not qualify as de minimis, generally the entire amount of the benefit is taxable and is subject to all payroll and income tax withholding.

Whether or not the fringe benefits you offer your employees are taxable, you may want to let your employees know.

Cash doesn’t count

Cash or a cash-equivalent benefit (e.g., a gift certificate, gift card, or other stored-value card) is generally not a de minimis fringe benefit. This means that providing employees with nominal amounts of cash or gift certificates (e.g., a $50 gift card for meeting a goal) do not qualify as a de minimis fringe benefit. The receipt of cash by the employee is always taxable even if the employee uses the cash to purchase otherwise de minimis benefits. For example, cash provided to an employee for theatre tickets is fully taxable even though the value of the theatre tickets given to an employee might be excludable as a de minimis fringe benefit.

Read the fine print

A certificate that allows an employee to receive a specific item of personal property that is minimal in value (e.g., a certificate for a Thanksgiving turkey), is provided infrequently, and is administratively impractical to account for, may be excludable as a de minimis benefit, depending on facts and circumstances. However, gift certificates that are redeemable for general merchandise or have a cash-equivalent value are not de minimis benefits and are taxable. For example, an employer’s $35 gift coupon that is redeemable for anything sold at a particular store is a cash-equivalent taxable benefit subject to payroll taxes. Even though the coupon contains several restrictions that limit the time period in which the coupon can be used and stipulate that unused portions are forfeitable, which prevent the employee from converting any of the certifi cate to cash, such employer provided gift coupons operate in essentially the same way as a cash-equivalent fringe benefit and so do not qualify as de minimis fringe benefits.

Deciding what to give

It’s a truism that the value of a gift, especially for employee morale, is worth much more than a dollar amount. When you decide which fringe benefits to give your employees, you probably consider several factors: What’s the purpose of the benefit? What’s appropriate for the employee? What expresses the firms’ gratitude best?

While the tax implications of the fringe benefit may not be your deciding factor, it’s certainly something to consider.