- Learn more about de minimis fringe benefits.
- What you should know if you give cash gifts.
- Learn how to treat gift certificates for tax purposes.
- Do de minimus fringe benefits include group meals?
- Learn about FICA and wage withholding on cash gifts.
It is common practice this time of year for employers to give their employees holiday gifts. Where a gift is not offered often and has a fair market value so low that it is unreasonable to account for it, the gift’s value would be treated as a de minimis fringe benefit. As such, it would be tax-free to the employee, and its cost would be tax deductible by the employer. If your company gives gifts to your employees this time of year, Fiducial has all you need to know about related taxes.
De minimis benefits
For the most part, we define a de minimis benefit as one, considering its value and the frequency with which we provide it, so minor as to make accounting for it undue or impractical. The Internal Revenue Code section 132(a)(4) excludes them from income and includes items not specifically excluded under other sections of the Code. Examples of de minimis benefits include items such as:
- Controlled, occasional employee use of a company photocopier.
- Occasional snacks, coffee, doughnuts, etc., given to employees.
- Occasional tickets for entertainment events given to employees.
- Holiday gifts from the employer to the employees.
- Occasional meal money or transportation expenses paid for by the employer for employees working overtime.
- Group-term life insurance on the life of an employee’s spouse or dependent with a face value not more than $2,000.
- Flowers, fruit, books, etc., given to employees at special times, such as a birthday or illness.
- Personal use of a cell phone provided by an employer primarily for business purposes.
In deciding whether a benefit is de minimis, you should always think about how often it occurs and its value. An essential element of a de minimis benefit is that it happens only occasionally. It also must not be a form of disguised payment.
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 whole value of the benefit is taxable to the employee, not just the excess over a specified de minimis amount. The IRS has ruled before that items with a value over $100 cannot be considered de minimis, even under unusual circumstances.
A gift of cash, no matter the amount, is considered extra wages and subject to employment taxes (FICA) and withholding taxes. Caution: If the gift recipient is a W-2 employee, the employer may not issue them a Form 1099-NEC or a 1099-MISC for a holiday gift of cash; you must treat the amount as W-2 income.
When an employer gives gift certificates, debit cards or similar items convertible to cash, the IRS considers the value as additional wages no matter the amount. However, if employers give a coupon, nontransferable, and convertible only into a turkey, ham, gift basket or the like at a particular establishment, the gift coupon does not count as a cash equivalent.
Holiday group meals, cocktail parties, picnics or similar events for employees are also treated as de minimis fringe benefits.
For more small business COVID-19 resources, visit Fiducial’s Coronavirus Update Center to find information on SBA loans, tax updates, the Paycheck Protection Program, paid sick and family leave, and more.